Commercial Apartment Complex - Private Investor IRR

[Ian McDonald]

Hello,

I want to give a little back story before I state my question.  My partner and I came across a potential deal through some diligent searching and mailers throughout the last year (patience is a virtue they tell me).  We received a phone call from an older gentlement set on retiring and wanting out of his aparment complex with 34 units.  We got ahold of the financials and quickly realized this will be a a small goldmine.  He bought the property in the late 70's and hasnt done much renovating in that period of time outside of normal wear and tear replacments meaning we went in one room and it still had shag carpet and popcorn ceiling, you get the idea.  He stated he hasnt raised rents in a decade because he feels for the tenants which is admirable but not a very good business/cash flow position to hold.  This project has value add all over it with rents well below the median for the area so we are talking about aquiring an underpriced undervalued property that will require mid tier renovation and rent increase to median that would put us with close to $1m equity and favorable cash flows within the first three months after acquisition. So to my questions....

Our vision all along has been to utilize private capital along with our own at a 50/50 split in order to make the downpayment and finance the remaining traditionally which seems pretty straight forward. 

What is an average rate of return for a private investor? We plan to offer at least 2% more to beat the market and retain investors.

Do you calculate the return for the investor based on the cash flow after expenses per month?  For instance we bring in $10,000 cash flow in January so the investor (paid first) would pocket $1150 per month and $11500 annually while my partner and I take the remaining.

Upon sale of the property, what is a reasonable return to the investor based on appreciation we gained over the life of the acquistion? Meaning we want to provide a "bonus" to the investor above and beyond the 11.5% return guarantee once we sell.  For example we purchase for $1.28M and sell for $2.5M. 

The deal would look like this:

Our Capital - $100,940

Private Captial - $100,000

Purchase Price - $1.128M

Private Capital Rate of Return - 11.5% (preferred)

Plan to return $100k back to investor after 2 years when we plan to refinance.  This would be $23,000 in return over two years for the intial investment.

Thanks in advance for your assistance/guidance.  Love the wealth of knowledge this site offers!

Ian