How to pay myself in a MF deal?

Question

If this has been well answered elsewhere please point me there, I couldn’t find it.

If I’m look at small mf deals that require more than one additional partner, so in my area more than $500,000 per say. These would be 10 or more units. I suppose the same principle ultimately applies to any size though. I would be self managing.

Would you account in a management cost that would pay to you plus than the true profit percentage split on the back end, or would you design it somehow else?

For example: I account in 9% as a management fee total for both lease ups and everyday mgnt. Then as well  my 2 other cash partners and I agree to a 3 way split of all profits. Is that how it’s typcially structured?

I do understand you can structure it anyway you want to, but a typical well balanced approach is what I’m looking for. I’m trying to figure out analyzing the next size of property.

Thanks!

Daniel J. · Answer

@Aaron Klatt ok, thanks!

@Ali Hashemi ok, thanks!

Daniel J. · Answer

@Gino Barbaro That’s exactly what I’m looking for, thanks! For clarification depending on what you negotiate in the deal and what your partners desire/are willing to do, you could have it as a described with both say a 1/3 equity plus management, or your management basically rolls into your equity forming that 1/3 ownership. Is that correct?

I think the podcast you and Jake were on is one of the best down to earth ones for MF investing so far. I might be biased because I’m a restaurant manager though.

Michael Le · Answer

You should separate the different functions of finding the property, raising money for the property, buying the property, managing the property, and selling the property. Put a value to each of those functions. Which part of that will you be contributing and which part of that will your partners/investors be contributing.

Daniel J. · Answer

@Gino Barbaro That makes sense, it seems like that would be the easiest way to do it. To begin with I don’t have any equity to put down, but i suppose once again all that is negotiable and will differ person to person.

Thanks!

Gino Barbaro · Answer

@Daniel J.

Hi Daniel

This is what my partner and myself did when we started. Whatever % of equity we brought in is what was our percentage of ownership. He was boots on the ground and managed the asset. He was paid 10% management fee to manage the property.

I think that is only fair. He did a better job than a property management company, and I would rather pay him than a company.

Gino

Daniel J. · Answer

@Michael Le That makes sense, thanks!

@Todd Dexheimer Ok, thanks!

@Steven Gesis That was what I was thinking but wanted to check. Thanks!

@Lennon Lee Ok, thanks! I have no desire to make it more complicated than necessary, but also want to cover all my bases.

Lennon Lee · Answer

Daniel,

For what you are describing it definitely looks like you are not looking at a syndication, which has a more complex fee structure.

So in your case, as everyone has already pointed out, it will depend on the negotiation between you and your partners and what everyone is bringing to the table. That being said, if you are the partner managing the daily operations of the property and carrying out the business plan for the investment, then for that size property 9% sounds fair.

Beyond that, if your other two partners are only bringing capital and nothing else, you can negotiate an acquisition fee at the time of closing (In large syndicated deals goes from 1% to 3% of purchase price or total raise). This is of course if you are the one finding the deal, securing the financing, and putting everything together. And just as @Gino Barbaro you can roll that acquisition fee into your equity, which many people do to enhance their upside at disposition.

Happy investing!

Steven Gesis · Answer

Daniel, yes, I would say you should account for the management fee, in our area on MF the rate is 8% and then it goes down relative to unit size, you have to consider no matter the partnership, someone will have to get paid for this whether you are the defined management or a 3rd party group -

Todd Dexheimer · Answer

If you are trying to get paid extra to manage the property, just make sure the other tasks that you do is equal to your other partners.

Michael Le · Answer

Yes, I am but I don't see why a JV couldn't be the same way? Unless you're sure that everyone will contribute evenly this is a way for you to come up with an agreeable split. If all partners are contributing the same amount of capital but you are the one who found the deal and doing the day to day management, it obviously doesn't make sense for you to only get a prorate share of the profits.

How to pay myself in a MF deal?

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