Apartment Partnership Scenario

[Robert Lipscomb]

I'm trying to buy a 20-unit apartment complex in Southwest Missouri. The specifics on the value of the complex is the subject of another post. In this one, I want to get feedback on whether or not this partnership scenario is feasible. 

Facts:

- The owner wants to sell but would be willing to only sell a portion as long as he's not involved in daily management.

- The owner is a family friend. 

- I could possibly come up with the funds to purchase it conventionally, but it's a long shot. 

Proposal:

I partner with the owner and finance the deal so that he maintains 20% of the complex with his remaining equity. I add $50k in operating capital and take on all of the debt. So, he gets 20% of NOI and I service the debt with the remaining. Over a couple of years, I force appreciation, mostly through RUBS and rent increases which are long overdue, and then refinance and buy the original owner out.

So Original owner is limited partner that contributes 20% equity. I am General Partner that contributes $50k cash and all debt. 

Is this feasible? What am I overlooking? Sorry for sounding like a rookie (I am).

[Spencer Gray]

Hey Robert it sounds like you could have a nice deal, congrats!

What you're suggesting is totally feasible, although I think you should compensate yourself more during the deal.

A common arrangement would be for all equity contributed (his 20% and your $50k) to the project receives an annual preferred return based on capital contributed, typically in the 6-9% range, followed by a split of remaining cash flow between the limited partner and the general partner. This split can be anywhere from 50/50, 60/40 with 70/30 (LP/GP) being pretty typical.

Also all free operating cash-flow is calculated after debt service as this will be required by the lender.