Real Estate Agent · Orlando, FL · Member since 2014 · 46 posts · 11 votes
As a rookie investor, I'm finally at the point where I'm confidently analyzing multifamily leads where I live in FL. In listening to the stories of how investors like @Brandon Turner or Sterling White started, I'm interested to learn from the experience of other investors - is it true that partners do fund the whole down payment for a deal &/or help to qualify for the loan, or is there an expectancy for the general partner/principal to contribute at least 5% - 10% of the down payment in multifamily investing? I'm connecting with people for potential partnerships who are not family members or friends.
Also, what is a typical split on a multifamily deal with partners after the debt is serviced: 70%-30%, 80%-20%, 90% -10%?? Is it possible for such a partner to contribute to the full down payment for the multifamily deal & still agree to a split?
I would love to get your feedback - thanks for sharing in advance!
It's going to be very difficult to have *no* money down. You'll probably need to put some up at some point. Whether it's emd, legal, lending, or otherwise, you'll probably need something. In the syndication space 80-20 is very common. Oftentimes that split is tailored to produce attractive returns for the investors while making it worth your time. There are folks out there like @Ari S. doing midsize multifamily deals using the JV strategy, where he and a few other active participants put deals together and pool their money. Look into and learn about how JVs work!
Yes it is possible to have a partner to fund the whole deal. A lot of the time people that are funding a deal would like to see that you have some skin in the game and would like to see you put down at least some money. (Which can very by who you are working with)
When you are looking at splitting profits with a partner it can very between the situation. I hear a lot of people doing 50-50 where one funds the deal and the other does all the work. This will depend again on who you are working with and what sort of terms they want.
It's going to be very difficult to have *no* money down. You'll probably need to put some up at some point. Whether it's emd, legal, lending, or otherwise, you'll probably need something. In the syndication space 80-20 is very common. Oftentimes that split is tailored to produce attractive returns for the investors while making it worth your time. There are folks out there like @Ari S. doing midsize multifamily deals using the JV strategy, where he and a few other active participants put deals together and pool their money. Look into and learn about how JVs work!
@Mona B.I have never been through a deal where at least a few limited partners asked me whether I was investing in the deal myself. I have always invested in the deal to show my confidence and to say "we are in this together
Yes, as a partner, you receive your portion of the promote, but you can also invest as a limited partner. I think the only time I could not invest as a limited partner is if I was genuinely illiquid at that time. It doesn't mean that I wouldn't have confidence in the deal.
The splits you mention are all possible, but 90/10 is getting pretty thin for the GP.
In this business, anything is possible. No money invested is rare as others have said, if anything as a show of good faith that you believe in the deal as well. Depending on the deal there are some key 'financier' roles:
LP/passive investor: gives cash to close (down payment, repairs...other things you've underwritten)
Closing capital: Putting up the EMD, paying for lender or inspection reports, possibly even pay for travel to the asset if needed.
It is possible to get one or multiple people to fund 100% of the deal including reports and EMD, it's just about how much you want to give up in the deal you've found.
And as far as splits...it would generally depend on the amount invested. I don't know that there's a 'standard', if you're asking someone to put up $100k in closing capital, you'd expect to pay more than if the deal was smaller and only needed $25k.
@Mona B. Since we are talking syndications, people like Sterling White raise the needed down payment for the deals. That is the whole basis of a syndication. To pool money together to buy assets. It's a team sport. That being said, almost all sponsors will invest in the deal along side the LPs (limited partners) to show that they have skin in the game and are in this together, like others have said in here.
Of course, it is still possible to do deals without putting money in yourself but you should have a good reason. No money down is more appropriate to smaller deals with somebody providing 'sweat equity.'
@Mona B., I agree most with those that say you can technically go in with "no money down", but as Taylor mentioned, "no money down" doesn't mean you don't need money. Earnest deposits, legal work, due diligence, etc require money. Technically, you may be able to push all those costs back onto investors and raise the capital to end up with no money in the deal, before you ever close, but you had have funds available for the cash flow timing.
Now on to more realistic scenarios, if you are trying to raise capital from outside investors, it is very, very common to be asked if you are investing in the deal, but understand that investors just want to make sure that you will feel some pain too if things go south, and that you will feel motivated to continue fighting to stave off a loss more, if you are personally in a position to lose too.
As for splits and structures, you will see deals that run the gamut. 70/30, 75/25, and 80/20 tend to be the most common. But, there are hundreds of ways this can vary: pref or no pref, catch up or no catch up, second hurdles at what rate, etc. Multiple share classes? What are the fees? All of these effect the overall economics of the deal.
@Cody Neumann In reading through the various replies I've received from active investors, who I'm able to partner with and how good of a deal the lead ends up being seems to be key factors in having a remote chance at "no money down". Thanks for the reply!!
@Mona B. As mentioned the structure is open to design. Depends on deal size and what you or your partners are comfortable with. I started in joint ventures with private lenders and a 50/50 arrangement even on a 13 unit. Syndication starts typically when the funding levels make a joint venture a stretch, ie. perhaps over 1 million in purchase price. As to splits, 30/70 seems most common. I've seen people doing 90/10's which are scary for both sides in my opinion. If you are leaving 10% to GP and partners, unless it's a monster deal, not a lot of motivation for a syndication group and partners to perform over 5 years...Which means investors will get a poor product.
Just my opinion however. Remember this is a mutual arrangement and the split should reflect that. Both limited partners and general partners are succeeding in a deal because of each other. A syndication is literally the joining of forces to achieve something unachievable separated.
That being said, A preferred return and investing in the deal are both important for overall confidence in the arrangement as well. Always make sure you can eat at the end of the day. Last thing you want is to be struggling on a thin deal and still have to perform on an asset for 5-7 years.
Thank you also to @Rick Martin, @Fiza Ah, @Justin Moy, @Justin Goodin, @Evan Polaski, & @Chris Levarek for the feedback thus far. I've been coming back to this post during the last few days & re-reading the replies to make sure I gain a clear understanding of how deals are structured & what would be expected. It's been extremely helpful, & I'm keeping the information you have all shared in the front of my mind as I've been analyzing leads. When I find a deal, I may seek your feedback on the numbers from my analysis :) .
I big portion of finding investors is in the investors' opinion of you. Having some skin in the game helps, but if the investors trust you, they will be more likely to trust the deal. They are looking to maximize return and minimize risk. If you can show them your deal does that, you will have little problem raising the money and won't need to have anything in the deal. When putting together a group of investors, the principal typically puts up a lot of money and time on the front end to evaluate the deal. This should be considered when thinking about doing your first deal.