88 Units - First Big Deal

[Hayden Bowles]

Hey I just wanted to put this out there to get any advice or experienced opinions! I have built up a small portfolio on my own and am now getting under contract for an 88-unit deal for $8.65m.

I will be raising capital for the first time ($2m of it) and am piecing together the whole structure. It's going to be a standard LLC, not a fund, just for this one deal. Technically all partners will not be limited, but the operating agreement will spell out the specifics and make sure people cannot get voted out.

I would love to hear any advice from anyone who has raised capital! My debt is in place, management is in-place, off-market deal lined up.... it's all ready, now I am just raising the cash from my close inner-circle.

Rents are decent, fairly close to 1% already (I'll hit 1% after raising rents). Simple value add play, very confident I can bring the NOI from $427,000 to $550,000+ in a few years. Should be a nice double on the equity with cashflow along the way, buying it at a 4.9% cap.

Debt is going to be 3-year interest only at 3.5% with 2 separate 1-year options to extend. Then will either exit or place on longer debt with a cash out refi.

I've done this on a small scale many times (never a commercial loan). The deal doesn't scare me at all, this is super solid. But the specifics behind bringing in capital and operating with a larger amount of money just makes me want to be extra cautious since it's not only my money. I have funds out of my own pocket going hard to get the deal under contract.

[E. C. "Stony" Stonebraker]

@Hayden Bowles, looks like it might be a good deal there.  

Your metric of 1% looks like you are using a SFR metric which does not apply to multifamily properties. If your equity partners are equity only and not part of the GP team, be sure to get your legal documents written by an SEC attorney to stay out of hot water with the SEC, in case anything should go wrong. You'll need to speak with the attorney about whether this will be a 506(b) or 506(c) deal which makes a significant difference in your equity raise. If all of your partners are both investors and GPs, then a JV should be sufficient. Again, your attorney (experienced in REI, not just a RE transaction attorney) is your best advisor.

If all of your partners are both investors and GPs, then a JV should be sufficient.

Money spent on professional advisors, whether attorneys, CPAs, etc. is well spent and will improve your returns and reduce potential headaches in the future.

It also looks like you have a bridge loan on this property which, given this market, could be an issue at year 3.  If the market turns before year 3, it could limit your options and force a decision which is less than optimal.  We prefer longer term debt so you aren't forced into a decision by the market. I'd recommend you keep close tabs on the economy and local market forces so you can make the best decision before being forced to do so.

Good luck!  It's an exciting next step!