Splits and ROI when using OPM

[David Edwards]

Afternoon BP, 

I'm closing on my first small multifamily deal on the 30th of next month and am now sitting on a few deals with decent returns (on paper at least). When looking for funding how are the deals typically structured for private funding of small multifamily buy and hold properties? I see a lot of discussion on flipping splits and have my head around that but when I'm looking at buy and hold rental properties the splits aren't as cut and dry.

My second question is what kinds of numbers do you typically look for on deals that you are going to bring an equity partner in on? Obviously the higher return on a deal the better but there needs to be a cutoff somewhere on the low end. For example a 12 or 13% ROI looks great for an individual but a 40/60 split on that leaves the better half getting around 7% back. I imagine this is a case by case sort of thing but what are some weed out numbers to look for?

Thanks all for the read,

-Dave 

[Omar Khan]

@David Edwards IRR and time have an inverse relationship i.e. higher IRRs are usually associated with shorter time periods (all else being equal).

@Thomas Castelli has give you a good breakdown. But if you're looking at smaller deals (sub-50 units), syndicating might result in a higher cost structure as you'll have to deal with lawyers and specialized accountants. That will eat in your profits big time. 

Depending your equity sources, you can look to structure the deal as a partnership to get similar results (actually, better) results with lower costs and hassle. 

Furthermore, you are considering a straight split of the profits. Good syndicators offer a preferred return (8-10%) below which Sponsors will not get paid a dime. This is to align investor-sponsor interests. For e.g. with a 15% IRR, two scenario will play out differently:

Scenario 1: 20/80 straight split - Sponsor/Investor (GP/LP) split: 3/12

Scenario 2: 8% preferred return, 20/80 split for returns above 8% - Sponsor/Investor (GP/LP) split: 1.4/13.6

As you can see, Scenario 2 is better for the investor BUT long-term if you make your investors happy they will keep coming back to you. Otherwise, they might do a deal with you and then bail.