Investing in a new Fund: strategy is buy multis and rehab

[Ajay Malhotra]

A friend introduced me to a guy he met a few years ago, who is raising $ for a fund (3-4.5 milllion, of which 3 mil is already raised) whos purpose is to buy multifamily (2-10 units) in Philadalphia submarkets, rehab and stabilize or sell them. I myself, don't actually know this guy, but had a pretty good phone conversation with him. 

Terms

contributed: GP 5% / LP 95%

payout: 8% annualized preferred return - > returned capital -> 30 % GP / 70% LP 

target IRR: 19-21%

target LP multiple: 2.2-2.5%

fees: 

Asset management 2%

Brokerage 6%

construction management 15%

property management 8%

The guy raising teh money and heading the project has an MBA from columbia (recent) but has been investing and doing projects in the Philly area for 12 years. 

I mean, that target IRR seems amazing, but how does one really quantify the risk? How does one know what they are really investing in. What questions do I ask? What do I research?

There are a number of provisions about max LTV, rates, points, removal of GP's etc etc etc in the offering documents.

[Don Konipol]

@Ian Ippolito

Great post. Thanks for sharing your insights!