Buying into a 40 unit building

[Daniel Urso]

Hello BP community,

I am a long time listener of the podcast but a new poster.  I have a deal that I am going to possibly invest $100,000 into that I would like some advice on.  For the purpose of this analysis I'm going to use easy numbers that relate to the deal in question.

My friend and partner found a deal where the original owners of a 40 unit apartment building ran out of money for renovations and need capital in order to move forward.  Here is an example of how they purchased it two years ago:

Sale Price:  $1,000,000

Down Payment:  $300,000

Loan Amount:  $700,000

Over the past two years they have been renting it and realized that they could make 50% more rent income if they did a full renovation.  They ran out of money for the renovation and that's where myself and my partners come in.  They are looking for $200,000 which we are willing to provide as long as the numbers make sense.  I should mention that if they don't find an investor, they are going to be bleeding $20,000 a month from units which can't be rented because they already started the renovation process.

The original owners offered for us to purchase equity at the original appraised value of $1,000,000 which would give us 20% ownership.  We would be expected to split all costs (including the loan) which just doesn't seem to give us our fair share if we're going to be bailing them out of their predicament.  To be honest, even with the deal set up this way we're still looking at a 17% CoCRoI, but I don't think it makes sense that we don't get the advantage of the loan's leverage while still having to split the loan payments.

What percent equity would be fair for us to negotiate if we are assisting with the loan payment?  If we are expected to split the loan payment, should we become 2/5 partners (our $200,000 vs their $300,000 down) minus the equity built in from the loan pay down?  Remember that these owners are quite motivated as they will be losing a substantial amount of money MONTHLY if we don't help them with the renovation costs.  I have a feeling that they are going to counter by just stating that we don't have to be responsible for the loan anymore but stick to the 20% equity.  Would you guys take that counter, or should we lean more towards the <2/5 structure?

Any input would be greatly appreciated.  If anybody's been in a similar situation please chime in!  Also, what would you guys consider fair?  Are we being too greedy going for just under 40% equity?

Thank You