All Forum Posts by: Anthony Palmiotto

Another option without bringing in equity partners would be to see if the seller would owner finance a portion of the sale price in second position, say 30% and then get a first mortgage for 80%, so that you are effectively borrowing 10% more than the costs. Use this excess proceeds to fund your rehab expense. I did this a few years ago and left closing with 100k plus for rehab. My first lender was a private lender so they did not care that I was not putting anything down. This may not work with a bank that may require some skin in the game.

Generally you would raise the capital up front, and yes it does impact the CoC return slightly. This is pretty typical in value-add deals...not the strongest cash flow (sometimes none at all) in the first year and it ramps up from there.

Funding capX out of cash flow is just a bad idea because the cash flow in the early years is already compromised due to the lower rents and if you don't have the money to do the improvements you never get out of the rut.

There is another solution and that is to raise all the money in the beginning but don't call all of the capital at once.  As a simple example let's say you are raising $500K from 5 investors each investing $100K.  And let's say the capital improvements are $100K.  You would subscribe all $500K and call for $450K initially (to get you started) and when you are halfway through you call for the last $50K.  In this example each $100K investor would fund $90K at closing and $10K when you are ready for it.  No modification is needed to the operating agreement and as long as you are calling for capital pro-rata from the investors their ownership percentages stay the same relative to one another.

Having explained all that, if it were me I wouldn't do it.  I'd just raise it all up front and be done with it, and get your improvements done as fast as possible.  You should be able to do them all in a year or so.

If you only need to raise 91k (let's call it 100k for ease), why not look and see if the lender would be willing to provide a construction loan for this amount? 

As @Omar Khan and @Ben Leybovich stated, it's costly to do a true syndication for this amount. You may be better served trying to find partners to do a JV or raise the funds as debt. I know investors who simply raised the funds needed as debt with a promissory note, but you should talk to an attorney on the structure.

I agree with all that @Brian Burke mentioned. I second not doing piecemeal capital calls. People's circumstances change and I'd hate for you to get caught up in that.

Having said this, the elephant in the room on this is - why would you even think of syndicating $1.5M deal? The legal/procedural overhead of a private placement is too high for a small deal like that. Just handle it on the debt side.

@Anthony Palmiotto 13 units is a fairly small property. Consider partnering up with someone (one or two people) that has the funds. Granted you're from NJ and your property could be a local one ( = more on the expensive side), but I would explore the alternatives prior to setting your course on syndicating this deal.

Best!

Generally you would raise the capital up front, and yes it does impact the CoC return slightly. This is pretty typical in value-add deals...not the strongest cash flow (sometimes none at all) in the first year and it ramps up from there.

Funding capX out of cash flow is just a bad idea because the cash flow in the early years is already compromised due to the lower rents and if you don't have the money to do the improvements you never get out of the rut.

There is another solution and that is to raise all the money in the beginning but don't call all of the capital at once.  As a simple example let's say you are raising $500K from 5 investors each investing $100K.  And let's say the capital improvements are $100K.  You would subscribe all $500K and call for $450K initially (to get you started) and when you are halfway through you call for the last $50K.  In this example each $100K investor would fund $90K at closing and $10K when you are ready for it.  No modification is needed to the operating agreement and as long as you are calling for capital pro-rata from the investors their ownership percentages stay the same relative to one another.

Having explained all that, if it were me I wouldn't do it.  I'd just raise it all up front and be done with it, and get your improvements done as fast as possible.  You should be able to do them all in a year or so.