It feels like I have listened to 1000 hours of audio books, Vlogs, podcasts (including BiggerPockets), and other forms of media, on different strategies for real estate investing. People always mention how they financed a deal: traditional financing, hard money loan, partnerships, etc. The people who brought in investors never really explain the exit strategy plan for financing the deal. Did they plan on buying the investors out at some point? Did they plan on holding the property and selling at some point in the future, then splitting the profits? Can anyone who has ever structured a buyout of their investors explain how they approached the investors to begin with and what the terms of the buyout were?
I assume it went something like this:
10 unit (2br 2ba, 1200sqft) building in Gotham City selling for 400K (to keep it simple) or 40K per unit.
Property needs 100K in updates and upgrades (500k all-in, 50k per unit).
Rents are 1k per month (10K/mon total; 120k per year)
Capex is 70k, leaving 50k free cash flow for the year.
I only have 125K to invest, so I bring in 3 other investors who each have 125K.
At the end of year one, we take the 50K and split it 4 ways (12.5K each). It's good because I make 10% on my investment. I MAY be able to get a loan on the 25% equity interest that I hold in the property but that would only give me about 80% of the 125K I have in (not enough to pay them off). After 4 years, I could get a commercial loan for 400K (80% LTV) and pay the other 3 investors their principle; 375K (from bank loan) + 75K interest (5% per year; 25k left from loan + 50K savings from my portion of the rents in 4 years). That's 150K (P&I) per person from me + 50K they each made in 4 years = 200K each (62% return) after 4 years. If they choose not to sell to me, they still make 40% after 4 years.
Well thats my assumption and all the numbers included in the math is imaginary. If the deal isn't structured that way, can someone with experience explain how its done?
