What Do You All Think Of This.........
I have found an 28 unit aparment building for sale. I analyzed all of the numbers and they work great. DSCR of 1.25 and 11.5% cap. The owner wants to cash out after 20 yrs. of ownership, but will not carry any financing.
I know a few investors that are looking to get into real estate but have no idea how to invest. If I partnered with one of them and used their money to close this deal, what is a reasonable % to ask for. I already met with one of them and he is very interested. He is just looking for a money shelter and my management company will manage it. So it is hands off for him.
Is it to much to ask for a 50/50 split on profits and tax breaks? How would you pros structure this?
It is my first larger project. Thanks much in advance!
Well rates of return should reflect the level of risk and in a transaction such as this risk is largely a function of leverage. So the return your investor should get is, at least in part, a function of what he's going to put in. Is he going to fund the whole transaction or are you going to use some conventional financing as well? If you use a bank and he puts up the equity portion is he going to sign on the bank loan?
No, 50/50 on profits is not too much to ask. You found the deal, you handle the management I think half is about right. Sometimes (frequently) I pay the investor some base rate of return (say 10%) that represents the value of their capital in the open market and then we split above that rate. But those tend to be development deals with more risk and more potential return. In a cash-flow/management situation like you describe I have done a split that looks like this: the investor gets 100% of the cash until he has a 10% annual return on his investment. Then I get to collect a management fee. Then we split.
There are many other approaches I have seen here but I will let those who use them post them.
Great idea!
He is putting up 25% equity financing with the bank doing 75% LTV debt financing. Interest rates are looking rather sweet too!
His 25% equates to 63k. In this cashflow/management transaction, I will propose as commercial describes......
He gets the first 6300 of all cash flow each year realizing a 10% annual rate or return. Then, I will collect a 7% management fee. After, we will split any remaining 50/50.
But let me ask you guys this? Would you still use the 50/50 principle when cashing out, either through refi or sale?
Thanks
Also, he is putting up closing costs.
Do you usually figure this in to his "original investment?"
If so, that 63k increases quite a bit!
Any advice is greatly appreciated.
Yes, I would consider his original investment to include the closing cost figure. My next question is, Is he signing on the loan? If not then I think 50/50 is kinda high and I would rather negotiate a more-or-less fixed rate, even if the rate needed to be higher.
we haven't came to a decision if he is signing on the loan.
if he does, 50/50 is too much to ask?
also, what about profits from sale or refi in future....50/50 as well?
I really appreciate all your help with this deal.
also, would you put him on title?
If he signs the loan (or puts up 100% of costs) then I'd make him 50/50. If not, and you did sign, then I'd try to get him to sign a note with an interest rate of say up to 15% (depending on how rich the deal is). Thats still a whale of a lot better than he'd do in a CD these days.
Assuming some split (50/50 or whatever) I'd probably structure the deal in a LLC or a Sub-S corporation. Otherwise I'd just do a note.
so just use his cash to get into the deal and keep him on the outside.......
or
put him on title and loan giving him all benefits of ownership?
If I were interested in doing this I guess I'd also want to know what you bring to the table. Do you have experience in building or developing projects of this size and complexity?
Do you have an actual lender approval pending raising the equity or just several lenders who have expressed enthusiasm?
Are you expecting this investor to sign on the loan for the balance or have you arranged non-recourse financing?
I have 8 years experience in Real Estate Acqusition & Development. I have bought and sold properties in Philadelphia, PA. Pittsburgh, PA. Harrisburgh, PA. New Jersey,.
I do have actual commitment from a lender . The only thing they need is proof of the $875k and the deal is good to go.
I expect a co developer/investor to sign on this loan.
Thanks
Paul
[ Edited by pmaucha on Date 09/01/2004 ]