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Hey everybody!

With this week’s newsletter, I wanted to go through a sample deal to give everybody an idea of how my business works with passive investors and how I would provide them with returns.

To begin, my business model involves raising money from passive investors to use as a down payment on an apartment building. In return, the passive investors or limited partners will receive quarterly distributions from the cash flow of the apartment and then receive profits from a refinance and sale.

My favorite strategy would be to buy real estate and hold forever.

However, I understand many investors usually want their original capital plus the return back in approximately 5-7 years. Everybody is different, but that is what I have found is most common among apartment syndications.

In that case, value-add apartment investing is often the best business model for increasing value and earning a profit in a shorter hold period. This mainly consists of completing renovations on the property to increase rents and overall income.

A typical structure involves providing investors with a preferred return that they would receive each quarter before I would receive any profits as the sponsor or general partner. This creates an alignment of interest between myself and investors. In this case, we will say a 7% preferred return as that is a normal amount.

Example: $50,000 original investment x 7% preferred return equals $3500/year. This breaks down to approximately $292/month or $875/quarter.

As an apartment brings in money through rent and other income streams, the profits after debt service and operating expenses are paid would be sent out to passive investors in distributions. It would go straight into your bank account, which is as close to “mailbox money” as there is.

If a distribution is missed due to problems at the property or large unexpected expenses, the distributions would accrue until they would be paid in full later in the business plan during a catch-up period.

If the business plan includes a value-add component where renovations are completed to boost income at the property and the overall value, then a refinance is common to pay back the investors a portion of their initial capital contribution. This usually happens around the 2-3 year mark or whenever renovations have been completed and the new apartments are all leased.

Typical hold periods are between 5-7 years before the business plan is completed.

Once the property is sold, all unpaid investor capital is paid back, plus any profits from sale.

Typical Return Metrics

Cash on Cash Return (CoC)

Average Annual Return (AAR)

Internal Rate of Return (IRR)

I’ll plan to explain these metrics in further detail in a future newsletter.

In conclusion, many deals right now are hard to make the numbers work with the current interest rate environment.

Also, some operators who bought deals in the past couple of years are running into distress with loans maturing soon as they did not expect interest rates to be this high when they originally analyzed and purchased the deal.

However, I am always trying to keep an eye on things to hopefully make an investment in the future as prices level off and potentially come down some.

Opportunities are often found in times of difficulty.

I hope you found this helpful.

Otherwise, if you have further questions, don’t be afraid to reach out!