Personal Multifamily Acq Questions
At some point I would like to begin investing in smallish MF (<25 units) on the side and I was wondering how a waterfall would look like.
Let’s say $3m purchase price, with 60% LTV leaving you with $1.2m needed equity. I would personally put in ~$50k (at current stage in career) and feel confident raising the other $1.15m from friends and family.
Obviously their capital would be passive (LP), so how would the splits work assuming a value add investment? I am familiar with typical value add hurdles, but how would it work with such little equity put in? Would you use fees as well?
For the people out there who have done
something similar, how did you do this? Would love some answers and even someone to discuss with through PMs if possible. Thanks.
Based on the most helpful WSO content, structuring a waterfall for a multifamily acquisition where you're contributing a smaller portion of the equity and raising the rest from limited partners (LPs) typically involves several key components. Here's a breakdown of how the splits might work, considering a value-add investment:
Preferred Return (Pref): This is the first hurdle in a waterfall structure. LPs are usually given a preferred return on their investment, which is a fixed percentage paid out before the general partner (GP) receives any profit. This rate is often between 6-10%.
Catch-Up Provision: After the preferred return is met, there may be a catch-up mechanism where the GP can receive a certain percentage of the profits until they have received an amount that brings them up to the same percentage return as the LPs.
Profit Splits: Once the preferred return and any catch-up have been paid, profits are split between the GP and LPs according to agreed-upon percentages. This could start at something like 70/30 in favor of the LPs and then shift to 50/50 or another ratio after certain return milestones are reached.
Equity Multiple Hurdles: Additional hurdles can be set where the profit split changes once the LPs have received a return of their capital plus a multiple of their investment (e.g., 1.5x or 2x equity multiple).
Fees: As the GP and manager of the deal, you could charge an acquisition fee, asset management fee, and/or a disposition fee. These fees compensate for the work involved in managing the investment and are separate from the profit splits.
For a deal where you're putting in significantly less equity than your LPs, you might expect:
Remember, these structures are highly negotiable and depend on the risk profile of the investment, the track record of the GP, and the relationship with the LPs. It's also important to have clear and transparent communication with your investors about the structure and potential risks and rewards.
If you're looking for a more in-depth discussion or to connect with someone who has experience in this area, the WSO forums are a great place to reach out for private messages (PMs) and networking. Many users are open to sharing their experiences and could provide valuable insights into their own deal structures.
Sources: How are you structuring equity split on personal deals?, Best way to learn Real Estate Waterfalls?, Your Thoughts on An Office Acquisition Deal, When does the promote split actually occur?, Why Growth Equity vs Buyout?
Fees and hurdles are typically the same as you would expect on larger syndications. Some increase the asset management fee to 2% because it’s a nominal amount on these small deals but really, it still is at 2% and I personally don’t feel it’s justified to increase fees just because it’s a small deal.
edit: In terms of your co-invest, I’m assuming that you would have an acquisition fee and that would be rolled into the deal as well? Investors and lenders (Freddie SBL for example) still like to see a 10% co-invest but all often includes friends and family which is who the LP equity really is so there’s a little more gray area.
A fee of some sorts would make sense, just would probably need to put in more co-invest $$$
Definitely keep it simple with friends and family equity and try to get more of the upside. Your equity contribution is minimal so maybe like a GP/LP split of 30/70 on all profits over 12%. I've seen guys who raise "country club money" get 50/50 over 10% and only put in 10% of the equity.
You should also charge a fee of some sort to make it worth your time. It's up to you what you want to call it...asset management fee, construction management fee, acquisition fee, all three! at least 1% of the total capitalization, maybe more if paid out over the 3-5 yr hold.
Has anyone done this with long term holds? I'm from a city in the mid-west where you can get significant cash flow but tougher to get appreciation and value-add plays. I have many friends/family that would love to invest with the idea of holding for 20 - 30+ years or forever and have the cash flow fund their retirements. Has anyone run a deal like this? Obviously a waterfall won't really do much here, so is it more based on charging an annual fee which maybe has opportunity to become outsized if you hit certain cash on cash hurdles?
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