How To Pay Yourself $30,000 When Buying your Next Apartment Building

When I bought my 12-unit apartment building, I put the entire deal together with a handful of investors. In fact, I ended up not putting any of my own money into the deal and got paid $15,000 at closing.

Watch this Video to learn how you, too, can pay yourself when you purchase your next apartment building deal.

When you’re putting together a deal to buy an apartment building with investors, you’re doing a lot of hard work: chances are, by the time you have a building under contract, you looked at many others. You negotiated the deal and did the due diligence. You brought the investors together to raise the equity and you secured financing for the rest. And finally, you need to manage the property manager and eventually sell or re-finance the building to return your investors’ money.

This is a lot of work, and you’re providing value for yourself and your investors. Many people who go through the trouble of syndicating a deal don’t compensate themselves appropriately, when in fact it’s perfectly reasonable to do so. There are three ways you can pay yourself when syndicating an apartment building deal:

  • Upfront at closing;
  • While you own the asset; and
  • When you dispose of the asset.

Learn More About the Syndicated Deal Analyzer I use in the Video to Show How You Can Pay Yourself.

Getting Paid When you Purchase the Building

If the deal allows it, pay yourself an acquisition fee at closing. How much? Whatever the deal allows and whatever seems reasonable to you and your investors. The broker gets paid 3% – 6% of the purchase price. Wouldn’t it be reasonable to pay yourself 3% for putting the deal together?

Say you’re buying a building for $1M. A 3% acquisition fee would be $30,000 … not a bad pay day, right?

Paying yourself an acquisition fee increases the overall cash required to close. This of course reduces your investor’s returns. You need to work the acquisition fee into your projections and see if you can still achieve your desired returns for the investors. In general, you should try to pay yourself something at closing. Shoot for 1%-3% if possible.

Getting Paid While you Own the Building

There are two ways you can pay yourself while you own the building. The most obvious one is cash flow distributions. You should retain at least 20% equity in the property for being the managing member (with your investors getting at most 80% for putting up the cash). This will then entitle you to at least 20% of any cash flow distributions and profits from appreciation.

The other way is to pay yourself an “asset management fee”. This concept is borrowed from money managers who are paid a small percent (1-2%) of the assets they manage. You, too, could pay yourself 1% of the total cash invested. This would be paid out before any kind of preferred rate of return distributions for your investors.

In our example of a $1M building, let’s say you raised $300,000 of equity and cash to purchase the building. A 2% asset management fee would be $6,000 per year, or $500 per month while you own the building.

Getting Paid when you Sell the Building

When you sell the building, you need to pay closing costs and sales commissions. You need to repay the outstanding loan and the initial investment to the investors. Whatever is left over is called the “Net Proceeds from Sale”.

If you own 20% of the building, you are then entitled to 20% of the Net Proceeds. That’s one way you get paid at closing.

You can also pay yourself a “Capital Transaction Fee”. This would be a small amount (1% – 2%) of the sales price that would be paid to you at closing. If you sold the building for $1.5M, a 2% fee is another $30,000.

Keep your Investors in Mind

Regardless of how you decide to pay yourself, make sure you disclose how you’re compensated to the investors up front. This is usually done in the LLC operating agreement and/or the Private Placement Memorandum (if you have one).

Also make sure that your compensation is reasonable and that your investors achieve their projected rates of return. If you are the only one being paid and the investors are not, it will leave a sour taste in their mouths and they’re not likely to invest with you again.

Conclusion

You are providing real value to your investors and are doing all the work, so don’t be afraid to compensate yourself reasonably when you buy the building, while you own it, and when you dispose of it.

In our $1M apartment building example, you paid yourself $30,000 upfront, $500 per month while you own it, and another $30,000 when you sell it. Plus you’re getting 20% of any profits.

Then do another deal!

Learn More About the Syndicated Deal Analyzer.

What Are Your Goals?

What are your goals in 3-5 years? Where do you see yourself? Share with us so we can cheer you on!

22 Comments

  1. My goals are to have 200 units within the next 3 years. I will also be helping hundreds of people reach their full potential as entrepreneurs.

    Reply
    • My goals are to have 100+ units within the next 3 to 5 years.

      Reply
  2. Great information. How did you reduced the expenses by $30K?

    Reply
    • Hi Edwin, ways you can reduce expenses include: shopping your insurance, trash and landscaping contracts. Appealing your real estate assessment. Installing low-flow water devices in all faucets and toilets; managing the repairs with a budget. Just some ideas …

      Reply
  3. Looking to buy a 16 unit property(a choice between two 16 unit properties). what to know which property is best for me.

    Reply
  4. Around minute 4:30 you calculated an updated GPI and vacancy. At that time, I noticed that you added an additional $16.7k of Concessions/Bad Debt Expense, which made a big difference on your NOI. How did you decide that was a reasonable number for that expense?

    Thanks,

    Reply
    • It’s a rule of thumb that I use for Class B- / C+ property where I know that in addition to vacancies there will also be tenants who don’t pay the rent and may have to be evicted and I never get any of that unpaid rent back (“delinquencies / bad debt”). Hope that helps.

      Reply
  5. Is it common for the advertised cap rate in the marketing package to be “usual” cap rate in that area? Is that why you try to match the offer price to the advertised cap rate.
    I am trying to find out how we don;t overpay for the property rather than just looking at just returns?

    Reply
    • Hi James. Yes, that’s correct. “Normally” brokers use the prevailing cap rate in that area. But remember, cap rate is by far secondary to the returns you want to achieve. In the early stage, we use the cap rate to beat up the broker about their valuation. But ultimately, it’s the returns that drive the deal.

      Reply
  6. My goal is to buy >100 units apartment by Dec 31st 2015. Should be at least 10% cap and >15% CoC.

    Reply
    • You have a nice and ambitious goal. I like it. Good luck

      Reply
  7. I want to have my first apartment under contract this quarter at least 16+ doors, >9 cap.

    Reply
    • Good luck Roger. I have spent several hours exploring many markets around the US, and I can see that Nashville is a buyers market. You should be able to find 9 caps without much problem.

      Reply
      • Thanks Mathew. I am curious where you are looking to determine it is a buyers market. LoopNet.com is showing almost no inventory. What is available is asking a 4 to 6 cap. As a result I am looking all over the county. Are you looking someplace that I am not?

        Reply
  8. My 3 year goal for real estate is to have an average monthly income from real estate cash flow of at least $3,000.

    Reply
  9. I appreciate the video you posted. I really gained a lot of knowledge from watching the video.

    I have a question about structuring. You provided us with three different ways to structure a deal (the straight equity split, some preferred return, and high preferred return and low equity). Let’s say that we have a deal that cost $1.2 million (including closing cost for the sake of simplicity); I need to raise $300k to put 25% down to qualify for a loan. How could I structure the deal if I get three different investors that put down $100k each and one investor will only do a deal with high preferred return and some equity and another investor prefers the straight split?

    Thank You,

    Matthew

    Reply
    • Hi Matthew … you can approach this in different ways: (1) if you absolutely must, then you can do this with multiple classes of members in the operating agreement. You might want to do this if you have a BIG primary investor who puts up most of the capital and gets “special” treatment and then you have a bunch of other “lesser” investors who invest less and also get less say. Or if that is not the case, you need to find a way to (2) treat every one the same. Find common ground with terms where you can raise the money you want.

      Reply
  10. Michael, firstly thank you very much for the videos. If anyone could make understanding apartment investing simpler it is you. I have a question – How do you handle any abnormally high repairs or equipment replacement that may occur during the holding period? Is this something you model in your spreadsheet when analyzing the deal?

    Reply
    • To model abnormally high repairs in the Analyzer, you would increase the “Repairs” field in the Summary tab. This would act as a cash reserve.

      Thanks!

      Michael

      Reply
  11. Presently, I own a single condo unit. My goal is to purchase a 10-50 apartment property within one year. Would you like to invest Michael 😉

    Reply
  12. Again, another good video, Michael. Admittedly, I found some of the covered topics to be a little sophisticated, over my head, so I had review it twice. I’ll probably do so for a 3rd time as well. Nevertheless, I think it’s worth it, for as the saying goes, “There’s no growth in the comfort zone; there’s no comfort in the growth zone.” 🙂

    As for my goals, within a year my team will have a minimum of 50 units (representing x # of apartment buildings) under control. Within 3 years, my team will control a minimum of 500 units. Within 5 years, my team will control a minimum of 750 units.

    Yes, I believe these goals to be reasonable.

    With your tool, I will further enhance/improve my underwriting knowledge and analysis skills so the preparation will be there. All I will need then is the opportunity. And I’m trying to make that happen through my broker & asset connections.

    Thanks again, & wish me luck!

    Reply
    • Albert – an outstanding goal and thanks for putting it out there in the Universe – thanks for sharing!

      Reply

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