Today’s REI Classroom Lesson
Michael Blank explains how you can still pay yourself on a multi-family investment deal, even if you have $0 invested in the deal.
REI Classroom Summary
As the syndicator who finds the deal, you can align with investors who go in on the deal and everyone makes money. They didn’t have to do all the legwork and you didn’t have to spend money so it can be a win-win.
Listen to this REI Classroom Lesson
Real Estate Investing Classroom Show Transcripts:
Mike: Welcome back to the flipnerd.com REI Classroom where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Michael: Hi there, and welcome to the REI Classroom. My name is Michael Blank and if you’re interested in getting started with apartment building investing, you’re in the right place. In today’s episode, I’m going to talk about how to pay yourself for syndicating an apartment building deal.
Mike: This REI Classroom real estate lesson is sponsored by theinvestormachine.com, FlipNerd’s private investor coaching program and your blueprint to investing success.
Michael: So when I bought my first 12-unit apartment building I did so with a group of investors and I put none of my own money in the deal and I still paid myself $15,000 at closing. So it’s called an acquisition fee. Now some of you might go, “Well, shoot, you have no money in your own deal and you still get paid at closing. Why would anyone agree to do that?” So let’s talk philosophical first of all about why you should be paid as a syndicator.
Now first of all, let’s find out what a syndicator is. A syndicator is a real estate entrepreneur who is finding deals, finding money, and finding an operator or manager and putting them together to make something happen out of essentially thin air. So philosophically, why do you deserve to be paid as a syndicator when you’re not putting your money in? What is up with that? Before I discuss how you’re going to get paid, but first of all, look, you’re doing all the work.
You are finding a deal and, by the way, by the time you have a deal under contract then you probably have looked through probably 150 deals before you got to that one. That’s the truth. You have spent hours and hours, by the time you pay yourself for this thing at closing you’re like minimum wage honestly. Number one if it weren’t for you, the investors would not have an opportunity to invest. In fact, without the deal, but without the investors putting in the deal without you bring in 7 or 10 people, there would be no deal. So the investor that complains about you being paid as a syndicator is probably not the right investor.
The way I think about it is this. You need to be on the same page as an investor, meaning that if you make money, if the deal makes money, and the investors make money you make money. What if the investors make money and you don’t make money? Why would that incentivize you to continue working over the years to maximize the profit of the deal?
So philosophically, you and the investor need to be aligned and so getting paid at closing rewards you from the long path. Getting there and getting paid during the process incentivizes you to kind of stay engaged and maximize the profits.
So there’s really three ways that you can get paid. One is upfront at closing, the second one is while you own the asset, and three is when you dispose of the asset. So let’s talk about each in turn.
So upfront at closing. Upfront at closing you typically get paid what’s called an acquisition fee and that fee is normally between 1% and 5% depending on what the deal allows and how much work the deal is. For example, if it’s a very stable deal you might want to pay yourself a little bit less on the lower end. On the other hand, if you’re doing a lot of development like, for example, you’re putting in $10,000, $15,000 a unit and it’s almost like a development, then you get paid more because you have to do a lot more. Right? Makes sense.
So normally my target for an average deal is about 3% of the purchase price. So for a million dollar deal which is not that big of a deal, a 3% acquisition fee would be $30,000 at closing. Kind of makes it a little bit worth your while.
The second way you can pay yourself as a syndicator is while you own the building and there’s two ways to do it. One is called retained interest or equity interest as a syndicator. So typically, as a syndicator you get a certain amount of equity simply for being the syndicator. Normally between 10% and 30% the deal is the syndicator or the general partnership. And the investors for bringing in the money get the rest. So for example, an 80/20 split, the investors bring in all the money for 80%, you as a syndicator get or retain 20%. So you actually get paid profits along the way.
Now there’s another way that you can pay yourself and that’s an asset management fee. This is sometimes depending on the deal, depending on the situation, but it’s normally 1% of the equity or it’s a certain percentage of the NOI, the net operating income. There’s different ways to do it. But the idea is this. You’re being paid a management fee as an asset manager. So in other words, you’re responsible for doing reporting to the investors, for dealing with the investors, and of course for managing the property manager. So that’s the asset management fee.
Then the third way you pay yourself is when you sell the building or when you refinance the building. In other words, a point at which you return the principal back to the investors and you do that either by outright sale or by refinance. Now why is this significant? The significance is if the investors get their principal back the risk is off the table and you should be rewarded for, or you can be rewarded for, returning the principal back to the investors. That’s called a disposition fee or a capital transaction fee, however you want to call it. And again, what’s normally done if the deal allows for it is 1% of the final price, the re-appraised value or the sales price.
So those are the three ways that you can pay yourself as a syndicator. It makes it very lucrative in addition to the actual equity you have in a deal. Now this is really important. You got to keep the investor in mind. So it’s all fine and dandy that you pay yourself all over the place, but the deal has to allow for it. What’s driving the deal is the investor return. Keep that in mind.
So in my deals, I’m normally looking for an average annual return of at least 13%, if I can get to 15 that’s even better. So I know around an averaging return of 15% the investors are very interested in investing with me. So if I’m paying myself too many fees that reduces that return, then number one maybe I shouldn’t do the deal or number two maybe I need to pay myself less so the investors make their target returns. So keep that in mind as you’re underwriting the deal to keep that in mind.
So look, you are the syndicator, you’re the real estate entrepreneur, you’re creating value where there was none. Without you there would be no deal. Without you there would be no return. So you absolutely get . . . you deserve to get paid. If the deal allows for it, pay yourself when you close on it, and while you own it, and when you dispose of it.
If you’re interested in finding out more about raising money, please, you can go to my website themichaelblank.com and I have a bunch of free resources including a free e-book, articles, blog articles, videos, and podcasts. I spend a lot of time in raising money so I hope you find that very useful. All right, so that’s it for what I have today for you today. Thanks for taking the time out and I will catch you in the next REI classroom episode on apartment building investing. All right, take care till next time.
Mike: Are you looking to change your life through real estate investing? If you’re interested in either getting started or taking your business to the next level, please check out FlipNerd’s private program at theinvestormachine.com. This is the most robust real estate investor coaching, networking, and mastermind on the planet and designed for your success.
If you’re ready to roll up your sleeves, ready to take personal responsibility for your own success, and ready to dive into a world class instructional coaching program that provides you step-by-step instruction to help you achieve financial freedom, then you should apply today. Spaces are limited and candidates are only considered after an application and interview process. Our 12-month investor program is unparalleled. Think you might be a fit? Learn more today at theinvestormachine.com.
Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of flipnerd.com or any of its partners, advertisers, or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.
Are you a member yet of flipnerd.com, the hottest real estate investing social community online? If not, you can join for free in less than 30 seconds and get access to hundreds of off-market deals, vendors in your market to help you in your business, and you can start networking with thousands of other investors just like you. Get your free account now at flipnerd.com.
Please check out the FlipNerd family of real estate investing shows where you can access hundreds of expert interviews, quick tips, and lessons from leaders across the real estate investing industry. They’re available at flipnerd.com/shows or simply search for FlipNerd in the iTunes store.
Michael: Hi there, and welcome to the REI Classroom. My name is Michael Blank and if you’re interested in getting started with apartment building investing, you’re in the right place. In today’s episode, I’m going to talk about how to pay yourself for syndicating an apartment building deal.
Mike: This REI Classroom real estate lesson is sponsored by theinvestormachine.com, FlipNerd’s private investor coaching program and your blueprint to investing success.
Michael: So when I bought my first 12-unit apartment building I did so with a group of investors and I put none of my own money in the deal and I still paid myself $15,000 at closing. So it’s called an acquisition fee. Now some of you might go, “Well, shoot, you have no money in your own deal and you still get paid at closing. Why would anyone agree to do that?” So let’s talk philosophical first of all about why you should be paid as a syndicator.
Now first of all, let’s find out what a syndicator is. A syndicator is a real estate entrepreneur who is finding deals, finding money, and finding an operator or manager and putting them together to make something happen out of essentially thin air. So philosophically, why do you deserve to be paid as a syndicator when you’re not putting your money in? What is up with that? Before I discuss how you’re going to get paid, but first of all, look, you’re doing all the work.
You are finding a deal and, by the way, by the time you have a deal under contract then you probably have looked through probably 150 deals before you got to that one. That’s the truth. You have spent hours and hours, by the time you pay yourself for this thing at closing you’re like minimum wage honestly. Number one if it weren’t for you, the investors would not have an opportunity to invest. In fact, without the deal, but without the investors putting in the deal without you bring in 7 or 10 people, there would be no deal. So the investor that complains about you being paid as a syndicator is probably not the right investor.
The way I think about it is this. You need to be on the same page as an investor, meaning that if you make money, if the deal makes money, and the investors make money you make money. What if the investors make money and you don’t make money? Why would that incentivize you to continue working over the years to maximize the profit of the deal?
So philosophically, you and the investor need to be aligned and so getting paid at closing rewards you from the long path. Getting there and getting paid during the process incentivizes you to kind of stay engaged and maximize the profits.
So there’s really three ways that you can get paid. One is upfront at closing, the second one is while you own the asset, and three is when you dispose of the asset. So let’s talk about each in turn.
So upfront at closing. Upfront at closing you typically get paid what’s called an acquisition fee and that fee is normally between 1% and 5% depending on what the deal allows and how much work the deal is. For example, if it’s a very stable deal you might want to pay yourself a little bit less on the lower end. On the other hand, if you’re doing a lot of development like, for example, you’re putting in $10,000, $15,000 a unit and it’s almost like a development, then you get paid more because you have to do a lot more. Right? Makes sense.
So normally my target for an average deal is about 3% of the purchase price. So for a million dollar deal which is not that big of a deal, a 3% acquisition fee would be $30,000 at closing. Kind of makes it a little bit worth your while.
The second way you can pay yourself as a syndicator is while you own the building and there’s two ways to do it. One is called retained interest or equity interest as a syndicator. So typically, as a syndicator you get a certain amount of equity simply for being the syndicator. Normally between 10% and 30% the deal is the syndicator or the general partnership. And the investors for bringing in the money get the rest. So for example, an 80/20 split, the investors bring in all the money for 80%, you as a syndicator get or retain 20%. So you actually get paid profits along the way.
Now there’s another way that you can pay yourself and that’s an asset management fee. This is sometimes depending on the deal, depending on the situation, but it’s normally 1% of the equity or it’s a certain percentage of the NOI, the net operating income. There’s different ways to do it. But the idea is this. You’re being paid a management fee as an asset manager. So in other words, you’re responsible for doing reporting to the investors, for dealing with the investors, and of course for managing the property manager. So that’s the asset management fee.
Then the third way you pay yourself is when you sell the building or when you refinance the building. In other words, a point at which you return the principal back to the investors and you do that either by outright sale or by refinance. Now why is this significant? The significance is if the investors get their principal back the risk is off the table and you should be rewarded for, or you can be rewarded for, returning the principal back to the investors. That’s called a disposition fee or a capital transaction fee, however you want to call it. And again, what’s normally done if the deal allows for it is 1% of the final price, the re-appraised value or the sales price.
So those are the three ways that you can pay yourself as a syndicator. It makes it very lucrative in addition to the actual equity you have in a deal. Now this is really important. You got to keep the investor in mind. So it’s all fine and dandy that you pay yourself all over the place, but the deal has to allow for it. What’s driving the deal is the investor return. Keep that in mind.
So in my deals, I’m normally looking for an average annual return of at least 13%, if I can get to 15 that’s even better. So I know around an averaging return of 15% the investors are very interested in investing with me. So if I’m paying myself too many fees that reduces that return, then number one maybe I shouldn’t do the deal or number two maybe I need to pay myself less so the investors make their target returns. So keep that in mind as you’re underwriting the deal to keep that in mind.
So look, you are the syndicator, you’re the real estate entrepreneur, you’re creating value where there was none. Without you there would be no deal. Without you there would be no return. So you absolutely get . . . you deserve to get paid. If the deal allows for it, pay yourself when you close on it, and while you own it, and when you dispose of it.
If you’re interested in finding out more about raising money, please, you can go to my website themichaelblank.com and I have a bunch of free resources including a free e-book, articles, blog articles, videos, and podcasts. I spend a lot of time in raising money so I hope you find that very useful. All right, so that’s it for what I have today for you today. Thanks for taking the time out and I will catch you in the next REI classroom episode on apartment building investing. All right, take care till next time.
Mike: Are you looking to change your life through real estate investing? If you’re interested in either getting started or taking your business to the next level, please check out FlipNerd’s private program at theinvestormachine.com. This is the most robust real estate investor coaching, networking, and mastermind on the planet and designed for your success.
If you’re ready to roll up your sleeves, ready to take personal responsibility for your own success, and ready to dive into a world class instructional coaching program that provides you step-by-step instruction to help you achieve financial freedom, then you should apply today. Spaces are limited and candidates are only considered after an application and interview process. Our 12-month investor program is unparalleled. Think you might be a fit? Learn more today at theinvestormachine.com.
Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of flipnerd.com or any of its partners, advertisers, or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.
Are you a member yet of flipnerd.com, the hottest real estate investing social community online? If not, you can join for free in less than 30 seconds and get access to hundreds of off-market deals, vendors in your market to help you in your business, and you can start networking with thousands of other investors just like you. Get your free account now at flipnerd.com.
Please check out the FlipNerd family of real estate investing shows where you can access hundreds of expert interviews, quick tips, and lessons from leaders across the real estate investing industry. They’re available at flipnerd.com/shows or simply search for FlipNerd in the iTunes store.
