One nice benefit of syndicating apartment building deals is that you have the ability to pay yourself. While you may not be putting in all of the money, you’re doing all the work.
When I bought my first 12-unit building with investors I paid myself $15,000 (or 3%) of the purchase price. I wish that building had been bigger!
Why did I do that, and why did my investors agree to it?
The answer is that because it was reasonable to do so, and it was also disclosed to the investors.
- You’re finding the deal. And before you actually land a deal, chances are you’ve looked at many, many deals before that. This is time consuming and can actually cost you some money.
- You not only find the deal, you also bring the money together. Without you bringing all of the investors together, there would be no deal.
- You also manage the whole project. Yes, you should certainly hire a property manager, but you need to manage that property manager, and replace him if he doesn’t work out.
- You also need to communicate with the investors on a regular basis, putting out reports and managing expectations.
And in the end, you need to sell the asset, or perhaps refinance it, to return the investors’ capital.
Because of all of this work and responsibility, you deserve to be paid. And if you explain to your investors all that you do, they will have no trouble agreeing to you being paid.
In addition, I also disclosed it in my disclosure documents and operating agreement. That way, everyone knew exactly what is going on and they were OK with it.
How Much Should You Pay Yourself?
You can pay yourself anything as long as it’s (a) reasonable and (b) you still achieve your investors’ projected returns.
For example, if you’re projecting average annual returns for your investors of 15% and your acquisition fee still allows you to realize that return, then go for it! Otherwise, you may have to pay yourself less or nothing at all (in which case I might look for another deal). In any event, preserving your investors’ returns are paramount.
3 Ways to Pay Yourself
There are three ways you can pay yourself:
- Upfront: You commercial broker usually gets paid 4-6% for brokering the deal. Would it be unreasonable to pay yourself 1%-3% when you purchase the building? Not all!
- While You Own the Asset: This is sometimes referred to as an “asset management fee”. Financial planners and money managers normally get paid around 2% of the assets they manage. It’s not unreasonable to do the same here.
- When you Dispose of the Asset: You could pay yourself an “asset disposition fee” when you sell or return the investor’s capital in a cash-out re-finance. A fee of 1%-3% is not unreasonable.
Make sure that when you’re syndicating deals with money from private individuals, you also pay yourself! It’s justified and reasonable – otherwise you’re just leaving money on the table!
Written by: Michael Blank