Today’s REI Classroom Lesson
In the classroom today, Michael Blank teaches us a few ways to pay yourself on a deal.
REI Classroom Summary
Find out the 4 ways to pay yourself when you buy an Apartment Building and why you deserve it.
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: Hey there, this is Michael Blank and I’m your instructor today on today’s REI Classroom. Today, we’re going to talk about how to pay yourself when you purchase an apartment building. This is a little odd, but I’m assuming that you’re going to be purchasing apartment buildings with other people’s money.
Mike: This REI Classroom real estate lesson is sponsored by UglyOpportunities.com
Michael: And that makes you a syndicator. Syndicators put together deals that are almost . . . I don’t even call them real estate investors. I call them real estate entrepreneurs. Entrepreneurs make stuff happen. They find money, they find deals, they find managers and they put the whole deal together.
That’s what real estate entrepreneur does and you get compensated for that. Whether you put in your own money or not, you are actually compensated for that. Most people don’t know this. When they do find out about it, they start feeling guilty and they feel guilty about asking their investors and they kind of say, “Well, I’m going to pay myself something also,” and they feel like they don’t deserve to be paid.
Before I talk about how to pay yourself, let me just start to dispel a little bit of why it is totally reasonable to pay yourself throughout this process. When I bought a very small 12-unit apartment building, I paid myself $15,000 at closing, that’s 3% of the purchase price. So 3% of the purchase price and let’s say you’re doing a slightly larger deal, you’re doing a million-dollar deal. You’re paying yourself a $30,000 acquisition fee, which is paid to you at closing.
Now, why would an investor agree to do that? Here’s why. First of all, if you have this deal under contract that means you probably looked at, I don’t know, somewhere in the neighborhood of 100 deals and maybe even you went and drove there and spent two to three hours touring the deal. You’ve made phone calls. If you calculate your number hours, you’re probably working minimum wage by the time you get this deal under contract.
There was a lot of work that went into, number one, finding this. Number two, not only did you find a deal but you brought together people who don’t know themselves and brought their financial resources together to enable you to do this deal so that they can all make money. So you worked hard to expand your network and bring people together. Number three, you negotiated the deal and you put property management in place and you’re running the place and, eventually, you going to sell this thing all to make money.
You deserve to be compensated. Without you, the investors would not make any money at all. An investor who puts up resistance to this after you try to help them understand that this is going on may not be the right person to take money from. Look, you’ve got to be on the same page as an investor. If the investors . . . why would you bust your butt to make something very profitable if you’re not being compensated fairly for doing so?
So if the investor wants to make as much money as they can and you’re not being compensated in the same way, why would you bother? The investor has to understand that the more money they make, the more money you make. On the other hand, if they don’t make any money, maybe you don’t make money either. That’s fine too. There’s no reason for you to be making money and everybody else does not make money.
My point is you have to be on the same page and you deserve to be compensated. So there are three ways to the pay yourself. One is up front. We talked about this acquisition fee, which is paid at closing when you purchase it. It’s normal somewhere between 1 and 3% and if the deal allows for it.
Number two is while you own the asset. Sometimes, this is called an asset management fee and there are different ways to structure that. You can have it be a small percent of the income, a small percent of the equity that was invested, different ways to do it. The point is you are being paid while you own the asset and as you manage the asset.
Number three is when you dispose of the asset or when you return the principal to the investors. So you can have one or both. For example, if you refinance in three years because you renovated the property and you return all the principal to the investors, you can pay yourself a fee of 1% or 2% of the loan amount or of the valuation at the time or when you sell it. That’s called a disposition fee.
Those are all reasonable fees. You also, of course, get equity in the deal. You’re going to get between 10 and 30% equity simply for putting the deal together. This means that you get, after you pay your investors their returns, you get to share in the profit and the upside as well. All of these are four different ways you can make money with syndicating deals, which makes it so attractive even if you don’t put your own money in the deal. That’s how you’re compensated. Now, if you put your money in a deal then you’re also treated as an investor.
If you want to know more about raising money and structuring deals, I do a free eBook on this and you get from the TheMichaelBlank.com right there on the homepage. That will give you some more information about structuring deals and raising money. I hope that was helpful and please be sure to compensate yourself fairly when you do deals. It’s only fair and reasonable and what makes it fun. I hope you guys enjoyed it and I’ll see you next time.
Mike: HomeVestors, the we-buy-ugly-houses folks, is a franchised system of hundreds of real estate investors and have purchased over 65,000 houses. If you’d like to learn more about the most powerful real estate investing system in existence, whether you’re a pro looking to take your business to the next level or whether you have no experience at all but a burning passion to be successful in real estate investing, please visit FlipNerd.com/ugly to learn more.
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