How Do I Split Money With Investors?

How Do I Split Money With Investors?

There is no “right” answer on how to split money with investors. The answer depends on the deal. In your early deals, your friends and family who believe in you and what you’re doing are your most likely investors. At Syndication Attorneys, PLLC we help plenty of new syndicators do their first deal without an experienced syndicator on their team. If you are trying to crowdfund (advertise) your offering, you will need an experienced syndicator with a significant track record on your team.

A typical syndicate uses a limited liability company (LLC). Although some may use limited partnerships, LLCs are more common. The syndicator “carves out” a portion of the ownership interests for himself/herself (20%-30%, depending on how good the overall returns look in your projections) and sell the rest to investors in exchange for their “capital contributions.” Ideally, you want to find a deal that yields a 12% cash-on-cash return during operations from the beginning or within a couple of years, and you can make improvements such as add value or decrease expenses so that the property can increase in value in 3-7 years, giving you equity to share with investors on resale.

The sweet spot for investors for several decades has been an 8% preferred return from cashflow before the syndicator takes his/her cut. Additionally, for multifamily deals, investors typically get a share of excess cash flow or equity on resale based on their “percentage interests.”
Syndicators should seek properties with projected overall annualized returns in the high teens to low 20s range, after applying the amount of equity they realize on sale, spreading it out over the years the property has been held and adding it to the cash they received from operations. This will allow them to give investors 70-75% of the profits and keep reasonable compensation for themselves.

As for who signs on the loan, if you don’t have strong enough financials to do it yourself, you will probably need a “sponsor” (or experienced syndicator) who can help you qualify, even for non-recourse loans. In exchange, you might offer a piece of the syndicator’s carve-out. It is not typical for every investor to be underwritten, unless you have a very small number of investors.

In any case, if you are selling passive interests (where profits are not derived from the investor’s own efforts) you are selling Securities and will need to comply with Securities laws, so be sure to seek advice from a syndication attorney prior to offering interests to investors.
Also, see our article entitled “How to Structure a Real Estate Syndicate.”

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Are you ready to raise private capital?

At Syndication Attorneys LLC, we are committed to your success – book a consultation with one of our team members today!