How to Make Big Money in Small Apartments by Lance Edwards

Author:Lance Edwards [Edwards, Lance]
Language: eng
Format: epub, pdf
Publisher: First Cornerstone Group, LLC
Published: 2014-08-28T07:00:00+00:00

Model #2: Equity Partners

Model #3: Hybrids

Model #1: Lenders

Lenders are going to loan you money for an interest rate return on their investment. This is my preferred investor return model. My private investors are lenders to my deal. I retain 100% ownership. This works well for stable projects that may require modest improvements.

Model #2: Equity Partner Model

Equity partners will put up all of the cash for equity or partial ownership of the deal, and you run the project. They will want control over the property but it is a good combination of leveraging their money and your time. It costs more – typically 50% of the cash flow and appreciation, in exchange for 100% of the capital. But it is a way to raise monies to do more deals; 50% equity will generally raise you all of the money you’ll ever need. However, an important point is that you don’t have to give away 50% equity - it varies with the investor’s return expectations.

Model #3: Hybrids

The hybrid return model is a combination lender and equity structure where maybe you pay 4% interest and give up 25% equity. Now I’m just throwing out numbers. Obviously, it will vary with the type of deal and you want to package it such that you retain a fair amount for yourself.

I know that deal structures is an area that everyone is especially interested in – what do the actual deals look like? Well, let me give you three examples.

Example #1: On an apartment project, the private investors are lenders that put up all of the cash (the down payment) and earn 10% APR. But in order to preserve the cash flow of the property, 4% APR is paid monthly and the other 6% APR is deferred and accrued until the private investors are paid off. This grants a nice future return to them and cash flow today to the entrepreneur. This type of model works when you have a plan to raise the property value through forced appreciation so that you have adequate equity to refinance and pay-off your private investors from the new loan.

Example #2: A local apartment rehabber takes really distressed properties (i.e. vacant) and revitalizes them back to stabilized operation. The high return they offer for their capital is usually 20% on the money. They employ the hybrid structure where they pay 7% interest guaranteed AND the private investor gets a 10-25% equity stake in the deal. The equity stake is set on the expectations of what it takes to generate an overall return of 20% on the private investor’s money.

Example #3: Years ago, I had the opportunity to spend two hours with the owner of a national luxury apartment developer. They constructed thousands of apartment units nationwide. Their private investors were pension funds. They raised hundreds of millions of dollars. They utilized a hybrid model - paying 10% interest guaranteed and giving up to 50% of the equity.

Now you might say that’s a lot, but if you had access to $100

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