Should an Apartment Syndicator Invest in Their Own Deal?
As an apartment syndicator, you raise money from accredited investors to purchase apartment communities and share in the profit. However, should you rely on private capital to fund the entirety of the deal, or should a portion of the investment come out of your own pocket? Based on my experience as a syndicator and interviewing syndicators on my podcast, I believe a syndicator should invest in all of their deals.
First, it benefits the syndicator from a monetary standpoint. By investing their own capital in the deal, they will make the same projected returns as your investors. So, by neglecting to do so, they’re decreasing their overall profits.
Secondly, and most importantly, investing in your own deal results in an alignment of interest with your investors. If you have your own skin in the game, your investors will have more assurance in the investment. In fact, it may be a requirement for them to actually invest their own capital. If you don’t invest in your own deals, why would someone else have the confidence to do so?
But what happens if you don’t have enough money to invest in your deals? This was the situation I was faced with on my first deal – I just didn’t have enough money saved up to invest. So, if the reason you aren’t investing in your own deals is because you don’t have enough money, you’ll need to achieve an alignment of interest in other ways.
For example, on my first deal, I had the brokerage that represented the seller invest their commission into the deal. Because they had over 20 years of experience and believed in the deal, this made up for my lack of investment in the minds of my investors. Therefore, if you don’t have enough money to invest in your own deal, consider offering the broker/s the opportunity to reinvest their commissions and become a limited partner. Similarly, another option is to have the property management company invest in the deal. They can either invest their own capital or bring on their own private investors. The idea for both of these approaches is to have an experienced party invest to provide your investors with additional faith in the strength of the deal.
Another way to show alignment of interests is to invest your acquisition fee into the deal. Generally, a syndicator is paid a fee of 0.5% to 3% of the purchase price at close for finding, analyzing, evaluating, financing and closing the investment. Instead of cashing in on this fee, reinvest it back into the deal. This accomplishes the alignment of interest and will increase your overall profit on the deal too.
Finally, offer a preferred return. A preferred return isn’t a guarantee, but it signals to your investors that you believe the deal’s performance will not only achieve, but also exceed the level of preferred return. And to take it a step further, something my company does is we put our asset management fee in second position to the preferred return. If the asset doesn’t achieve the specified preferred return, we don’t collect our asset management fee. If our investors don’t get paid, we don’t get paid.
Ultimately, to attract private capital, it boils down to an alignment of interests. You want to show your investors that they take a priority over your interests. Having your own skin in the game is own way to accomplish this, but if you don’t have enough capital to invest in the deal, you must achieve an alignment of interests in other ways, like having the broker or property management company invest in the deal, reinvesting your acquisition fee or offering the preferred return before collecting an asset management fee.
How do you show alignment of interest to your private money investors?
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Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.