Let’s say I put together a group of 4-6 buy and hold investors who want to maintain tight control over their investments. Most of these people own and manage their own rental property already. The goal here would be to get into a large multifamily investment with on site management without the high upfront investment and risk in partnering but still the higher returns than we are getting in SFH.
So, we go as a group and subdivide a multifamily lot into a small subdivision for apartments (apartment complexs with each building on a seperate lot). Let’s say 100-300 units. We divide the lots between each of us and set up the equivelant of an HOA whose job it is to manage the investment and keep it rented, as well as own communal property such as a clubhouse and maybe a pool. Each owner is only allowed to build to one set of plans. Then, we can each start by building one building and add the rest of it as the place gets occupied. Our up front risk would be pretty low (I figure 800k to build a 12 unit 8000 sq foot building) compared to investing in a complex and we can each control the growth of our investment and the risk.
In my area the 12 unit building with a mix of 1,2, and 3 unit rooms would rent for about 10k/month. If management is 1k/month and the payment is 5k/month that leaves a 15-20% return.
It seems like an odd idea to me too, never seen it done. I’m curious if anyone has and if it worked.
Why would this not require a high upfront investment?? What does the land for this subdivision in a desirable rental area cost that can accomodate 300 low rise horizontally built rentals with a clubhouse, pool, etc. with city planning approvals, servicing and roads? $4m? Cost of land is why most investors build vertically in some kind of syndication. The bank’s not gonna finance vacant land, so you need to come up with $667K a piece for the land until it’s developed plus $133K a piece for the first 12 plex and all the carrying costs until it gets developed. I don’t see how you get a 15-20% return in year 1?
Why not just get 6 partners to each buy a block of 12 condos in a new 72 unit highrise condo? Each partner can rent their condos out through onsite management like they do with hotel condos. It’d be a lot easier for each partner to get financing for a condo complex and you can accomplish the same objectives with much less upfront investment.
What I’m saying is that I don’t think any of us would participate in a commercial apartment complex. This would allow us to get the higher rents that places like that get without the risk of being a minority partner.
I think youre better off investing in existing condominium and townhome complexes, with reasonable HOA fees (very, very important) and high enough market rents, as even though your individual units won’t necessarily be side by side, by purchasing used properties and fixing them up you’ll get a far better ROI if the properties are purchased at a below market price than building them new.
Personally, I would want to put together that same group of 4-6 investors, and if you could get $800k from each of them, $3.2mm to $4.8mm will give you far more than enough capital to purchase some lower end apartment complexes, refurbish them, rent them for higher rents and enjoy the cashflow and/or sell for a large capital gain. People do that all the time in Texas! If you’re worried about potential partnership disagreements, pay a lawyer to put together a superb partnership agreement with exit strategies/options for partners that may need to get out for whatever reason. You should take a look at a law office partnership agreement if you want to see what a good one looks like…the last one I saw was probably 3/4’s of an inch thick. LOL
And what would your exit strategy be? You may get descent yield, but you’d get a crap IRR because you wouldn’t be able to sell it - and if you could it would be at a discount.
How do you finance the property? It would be hard to get Fannie or Freddie debt on it - which is one of the main benefits to multi.
It’s an interesting idea, but why not just do a TIC structure and go all in, together on a deal. Dividing the property like that seems like a practical and legal fiasco
Investrix is correct, the best way to do a group investment is to Sponsor a TIC (tenants in common) investment. If any one investor wants to exit the group it could easily be done by selling his shares. And 1031 tax exchanges works very well with TIC. And you only need a handful of investors just enough to raise the down payment of 30-40% then leverage the rest. On a $5 million purchase price, you might need to only raise $1.5 million (30%) and mortgage the rest.
it’s all great until partner #1 dies intestate, leaving half of his share to his minor children whose interests are controlled by his hostile ex wife who is now your new “partner” along with his impoverished widow who has no capital to put in when the bank says you need a new roof.
I’m saying that this type of arrangement would need a pretty heavy duty partnership agreement.