Lead Partner Compensation?

General Real Estate Investing
1

I have an acquaintance who has an impressive track record of locating distressed apartment buildings, rehabbing and refinancing/selling them. Several friends/colleagues have done multiple deals successfully over the past few years so the person is trustworthy. The strategy is to increase the NOI substantially and pull out most of the initial investment by refi. I am now thinking of investing on a passive basis. I want to find out if the compensation she is asking for is fair:

  1. Her property manament firm will get 5% of collected income.
  2. When the deal is refinanced, she will get 20% of the owners’ equity (so this includes the 20% down initial capital invested plus the appreciation). The rest is distributed to partners based on ownership percentage.

Thoughts?

The one concern I have is she will put very little of her own money in the initial capital. But we would not be able to purchase such deals without her credibility (with banks etc.) and track record.

2

You weren’t specific about the type of building. Management fees for moderately sized B & C class apartment buildings (say, 100 units or less) are typically 5% to 10%, so hers are quite reasonable.

A 20% equity share and little or no investment is in the ballpark of what many group investment organizers seem to be offering, and getting, lately. You might find better, but if you’re comfortable with this deal I would not be horrified by these numbers. She should get paid only if the deal is profitable, however.

I know you’re not comfortable doing this on your own, but don’t think you couldn’t do it without her.