I am a financially independent real estate investor, and always in the market for new investments. The secret to finding great deals is to be observant, understand what you are investing in, and understanding the risks. And a bigger key is to be able to actually get into the deal.
If all your capital is used up, you will have to watch others get into deals. So I have a choice coming, additional investment, or ride off into the sunset with what I have – which is more than enough already.
The Investment Opportunity
I have an opportunity to invest, as a 50% partner, into an additional 16-unit apartment deal, it is a property I am familiar with, and the price is close to market. That is to say, I am buying it at a decent price, and not getting a big discount, and not over paying either.
The property is already professionally managed, and has been for over 30 years. The same management company that was part of the initial development is going to continue to manage it. The pro-forma numbers are decent, and assuming the net distributions to the partners are the same as prior years, the numbers look like this, based on the investment amount I would be putting in.
2011 – 13.67%
2012 – 15.98%
2013 – 14.15%
2014 – 21.20%
2015 – 17.64% (projected)
These numbers do not include any real estate sales price appreciation (or potential losses). I think the building is solid and valued reasonably, so any loss of building value is minimal, other than normal selling expenses.
The building is already being managed as a partnership, and will continue to do so. The old partnership will be dissolved, and a new partnership created. The same management company will be maintained. Old loans will be paid off, and new loans will be created.
- It should provide a minimum of 10% return, likely more, based on previous years.
- The rental market is strong, for the next few years apartments should be good investments
- Rents are generally inflation protected. They rise with wages and inflation.
- It will be mostly hands off; one of the general partners will continue to manage the property as he has done for about 30 years. His fee will be 6% of rents collected.
- It is a large investment, but not really that large. It is a investment to put up 10% of cost. The other partner will come up with his investment for a total of 20% down.
- It is a property I am familiar with. I know the potential and know the area. It is a class B building, in a class A area.
- I will be involved in a seven figure loan deal. If the thing goes bad, I could be on the hook to owe seven figures, along with the partner. If he goes bankrupt, I owe the entire amount.
- We will be taking out a commercial loan. It will reset in 5 years to a market interest rate. What will that do to the cash flow, and ultimately the value of the property?
- Partnerships are always more risky than individual properties, but there are thousands of successful partnerships for every one that goes bad. And a partnership does spread the risk, so that is less risk.
- The odds of me owing seven figures is almost nil. The building is worth something. I could lose my initial investment, but likely not much more. If the building is priced right, and is maintained, it should bring in what was paid for it. Subtracting selling expenses would not even eat up all of the initial investment.
- I will be investing not as myself, but as a LLC. That will help insulate me from any issues resulting from lawsuits, etc.
- There are a lot of details still to be uncovered and flushed out. If this happens, it will be a long time to get covered with the financing and may take 4-6 months to finalize. And even then it may not happen.
What do you think? Have you ever invested in a partnership? Or looked at deals in partnerships? Is it worth the risk? Or should I just keep what I have and ride off into the sunset?
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