Jay wants to build an apartment complex, but he doesn't have the cash to fully fund the venture. He asks Dave about lining up investors, but Dave thinks this is a bad idea.
QUESTION: Jay is looking to build an 18-unit apartment complex, but he doesn’t have the cash to do it on his own. He has a net worth of around $400,000, and $100,000 cash he can put toward the $1.2 million project. He asks Dave if lining up investors, who will take a percentage of the profits, is the same thing as acquiring debt. Dave says no, and explains his reasoning.
ANSWER: No, because if there are no profits, the investors get nothing. It’s not debt — it’s partners. It’s what you would call an equity position, meaning they’re owners in the business. Now, they may have limited rights as owners, but essentially you’re taking on partners.
There’s a method that was used in the old days, and is still available, called syndicating a piece of real estate. You would set yourself up as the general partner and set the investors up as limited partners. They would certainly be limited in their input — the general partner runs the show. They can be given the lion’s share, for instance, of the tax write-off — the depreciation schedule can be given to them. The general partner, traditionally in those models, takes less of the depreciation schedule but gets a fee for running things and has a position of ownership.
You can do all that, a limited partnership or syndicate a piece of real estate, but it can be very messy and time consuming for the money you get out of it. At this stage of your investing life, I don’t think this is a good method for you to buy an apartment complex. It’s more like a way for you to get into the business of running a bunch of limited partners with a ton of paperwork and bookkeeping thrown in. And honestly, it doesn’t sound like a lot of fun to me.
If I were in your shoes, I’d use the $100,000 in cash to buy a money-making property — maybe a nice rental house. Then, save your money, invest and buy another one. And again, save the money, invest and buy another one, over and over again. It’s a gradual process, but I don’t teach or advise people to go into partnerships or borrow money.