A bad investment method at this stage
Dear Dave,
I want to build an 18-unit apartment complex, but I don’t have enough cash to do it on my own. My net worth is around $400,000, and I have $100,000 I can put toward this project. It is estimated to cost $1.2 million. Would lining up investors, who will take a percentage of the profits, be the same thing as acquiring debt?
— Jay
Dear Jay,
It wouldn’t be the same as taking on debt because if there are no profits, the investors get nothing. It’s more like taking on partners and what you would call an equity position — meaning they’re owners in the business. They may have only limited rights as owners, but essentially you’re taking on partners.
There’s a method that was used in the old days that’s still available today 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 be limited in their input, because the general partner runs the show. They can be given the lion’s share of the tax write-off, and the depreciation schedule. Traditionally in those models, the general partner takes less of the depreciation schedule but gets a fee for running things and has a position of ownership.
There’s a restriction under Blue Sky Laws on the number of limited partnership units allowed before it becomes a situation where you’re selling stock. Check with your state and current securities laws to be sure of the exact number to avoid any impropriety. You can do a limited partnership or syndicate a piece of real estate, but they can both be very messy and time consuming for the money you get out of it.
Honestly, I don’t think it’s a good method for you to buy an apartment complex at this stage of your investing life. 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. 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 moneymaking 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.
Best of luck, Jay!
—Dave