Typically, people only consider using lending or equity investors when putting together multifamily deals but there is a lesser known option that is a combination of the two. Let’s take a look at how it is possible to do a combination hybrid multifamily deal.
You can use pension funds for the private money and then get a 20% down payment and working capital for them. The pension funds put up all of the cash. The funds get a 10% interest rate and then everything after that is split 50/50. This is even better for the lender but not so good for you.
This is a preferred equity type return. The pension fund gets 10% APR interest on their loan and they are getting half of the cash flow after the loan is paid they are getting half of the equity creation in the deal. The investor funds all of the cash for the down payment.
Let’s say that you have a $1.0 million project with 40 units. In this scenario, the investor would put up $270,000 and get 10% APR on that and then half the cash flow and half when the property is sold. So the investor is getting 10% cash on their cash immediately plus half cash flow and half of the appreciation. These are projects that are largely appreciation.
This type of deal should not be the first option you go to because there is not much money in your pocket. It is good enough to raise tens of millions of dollars so it is a formula that satisfies the high return part of the deal. You still have none of your money into it. You need to make sure that whatever you are doing in this particular deal is enough to cover your cash flow.
The combination hybrid deal is typically a deal that is used on smaller amounts; hundreds of thousands of dollars as opposed to millions of dollar deals. You can do it on any amount if you choose.
As an example of how a combination hybrid deal is different from the lender and equity deals, let’s break down our $1.0 million deal. You have the $1.0 million project and you raise $270,000. Two years from now, the property is worth $1.5 million. You decide to sell there is $500,000 profit.
You sell for $1.5 million and the lender gets back both his $200,000, 20,000 and his $50,000. The bank will get paid $800,000 as their balance due. That’s $1,070,000. That leaves you with $430,000 profit in the deal of which you get half: $215,000 and the lender gets the other half. They get the $270,000 back plus $215,000. They made $215,000 on a $270,000 investment over two or three years. Plus they get half the cash flow in the meantime.
It is going to get $270,000. The bank gets $800,000. The $500,000 profit is not right. The bank is getting its $800,000 first. They get their $270,000 so that is $1,080,000 you are paying off so your actual profit was $430,000. You get more cash up front initially. You are splitting the $430,000.
If you apply the combination hybrid deal to this scenario, it is the same deal but the difference is that you would have been paying 10% on $27,000 per year in interest to this investor plus they get $215,000 when it sold. This ends up costing you an extra $27,000 a year to do it this way.
So while it is possible to do a combination hybrid deal, it is not always the best option available to you. You need to carefully consider your options before deciding which type of investor suits your needs.