How does all this work?
Maybe this concept is new to you. People do it all the time. Sophisticated investors loan or invest their money all the time to other people in order to get returns higher than what they would g able to get from conventional investments like stocks, bonds or certificates of deposit. It’s a simple process really from the side of the passive investor.
1.) Decide; the first step is decide if this is for you and start a conversation about a specific investment in a particular project that may meet your needs. An “offering memorandum” will be provided to the potential investor which would outline the proposed investment and business plan.
2.) Once identify the project, you would sign a subscription agreement and become part owner in the LLC, review the private placement memorandum that owns the specific project. These documents outline all the rules of the investment. Who owns what, and what are the different equity splits and who is getting paid for what and when.
3.) Next, you would need to wire your funds into an escrow account with Title Company or Lawyer . This account is never touched by anyone other than the title company or SEC attorney.
4.) Once the funds are wired into the account. All the inspections and closing process moves forward.
5.) Once the property closes, the investors would get monthly and quarterly updates and reports from the sponsor outlining how the business plan is preceding and what the cash flow and payouts will look like.
6.) Generally speaking, the investors would get paid out quarterly, this part would be your regular cash on cash returns. The project may opt to do a refinance at some point in the future to return most of the investor capital to the investor yet still retaining monthly cash flow until the property is actually sold.Once the property is sold, the investors would receive additional returns depending on the investors specific percentage of ownership they may have in the project. This is show is shown the “Average Annual Return”.
In the below hypothetical example, you will see the purchase price, capital needed to close, cash on cash return and also average annual return as well as the annual cash flow that would be available to members.
It’s really an easy process from the investors side, Most of the heavy lifting and day to day operations is handled by the plan sponsor. The investor provides capital and in return they are provided and investment that is professionally managed start to finish.
If you have more specific questions about apartment buildings, Give us a call at 510-863-1447