Out of Pocket Costs – Multifamily

Hi. I want to talk about out-of-pocket expenses on a multifamily project. This would be a project that you’re gonna go and buy, and syndicate, which means you raise money for it, from a number of investors. Syndication is where a number of investors come together, and go buy a property. Now, it might be 75% the bank’s money, 25% investor money. That investor money’s called equity. You go in and you buy the property. As a sponsor, the person that’s putting the deal together, what are the out-of-pocket expenses up front? Well, I’ll highlight a few here. The first one, just off that top of my head is going to be legal. You’re gonna need to put together what’s called a private placement memorandum. You’re gonna need to form an LLC, or maybe two LLCs for the property, specifically. You’ve got some legal costs. Let’s just say we’re dealing with a hundred plus unit apartment complex, like my company’s dealing with. We might expect a legal line item of 15 to $18,000, for the private placement memorandum, for some contract negotiation, and for LLC formation for the property. You’ve got that out-of-pocket. Now, depending on your attorney, you may pay that all up front, or you may pay a retainer, and the rest at closing. That’s on out-of-pocket expense, that you’re gonna wanna budget for. Another one is the inspection. We go in through, and we inspect a property as soon as possible after getting the property under contract. We might have a 30 window, from contract to the time that our money is at risk, our earnest money. During that 30 day period, we want to knock out our inspection as quick as possible, preferably in a first, literally first few days. You might hire a third party company to do that. We just did that on a project. It was $65 per door, give or take. It was about $8,000 to inspect the entire property. I mean, condition report for absolutely every system, HVAC, electrical, mechanical unit, condition, appliances condition, all that stuff. A third party goes through there and inspects all that, and gives you a very comprehensive report you can use to build your budget. On this example, that cost was $8,000. The biggest expense that comes to mind, is your earnest money or your deposit. You put up any property under contract, you’re likely going to put some money up front, that says, “Hey. I’m serious about this. I’m committed to it.” You have a window of time before that money becomes not yours anymore. You’ve got a period, let’s call it 30 days, or maybe 21 days of a feasibility or due diligence. That money typically, let’s just call it 1%, that could easily be 50 or $100,000, or maybe you’re putting down more than 1%, in order to show the seller that you’re serious. Let’s just use a place holder of $100,000. That’s gonna be considerable. This is called risk capital, because you’re putting that money at risk to go pursue this deal. That’s some money that the sponsor’s gonna need to have access to, in order to go pursue that. There are some other costs, just in terms of other little costs that you may incur, but, the three big ones that come to mind are legal, inspection, and your earnest money. Those are the things that a sponsor’s gonna come out-of-pocket. In that example, we’ve got 100k for earnest money, say 8k for inspection, that’s 108. Let’s say it’s another $16,000 for the legal. You’ve got $124,000 out-of-pocket from the sponsor, before you actually are able to recoup that from the capital raise, which happens later on in the process. As you’re considering a multifamily project, those are some of the out-of-pocket expenses that you can expect, on a smaller property. Obviously that’s less. You might also consider partnering with somebody, to make that happen, if you need to. Partnerships are very common in multifamily investing. You can split those responsibilities up pretty cleanly, to go get the deal done. If those out-of-pocket expenses are something that you want to have a partnership come and work on together. Hope that helps. Have a great day.