Introduction
Welcome to the world of multifamily investing! As a member of the Small Axe community, I’m thrilled to share the ins and outs of generating income and building your personal empire through multifamily real estate. In this blog post, we will explore the various roles within a multifamily investment and the fees and returns associated with each. So let’s sharpen those axes and dive in!
Understanding the Roles in Multifamily Investing
When it comes to multifamily investing, there are typically two primary roles: the general partners (GPs) and the limited partners (LPs). You can choose to be one or both, as I have. Let’s break down what each role entails and how they get compensated.
Compensation for General Partners
- Acquisition Fee
The first type of payment a GP might receive is the acquisition fee, ranging from 1% to 5% of the purchase price. This fee compensates the GP for their vital role in securing and closing deals. For example, on a $1 million purchase with a 2% acquisition fee, the GP would earn $20,000. However, it’s essential to evaluate whether the acquisition fee is reasonable for the specific project, as not all deals can support high fees.
- Asset Management Fee
Once the property is under management, GPs can earn an asset management fee. This is typically around 2% of the gross collected rents. While not a significant income stream on its own, it is a necessary compensation for the ongoing efforts in managing the property.
- Capital Event and Disposition Fees
Additional fees, like a capital event (refinance) fee and a disposition (sale) fee, can also be earned. While I have yet to charge such fees, they can be justified for the complexities involved in refinancing or selling a property.
Profiting as a Limited Partner
- Preferred Return
As an LP, you provide capital in exchange for a preferred return, similar to dividends from stocks. Let’s say you invest $100,000 with an 8% preferred return; you would receive $667 monthly. This model means your investment is actively earning and shields against inflation.
- Equity Participation After Preferred Return
Once the preferred return threshold is surpassed, any additional profits are shared between GPs and LPs. For example, after the preferred 8% is achieved, there might be a 70-30 or 50-50 profit split, encouraging GPs to work diligently to exceed this benchmark.
In Conclusion
Whether you’re aiming to be a GP, an LP, or both, multifamily investing provides multiple avenues to earn income. As a GP, you focus on the operational side, earning various fees for your hard work. As an LP, you leverage your capital for steady returns with less involvement.
If you ever have questions or need guidance, reach out to me, Nico Antonio Alfredo Salgado. I’m here to help guide you on your journey to building wealth through multifamily investments.
Thank You and Keep Going
Thank you for taking the time to explore this guide. If you found it valuable, please share it with others and consider leaving a review. Keep sharpening those axes and let’s continue to build and crush our goals together. Love you all!
