This time on the REsimpli Mastermind call, Sharad Mehta, CEO and founder of REsimpli, is joined by a prestigious guest, Axel Ragnarsson, a multi-family real estate investing expert and founder of Aligned Real Estate Partners.
In this insightful discussion, Axel shared valuable thoughts on the significance of partnerships and deal structures in scaling a business. He also shed light on various partnership models, including joint ventures, business-level partnerships, and syndications, along with highlighting their benefits, such as leveraging experience, risk mitigation, and faster scaling. His journey in real estate investing showcases the shift towards partnerships and raising capital for success.
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Investing in a multi-family business seems a hard nut to crack, but it can be a key to earning passive income and growing a professional portfolio. If you are also looking for financial freedom, Axel is here to guide you through your journey to a multi-family business.
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Axel Ragnarsson is the CEO of Aligned Real Estate Partners, a firm that aids busy professionals in effortlessly generating passive income to support their quest for financial independence. Remarkably, Axel purchased his first multi-family property at the young age of 21 during his college years, utilizing funds from others. Over the past three years, he has successfully expanded his real estate business, accumulating a portfolio valued at over $6 million.
Axel Ragnarsson 00:01
This is the approach in terms of how we get there and what we’re doing when we when we have this GPLP split of this 50 50 is when we sell the property and we pay the debt, we pay back all the investors, we pay any of that unpaid preferred return, all the money that’s left over. Some percentage of that is going to the investors for participating in this deal. Some percentage of it is going to the active partners for all of their contributions or that individual’s contribution, however many there are.
Sharad Mehta 00:32
Hey, guys. So welcome to weekly REsimpli mastermind call. My name is Sharad. So those of you who don’t know me, I am the owner and founder of REsimpli. So we do these calls every week, Tuesday. And last couple of months, we started bringing on experts from different background, different expertise in real estate investing.
And I’m super excited to have Axel Ragnarsson. So, yeah, I’m excited to have Axel on the call. And he’s an expert in multifamily. That’s something I’m personally looking into, diversifying, like moving a little bit from single family into multifamily. So I wanted to bring Axel on and just kind of share his knowledge, his wealth of experience, and see if he can help us out and answer some questions. So welcome, Axel. How are you man?
Axel Ragnarsson 01:14
I’m great. I’m great. I’m looking forward to getting to know everybody here today, and I appreciate the invite.
Sharad Mehta 01:21
Yeah, absolutely. Guys, before we get started, if those of you guys who if you guys are able to have your camera on, I’ll appreciate it. Again, I say this, I have a face built amazingly for radio, and I take the courage to have the camera on. So you guys are all good looking people, so you should be able to have your camera on. Thank you, Jeremy. Mark. But yeah, if any of you other guys can have your camera on there you go. Renee. All right, Axel, you said you have a presentation that you wanted to share, so if you want to jump right in so we can do that and then we can open it up for Q/A. Is that cool?
Axel Ragnarsson 01:56
For sure. Sounds good. What I’ll do is share my screen here and we’ll get going. So what I want to talk about today, I’ll give just a brief kind of high level background to myself. Try not to spend more than three or four minutes on that. So I don’t take up your time telling you guys about me, but just in terms of context as to what I’ve done and what our business does, then I’m going to spend the bulk of our time here today talking about partnerships and deal structures. Because obviously, I’m going to make the assumption that everybody on this call has some experience with finding off market deals. If you’re using REsimpli, you’re probably going direct to seller, and that’s probably a strong suit of yours.
So I want to talk about how you can partner with other investors if you’re out there sourcing multifamily deals and some very simple structures as it relates to just raising some money from investors, which in my opinion is the key to scaling a multifamily portfolio. Because no matter how good the deals you’re finding are, even if you’re finding deals consistently 75%, 80% of value, you’re going to run out of cash because it’s a capital intensive business in terms of getting into multifamily with renovations, building operating accounts, et cetera.
So what I found is the key in my business in terms of growing from the 20, 30, 50 units to 300, 400, 500, has been embracing partnerships and raising capital. So I’m going to talk about that at a high level and then we’ll do some Q and A. So quick backstory on me. So I live in Boston, originally from New Hampshire, started buying real estate back in college. This is seven, eight years ago now. Started buying small multis, two to four unit multifamily properties and financing them with private money and doing a lot of what I’m sure a lot of the folks on this call have done, sending the mailers, making the cold calls, et cetera, et cetera, to find those good deals.
But after a few years, even though we’re finding good deals and refinancing our money out, you still are faced with a problem when you’re doing even small multifamily projects that are value add in nature, which is typically why we’re buying a good deal because it needs some work. You’re not really making any money for the first year. You’re turning over the units. You’re trying to push the rents. You’re spending money renovating the units, maybe the exterior. And it takes a little bit of time for you to really make any real money. And there’s a lot of money going out the door and not a lot of money coming back, right?
So even though I was consistently finding deals at discounted value, I realized I had to go start bringing in partners or raising money in order to keep the business growing. And really that was three years ago that we made this shift, late 2019, early 2020. And we made a couple of key decisions which was let’s go raise money from passive investors and let’s go and do some deals out of state. Everything I had done was in New Hampshire up to that point, and then we started looking down in central Florida. So just giving ourselves more opportunity to look at slightly larger assets. And by large at that time to me was 30 to 80 units in size. Right? Now that’s technically considered mid-size. In the multifamily world, large is typically 100 plus. But that’s what we were looking to do at the time.
And along the way, we started a property management company in New Hampshire to manage our own deals and then to manage other investors deals. Started a podcast and I’m very active on Instagram as well. And my handle is at multifamily wealth. Always talking about multifamily on there and talking about what we’re doing in our business. So, long story short, Aligned Real Estate Partners is the business started it to raise capital to buy value add multifamily assets. And in terms of what we look for, we buy 5 to 100 unit properties in New Hampshire. And really anything that’s five to 25 to 30 units is just something I’ll do with myself or with a couple of partners. And then down in anything larger than that we’ll raise capital and either do a syndication or a larger joint venture type of deal.
And then down in Florida, we look throughout Central Florida and Southwest Florida, we’ll look for 20 to 100 unit deals down there and that’s what we typically buy. And we look for value add, right? The deals that have a good story, the value add deals where the owner is not maximizing the revenue, not operating it well, et cetera, et cetera. So what we’re going to talk about deal structures. There are many different ways to partner with other investors and I’ve done all any version of these and I’m going to dive into these a little bit deeper, but let’s define them at a high level.
So first of all, you could partner at the business level versus at the deal level, right? I don’t have any partners in my business, right, The Aligned Real Estate Partners business. But obviously a lot of investors out there are partnering with a business partner in their business and they’re co investing and they’re buying every deal together. Right? And if they’re raising money, the two of them are still involved in the deal and your partner is at the business level. Right? I think that’s kind of the very high level version of partnering with other folks. You can do joint venture partnerships, which is just a fancy way of saying you and other people that are going to be active in the deal, right?
So it could be you and another investor, you and a friend in the marketplace that’s got a deal, he’s got the deal, you got the money, you guys figure out a way to partner on. It could be you and a major investor that’s looking to be a little bit more passive, somebody that’s bringing all the equity. Maybe you’re finding the deal and operating it, but they’re funding the entire thing. And maybe you have all the decision making control from an operation standpoint, but they have some decision making control from when we’re selling the property or when we’re refinancing it. Or it could be you and a few major investors, right? And I’m going to talk about what technically defines a JV in a moment, but these are just some common in practice applications of what I’m talking about there.
And then you can do syndications, right? You could spend 2 hours on this topic alone. I’m going to touch on it, but I can’t go throughout this presentation without mentioning it. But that is you as the general partner or the sponsor, either you or other GPs, but one or multiple GPs raising capital from one or multiple limited partners who are investing in the deal that have no active involvement in the deal. They have no decision making controls or decision making control. They have no say over how the deal is managed or operated or when it’s sold or refinanced, et cetera.
In that situation, that is considered a syndication. And I’ll outline the difference in a moment. So what are some of the benefits of doing this, right? For me, I was so hesitant forever to partner with other folks or to raise any money. I was like, for the first five years in this business, I was like, I want to own everything. I want to own 100% of every deal I’m doing. I don’t really want to give up any of the upside. I want to control to control it. And it’s for, at the time, what I thought to be financial reasons. But really it was like, I think I was intimidated by the prospect of doing it. I didn’t really want to be on somebody else’s schedule. I didn’t want to have to answer to somebody else.
And at the time I just thought, I can keep scaling with my own money, right? Why would I decide to bring in other people’s money when I can keep buying these deals and maybe using a lot of debt to buy them or just investing a little bit more aggressively is probably the way to put it. And now I look back and I realized that was a really risky way to go about doing business and I happened to be doing it at the right time in terms of using a lot of debt and continually reinvesting capital into new deals and really having a thin amount of reserves on the back end. And now every deal we do, we bring investor capital in. Because now I prioritize the peace of mind of having money in the bank and I’d much rather use investor capital and have a nice chunk sitting in our company operating account than actually going out there and just trying to throw all of my money into deals as fast as possible, to grow as quickly as possible.
And in terms of some of the other benefits, right, you can scale faster and more efficiently. Obviously, when you’re using other people’s money, you can do more deals and deals becomes your constraint, more so than money and you can do these deals more efficiently. And a nice little reason that I like to mention to people is when you buy a deal with investor capital, you raise all the money that you need for the life of that deal up front. And it very significantly reduces the amount of complexity behind the scenes where you’re kind of taking some money out of this company’s operating account so that you can do a renovation over on this property or this property is cash flowing really well. So you take all that cash flow and go buy another one.
And the money is moving around. It’s a little bit harder to keep track of, but there’s something nice and clean and easy about doing a deal with a partner or some investors where all of the money is in that account day one to close on the property, to do the renovations for the reserves, et cetera. And it makes managing your cash as a real estate entrepreneur much easier. You can leverage other people’s experience and track record, and this is especially helpful for those that are newer in this game, right? Maybe you’ve done a ton of single family flips, for example, but little intimidated by the prospect of finding, financing, structuring and operating a 20, 30 unit multifamily or something.
You can bring somebody in that has a breadth of experience doing those types of deals and they can really be the partner on it and they can help to operate it. And you can just learn while also making money by partnering with someone that has experience. And oftentimes this is a way to get a deal across the finish line with a bank or other investors as well. You might need somebody with more experience. Again, mitigates your risk less of your money in a deal means your own risk is mitigated. And again, it mitigates the risk of your company running into cash issues because you’re retaining more money in your operating account, right, as a business.
And it might allow you to access different markets, do bigger deals. And it’s one of those things where if you’re going to try and do deals out of state and you don’t have a physical presence there, it is much easier to get a deal done there if you have somebody that’s local to that marketplace, right? And when we entered Florida, the first two deals we did were 16 and 28 units. A friend of mine just lives in Tampa, Florida. We did these deals in Lakeland, about 30 minutes from Tampa, and just partnered with him on the deal.
And he was kind of the boots on the ground to hold the PM accountable, to hold the GC accountable, to check on the property every couple of weeks. And we could have done it technically without him. I could have flown down there every few months or figured out some other creative solution. But it made that process significantly more streamlined and easy, right, to just embrace bringing in somebody else, giving them a piece of the deal. And it mitigated our risk, allowed us to operate the deal more efficiently, and made us feel a little bit more comfortable making that jump. So ultimately, you buy more deals with less of your own money, you reach your goals faster, right? That’s the point blank summary. Now in terms of JVs versus syndications.
So a JV is a deal where there’s multiple active partners in the deal. And the easy way to think about this is everybody in the deal needs to have a quote unquote job. So again, as I kind of use a few examples a few slides ago, but it could be you and a partner and you’re both operating the deal. Maybe he’s managing the construction, you’re doing the property management or something like that. But if you start to bring in investors, the line starts to get a little bit muddied between syndication, right? Because if you’re bringing in investors that have absolutely no say in how the deal is operated, they are now reliant upon you a third party for the success of that deal. And now you’ve crossed the security threshold and you’re in the syndication world.
Now, again, the easiest way to get past this is give everybody a job. If you have a few investors, maybe you make one of them responsible for quote unquote investor relations. They’re going to send the email around to all the other investors talking about how the deal is going. Maybe one of them signs on the loan and that’s a material participation in the deal. Maybe one of them, maybe you give them some kind of decision making control over when we sell the property. You need like a majority vote. So there’s speak with an attorney about all this stuff. Obviously, like, I’m not an attorney, you got to have a conversation with an attorney. But I think it’s important to distinguish these two structures because it informs how you approach a deal and look at deals.
So this is where this stuff actually gets applicable, the easiest way to structure partnerships. And there are all kind of ambiguities around partnering with other investors. And these are a lot of the questions that I had as I started to partner with other folks in terms of like, how do we determine who gets how much of the deal, how much should we both be investing or how much should the three of us be investing, who should invest the most? Like who’s going to do what job, how should they be compensated for doing that job, what should everybody get? What’s considered the norm in the marketplace? Right?
These are all questions that are extraordinarily vague and hard to understand unless you’ve done a few of these. And my goal is going to be to somewhat unpack that as best as I can. So the easiest way to go about this, and this is where it gets a little bit more complex and I’m happy to dive into this a little bit further if everybody would like to, but you should be separating the quote unquote GP equity from the LP equity. And this is regardless of if you’re doing a syndication or just a simple joint venture with you and one or two other people, right? You have to define how much money is required to execute on the deal. The down payment, the money for construction, the money to have some reserves in the bank account so that you don’t run out of cash.
And then you have to figure out who’s going to be bringing that deal and how are we going to compensate the individuals. Even if it’s just a couple of folks that are bringing the money for bringing that capital, how are we going to compensate those that are investing in this deal? And I’ll get into talking about a simple preferred return and some splits in a couple of slides, but basically we need to get out of the mindset of, okay, you bring half and I’ll bring half and I’ll do the property management. And since you found the deal, we’re good. Because when you start to think about this in a vague capacity such as that, and you’re not defining everybody’s role in the deal and how they should be complicated or compensated, excuse me, that’s where things get complicated.
So step one is how much money do we need? That is the LP equity when we invest in the deal that is the outlines of how LPs are compensated, is how we are going to be compensated as investors, or how investors will be if we’re bringing in other investors. And then we have the GP equity in the deal. And that’s what we carve up, depending on who is bringing what to the deal in terms of who found the deal, who signed on the debt, who’s raising the money, or contributing the majority of the capital, et cetera. And I’ll get into that. And just as I mentioned, this is how we’re talking about.
Sharad Mehta 15:46
So GP is general partner, LP is limited partner in the deal, right?
Axel Ragnarsson 15:53
Yes, exactly. And I’ll make a quick asterisk here because I think a lot of folks assume that GPLP like this has to be a syndication. This is just terminology that I’m using here to define investors. Where is the money coming from? And again, I want to make the distinction that it could be just you and your buddy who are doing the deal. You two are going to be throwing in the money to do it. Or it could be other investors, right? The money is coming from some set of individuals. Those are going to be the quote unquote, limited partners. And then we have the GP, right, the general partners. And that’s what I like to call the sweat equity, right?
That’s how the people that are operating this deal and actually running this deal are being compensated. And those can be the same people, which is typically where this gets confusing. And I’ll dive a little bit further into that too. And then again, so I already mentioned this, but we have to determine how the investors, the folks that are bringing the money, are compensated. So let’s use an example here, right?
Joe, Tom and Mike are buying a 50 unit multifamily property. So Joe finds the deal, maybe he sends a mailer to this owner. He’s the one that builds the relationship. He gets it under contract at a good price. But he has no experience in multifamily, he has no money, he has no credit. So he’s got to go find other people to get this deal done. So Joe’s finding the deal but doing nothing else. Tom is local to the market and he’s going to spearhead the business plan, the asset management, you know, signing the debt, he’s going to handle the tax returns at the end of the year, all of this stuff.
Tom is what we call the asset manager. He’s the operator, he’s the one that’s actually operating the deal. He’s managing the management company, he’s managing the construction, he’s holding all of these folks accountable. He’s local to the deal so he can go and get eyes on everything. That’s tom’s role. Now Mike and maybe Tom doesn’t have a lot of investors in his network or any money himself, so he can’t really solve the money problem, right? So then we got Mike over here who’s going to go and raise the actual money and he’s going to go interface with the investors. He’s going to send them updates every couple of months. When they have questions, they’re going to call Mike, he’s going to get on the phone and talk about what’s going on at the deal, et cetera, et cetera.
So you got three partners in this deal, right, with all complimentary skill sets and this is oftentimes how these deals get done in real life. I mean, this is how we structure a lot of our deals. You get Joe who finds the deal, he hustled and found the deal, but he can’t put the other two pieces together. We got Tom who know a great operator, who’s going to run this deal and make sure it’s a success after closing. And we got Mike who’s going to spearhead raising the money and actually help to put the money together for it. So then how do we allocate the GP equity, right? That’s the sweat equity.
This is the equity that we go in and assign to folks commensurate to the value they are bringing to the table. And the other thing I like to and something else I should have included on the slide here is the GP equity is oftentimes called the upside in the deal, right? How are we splitting the profits? And if I want to bring this back to a single family example and I think that might be helpful, let’s say you’re going out there and you’re doing a deal with, you got a house, live on a contract, right?
You’re a deal finder, you find a single family house to flip. But again, you’re tapped out, you got no money, you got a bunch of other projects going on. But you got the deal and you need somebody else to help you fund the deal. So it’s a $500,000 house. You need 100 grand to do it and you can sell it for 750, right? Round number, you’re into it for six. You sell it for 750, you make 150 grand.
So you’ve got the deal. Maybe you bring in a partner who helps to fund the deal. They bring all of the money to the deal and you have the deal and you’re going to manage the construction. And let’s say you decide, hey, let’s go split the profit 50 50 when we’re done. That’s oftentimes some kind of an arrangement in the world of flipping houses.
So you’re into this deal for 600, you sell it for 750. You got $150,000 in profit, removing closing costs and all that stuff, for ease of example, and you get 75 and your partner gets 75. That is what we’re doing here. But instead of just a simple you get half, I get half, we’re determining who’s getting what of the profit in the deal, right? That’s another way to describe GP equity.
So Joe takes 20% for finding the deal. That’s relatively normal in the world of mid to large multifamily real estate. Whoever finds a deal typically gets 15, 20%, depending on the size of the deal. Tom gets the bulk of it because he’s honestly doing the bulk of the work. It’s not easy to manage a large apartment community. He’s going to be getting on the phone every week with the management company. He’s going to be spearheading the construction. He’s also signing the debt. Right? He’s putting his balance sheet on the line to sign the loan. So he takes half the upside. And then Mike, who’s responsible for raising all of the money and bringing all the money to the deal and coordinating everything with the investors, he’s got 30%, really.
Sharad Mehta 20:33
When you say Tom’s signing the debt, is he like personally guaranteeing the loan? Is that what you mean? Because if Mike’s raising the money but Tom is just basically personally guaranteeing the loan, is that kind of what’s going on with signing the debt?
Axel Ragnarsson 20:51
Yes. 100%. So Tom is signing the loan, the bank is underwriting Tom. And in this scenario, when I was talking about it kind of at the beginning there, Joe doesn’t necessarily have the money or the experience or the credit, right? So let’s say Joe, he’s worth a hundred grand. He hasn’t been in real estate, right? He can’t qualify for a loan of this size. So Tom comes in and he’s the one to sign the loan, you know, typically in the world of not, lenders need to see a balance sheet that equals the loan amount to qualify a loan to get it through underwriting. So let’s say 50 unit deal, $5 million, maybe you got a loan of three and a half. You need somebody that’s worth three and a half million or multiple people that combined are worth three and a half million to go out there and qualify for the loan them.
So Tom’s being compensated for that in terms of he’s personally guaranteeing the loan. He’s putting up his balance sheet and he’s the reason that this deal is getting done. Right? So there’s some compensation for that piece of it and then we’ll talk about the LP side, right? And I want to breeze through this not because it’s not important, but because it kind of takes us away from the partnership side. Now we’re getting into the world of capital raising. But again, the money’s got to come from someone that’s the GP side. How are we going to compensate on the LP side? Right? How are we going to compensate all the investors that are actually writing checks into this deal?
So everyone who’s writing money, right? And this is the key distinction and this is where people get a little confused. Well, what happens if Tom, Joe or Mike wants to throw money in the deal, right? Where does their money go? They’re investing as an LP, right? We’ve separated these two buckets and the GP equity just defines how they’re that’s the sweat equity, how they’re being compensated for the value they’re bringing to the deal. But dollars that are invested are all treated the same. Whether it’s Joe, Tom or Mike investing 50 grand or Mike’s got 20 investors in his world that are all writing $25 to $75,000 checks. All of that money is treated exactly the same. All of the money that gets invested in this deal is treated the same. Right?
So now we get into complex deal structuring. But really the simplistic structure here is in multifamily, you have what’s called a preferred return which is basically a non-guaranteed rate of return that limited partners are due before the sponsor or the GP start making any money on the deal on the active side. And then you have a split above that preferred return, right? And in layman’s, right, it’s like the first X percent, which is that preferred return usually 6% to 9% in reality goes to the investors. And then anything above that is split according to the split between general partners and limited partners.
So, for example, let’s say this 50 unit deal we got, let’s say we had to raise a million dollars, right? And we have an 8% preferred return. So in a given year, all of the limited partners are due pro rata throughout or due $80,000 in distributions. That’s 8% of a million before the investors earn any money. I should say the sponsors, the active investors, the GPs. But let’s say the general partners do a really good job and they’re able to distribute $100,000, right? So the first 80 grand goes to the investors. We have 20 grand left over. And let’s say on this deal we did a 50 50 split, $10,000 worth of that 20 goes out to the investors split amongst the percentage interest that all the investors have and then the other $10,000 goes to the general partners.
And that is where we’re getting into how these general partners make money, right? Which is this percentage, right? Joe’s taking 20% of that 10,000, Tom’s taking 50%, Mike’s taking 30%, right? And that’s where we start to get into how the active investors are compensated and the GPS are compensated. And this is how million dollar deals are put together. And 100 million dollar deals are put together. This is like the bedrock of deal structuring in the multifamily world when folks are raising money and partnering with other folks. So grasping this concept is great because you can start to play with it and you can start to build off of it, but this is where the money is compensated. Long story short.
So if you’re new to structuring partnerships, the biggest takeaway from this presentation should be to not approach it in a lackadaisical manner, I guess is what I’m trying to say, right? You should get in the habit of saying the folks that are writing the checks get compensated in this capacity. The folks that are responsible for the success of the deal, the general partners, as I’ve been defining them, are compensated with their percentage upside, right? The GP interest in the deal. So we don’t want to hear any of like that. I get half the money, but I’ll take 70% because I’m going to do the property management. So 20%, that’s cool, that’s fine. I’ll get compensated for that.
There needs to be more of a tactical approach in terms of defining the roles and responsibility for everybody in a partnership and then being able to assign value to each of those roles. And then I share some other common things that I hear right. You get half for finding the deal, I’ll just get half for running it. How about you bring half? I’ll bring half and I’ll just take a little bit more because I’m local and I’ll drive to the property every couple of weeks. Partnerships are the key to scaling quickly in multifamily real estate. But partnerships that are not laid out in terms of in a comprehensive manner, they’re just asking for dissension amongst the partners. Because the easiest way for partners to have difficulty is when one partner feels that they are bringing more value and being undercompensated.
And oftentimes you get into a situation where both partners feel like that, which seems like that’s not even possible, but that’s oftentimes something that happens. So the way to get around that is to define literally all of the roles and responsibilities we have finding the deal. We have the asset management, which is literally getting on the phone every week with the property management company and the contractors to make sure that rent collections are high, that we’re turning over the units, et cetera, et cetera. We have who’s signing on the loan, could be one partner. It could be multiple partners. We have who’s raising the money; we have any other kind of specialized contribution, right?
Like, let’s say you’re doing a very large deal and you want to bring in an investor that owns thousands of units to really even though you’re going to be doing the tactical Asset management, you’re going to be on the phone. You just want somebody in the deal with some incentive to get on the phone with you and help you every once in a while when you have some questions, right? Maybe you give them 5% of a deal, right? Or of the of the GP interest to make sure that it all goes according to plan. But the exercise that is necessary here is defining all of these things and then writing the name next to it in terms of who’s doing that job and then assigning value to all of them. So I’m going to use a couple of real life examples and then we’ll close it out. It’ll be right at the 30 minutes mark and then we’ll do questions.
But let’s say we have a small five unit deal, just a few partners maybe we need $150,000 to close because it’s 75% loan to value 80%. But we need 50 grand for renovations, whatever, right? 150 grand to close a $500,000 deal. So this is a simple joint venture. You got a few partners in it. So let’s say we have one investor who finds the deal but don’t have really the means to put it together. So he brings it to an experienced investor that has all of those things. The investor brings the 150 grand and that investor is being compensated with some kind of preferred return and split. He’s getting 8% and maybe there’s a 50 50. He’s getting 50% of the upside. The other 50% is going to him and his partner, right?
So the investor splits the GP 80% to the individual that’s bringing all the money and who’s going to be operating the deal and who has the experience to run this deal. And then maybe 20% is going to the investor that just strictly found it but didn’t bring any other value, right? So in this situation, this is the investor, he’s personally bringing this 150 grand. He’s bringing all the money. That money is being compensated as if he was any other investor. But he’s also getting 80% of the upside in this deal of the general partnership equity, right? And then the other investor is getting 20%.
Now, let’s say totally on the other end of the spectrum, right? We have a large 100 unit deal. We got numerous LPs. This is a syndication, it’s a $10 million deal and we need two and a half million dollars to close, right? For just round numbers, 25% of the purchase price. How does this look? So let’s say we have an investor who finds the deal. He’s local to the marketplace, he can do the asset management he can get on the phone with the management company each week. He can get on the on-site to manage the construction, but he can’t raise the money and he doesn’t have the money. And he needs somebody to help guarantee the loan, to help the loan get through closing.
So he brings in a big capital partner/loan guarantor, who can raise 2 million out of the two and a half. Right? Now is when we get a little bit more specialized, right? So this guy’s going to raise two and a half, or excuse me, 2 million out of the required two and a half. And he’s going to do investor relations. So let’s say the guy that found it, he’s got a couple of buddies that can write $250,000 checks, right? But he’s still got to raise the other 2 million, which is why he brings in this capital partner who’s also going to sign on the debt and get that loan to closing. So the investor raises 500,000, capital partner raises $2 million and signs on the debt. The original investor takes 70% of the GP, right? The guy that found the deal, he found the deal, he’s doing the asset management, he’s raising some of the money, right? So he should get some credit for that.
And then we have the other capital partner, he raises $2 million and he’s guaranteeing the loan he’s signing on the debt. So he gets 30% of the general partnership. So in this situation, we have two investors that are kind of doing things maybe on both sides of the table a little bit, but we’ve defined all the roles, we’ve assigned a value to them and now we have a successful partnership. And then all of the LPs, everybody that’s investing in the deal is compensated with the standard preferred return and splits. And yeah, I’m happy to share a copy of this presentation afterwards as well.
Sharad Mehta 30:34
Just really quick, just so that you don’t understand. So let’s look at the small five units. This is really great, by the way. I didn’t even know a lot of these things. So you buy the property for 500,000, the first one, and let’s say you need 100,000 to close and you put 50 into it. So you’re all in for 550 and let’s say it’s worth million dollars now. So you make 450,000 out of that 450,000. The investor who brought in 150,000, the limited partner, that limited partner is going to get paid, let’s say 10% of the money that he put in. So he’s getting 10% interest on the money that he invested. So he put in 150,000. It took a year. So he’s getting paid 15,000 off that, is that correct?
Axel Ragnarsson 31:30
So what I can do, and I was actually planning to do this because I think it’s really helpful to walk through the exact scenario you’re talking about with like a tactical example. What I can actually do here is just quickly hop into excel and literally just show you, like, the breakdown. It’ll take three or four minutes.
Sharad Mehta 31:46
Yeah, that would be great.
Axel Ragnarsson 31:48
Okay. But from a conceptual understanding, I think that’d be good. So let me just pull up a blank Excel sheet here. I know this is not the most exciting content, but I think this is a great way to kind of tie in the understanding. Right?
Sharad Mehta 32:00
No, I think this is really good. I’m personally looking at some small size multifamily, like 20 to 50 units. It’s kind of good to just have this structure. And I like the idea of not going into a deal and saying, all right, let’s just do 50 50. We’ll bring the money together and then one person ends up doing bulk of the work versus the other guy, and then you feel unfair. I like the idea of kind of having a list of everything that needs to be done and then maybe assigning a percentage so it gets to 100%. And then whoever is doing what work, they get that percentage off the GP share.
Axel Ragnarsson 32:37
Yeah, absolutely. Okay, so can you guys see this blank Excel sheet on my screen here? And I saw Melvin, your comment in the chat there. So in the world of multifamily, I’ll quickly answer this and then jump into that. So the quality of the deal does swing that 20%, right? And I think that in general here, a lot of what I’m talking about, they’re not hard and fast rules. It’s merely kind of an exercise in benchmarking you in terms of valuing different parts of the actual overall deal.
So, for example, the one thing that I will say is the operator, once we start getting 50, 70, 100 plus unit deals, the individual that is managing the asset is the one who is compensated with the largest percentage of the general partnership because their work goes on for years, right? Like they are signing up to do the bulk of the work into perpetuity. And there’s oftentimes a misconception that the individual finding the deal is the most valuable person, when in reality, just in the practice of this game, it’s just not typically the case.
So that 20% maybe if you’re direct to seller on that 50 unit deal and you find a juicy deal, you can get 35% maybe, right? That’s like the high, high end of this range. Or if you’re somebody that’s just got you’re really, really tight with a broker and he brings you the deal before he takes it to everybody else and it’s a little closer to market, maybe you’re 15% right along those lines. So I think that’s just a way to think about it. But it’s kind of playing around off of that benchmark I think is a helpful exercise.
And this is assuming we’re talking about larger multifamily assets, right, which I’m defining as 50, 60, 100 plus units. If it’s smaller and you’re finding that five unit deal at half of market value, maybe you should be entitled to 35, 40%, because operating it isn’t going to be that time intensive. It’s going to be an hour a week, a couple of hours a week, right? Because you’re not managing that much. It takes a lot less time to manage a five unit than 100 unit deal.
Anyway, so let’s use the example of Sharad that you were mentioning. So we got a purchase my keyboard is just spazzing out here. So we got a purchase price of we’ll call it $500,000, Renault $50,000. And now we’re into it for 550, right? In order to get there, let’s say that’s, right, we had the investment from that one individual at 150,000. But the after repair value, right, the stabilized value is we’ll use your example of a million, right? This is a grand slam deal. We absolutely knocked it out of the park here. So this is what the economics look like, right? And we need another zero in here. So all in at 550. Stabilized value is a million bucks, and we have 150 in terms of the investment.
Now, let’s say that this individual was compensated with an 8% preferred return, which is somewhat normal, and we’re doing a 50 50 split above that. And please bear with the very lazy nature of me just running through this. I just want to use this as a visual aid.
Sharad Mehta 35:34
Nice. That’s really good.
Axel Ragnarsson 35:36
Let’s pretend that this is the best deal anyone on this call has ever seen. We did this in a year, right? We absolutely crushed this deal. We did this over a year and we got this million dollar property that we’re all into for 550. And we’re leaving closing costs and holding costs, all that stuff out of this for ease of example sake. So what’s the profit on this deal? What did we make? Right? So it’s obviously 650, but we’ll do a quick calculation here. So we made 450 on this deal. And how does this money get distributed now, right? That’s the big question, if we were to sell this deal. So we need to make sure that the original investor gets their $150,000 back. When we have investors that are investing in the deal, they receive all of their money upon the sale, plus any preferred return that they are due, and then we are splitting what’s left over.
So if we want to be exact, we need to start breaking down who gets the money now. So first, money back to investor. So we get $150,000 back to that investor. Now, what preferred return does he do? Right? Because he needs to earn his 8% along the way. And let’s just assume we haven’t paid any distributions along the way. We haven’t made any distributions so pref due to investor and we figure out what 8% of this is. So he’s got $12,000 in that preferred return that he was due throughout the year and then now is what’s left over now. So we’re going to go ahead and left to split between LPGP, right?
So now we have paid the investor back his capital, he’s earned his preferred return that he was due and now we have the money left over that gets into this 50 50 split right. This is where we start to make money as sponsors in terms of our active contributions to the deal so we got 450 -150 -12,000, so we got $288,000 left what happens now?
Sharad Mehta 37:45
Would it be 288 or would it be 438 because the 150 would come from the million, right?
Axel Ragnarsson 37:49
Well so what we’re doing is we are left over. Well, no. So the 150 is the equity that we invested in the deal. Right? I mean, the challenge here is we have this million dollars and I actually need to subtract. We would have debt and closing costs and all of that in this deal. But in terms of what is truly left over from a profit standpoint, that’s what we’re calculating, what the profit of the deal was above and beyond anything related to debt or the capital that’s invested in the deal. Right?
So it’s like, for example, we go out there, we close this deal 500, we spend 150. We’re going to have some amount of debt when we sell this million. When we have the million dollars in the HUD statement, we’re going to have 300 some OD thousand dollars in debt and then we’re going to have some closing costs. And the actual profit that we’re generating on the deal is this dollar amount. Right? We’re going to hit the account and in terms of what we’re actually distributing above and beyond that’s, what is left on that, unless I got lost on the way here because I’m doing this quickly.
Sharad Mehta 38:52
Because I would think the 150 would come out of the 550 part, not the 450 part.
Axel Ragnarsson 39:00
You are right. Yeah. That was assumed I got lost as I was doing it. So you are right. My apologies. Get a nice catch. I was breezing through. So long story short, so the profit in this deal so we’re paying back the 150 and now we have this is what’s left. (Crosstalk) Yeah. Exactly. So now we have the 8%. This is based on not on C10. This would be…
Sharad Mehta 39:31
Axel Ragnarsson 39:032
Yeah. Exactly. So it’s that $12,000 I’m just getting it down here. So we have it for reference here. Okay. So now what’s left? Yeah, nice catch. I was breezing through here getting lost. So now we have this 438 and this is where we get into the split here between the general partner, either one or multiple. In this case, we have multiple if we’re using the example that we have and the limited partners. So proceeds to LPs is 50% of this figure, which just happens to be the one investor in this deal. He’s not making $21 million. That would be pretty nice.
Sharad Mehta 40:08
Axel Ragnarsson 40:10
Yeah, that’s not bad. So he’s getting 219 on his 150, right? Hell of a return. As a passive as somebody who’s investing in a deal like this, obviously we’ve created one of the most successful deals ever here. So this number wouldn’t typically be this high, but that’s the money that is now going to the quote unquote LP. And then we get what’s going to the GPs, right, which is what’s left over the other 50%. So this guy’s getting 219 as well.
Now we got a couple of GPs here. So we got investor A at the 20%. This is the guy that found the deal, and we got investor B who’s getting 80%, right? You know, to Melvin’s question, if you’re finding a deal this good, you would better negotiate like 30, 45% of the general partnership here. This is a grand slam deal. You should be getting more than 20%, right? But now is when we figure out how much everybody actually made.
So we’re taking the 219 that is getting paid to the general partners, and we’re multiplying it by everybody’s percentage ownership of the general partnership. Investor A is getting 20%. Investor B is getting the 80%. Because he’s the one that put up all the money he signed on the loan, he ran the deal, he was the one that took it from closing to the successful stabilized property, et cetera, et cetera. And this is how we’ve compensated for everybody, compensated everyone in this deal for doing their job right. This investor gets paid 43 grand for finding a good deal and just kind of checking out, not doing anything else. Probably could have made more, right? If you found a deal this juicy, you probably should have gotten 30% or 35%, right?
And then this investor obviously did really well because this was a good deal. But conceptually speaking, this is the approach in terms of how we get there. And what we’re doing when we have this GPLP split of this 50 50 is when we sell the property and we pay the debt, we pay back all the investors, we pay any of that unpaid preferred return, all the money that’s left over. Some percentage of that is going to the investors for participating in this deal. Some percentage of it is going to the active partners for all of their contributions or that individual’s contribution. However many there are.
Realistically speaking, in a five unit deal, one person should be doing all this, right? The guy that’s finding the deal should be the one who goes out and finds the investor and who does it themselves, right? And then they’re getting this 219 right? That’s realistically how this should go on a deal of this size, it’s a small deal, but if you’re doing a big deal, a $5 million deal, that’s when these numbers start to get bigger. That’s when you maybe need a couple of people to help get this thing across the finish line. We’re doing a 45 unit deal in New Hampshire right now, but we have to raise 2.2 million. I’m raising a million five. My partner is raising 700. He’s operating the deal. I found the deal.
So I’m taking a portion of the GP for raising a good chunk of the equity. He’s getting a smaller portion for raising the other part of the equity. I’m getting a portion for finding the deal and he’s getting a portion for operating it. Right? And we’ve kind of defined all of these different things, and we’re both signing on the debt. So we were like, we’re both signed on the loan. We don’t have to go down the road of carving that up because we’re both doing it. And when that deal is all said and done, I’ll probably get around 40%, he’s going to get around 60. It’ll be a big deal. Hopefully it goes well. And that’s what we’re going to be splitting is all of the profit in that deal, of the upside. So anyways, I hope that was helpful. I’ll stop there.
Sharad Mehta 43:36
Yeah, no, this is super helpful. And then you can get more creative with these things. Right? I mean, it’s a 50 50 split. You can do different splits. And then you can also say, hey, if instead of 1 million, in this case, if it sells for 2 million, for example, right? Maybe you can have a little bit more upside. So, sure, there’s some other creative things you can do, but this was really good. And then typically, I would imagine it would take like three to five years to stabilize the asset and then exit out of it. The exit could be whether you refi it or you sell it. Is that correct?
Axel Ragnarsson 44:10
Yeah. So depending on the size of the deal, typically dictates how long it takes to get to what we call the stabilized property, right? When we’re done our business plan. So a 45 unit, we can typically get through in a couple of years. If we were doing a 20, 25 unit, if the lease is aligned and we can get in there and do our thing, maybe it takes 1 year, 18 months. So it really depends on the size of a 250 unit property. It’s like turning a cruise ship that’s going to take you a few years to get through and to do your thing to but sue asked a really important question.
Yeah. And I did want to address this because this simplified example was if you bought the property and then you just sold it, but in the world of multifamily, oftentimes you’re doing what’s called a cash out refinance. Right? We want to hold the property. We want to take advantage of owning the real estate long term. So what happens in a situation where we are refinancing a property and this is something that we just did, is you’re delivering a portion of the investor capital back, but all of the investors are staying in the deal. They still have their preferred return. And you’re continuing to operate the property into the future.
Now, what that actually looks like from a money standpoint, or I’ll try and give you an example to illustrate this. So we did a 40 unit portfolio acquisition up in New Hampshire. This was about 18 months ago. We bought this property and twelve months in, we had created some value. We paid 4.2 for it, so about 105 a unit. We put about 20 a unit in. So we were into it for around 125, really 130 and change with closing costs and the property appraised for 150. Right? So we created some value. Great outcome. We were into it for like roughly 4.75, but it appraised at $6 million. And we wanted to own this long term. We didn’t want to just sell it.
So we went out there and did a refi. So in terms of the refi proceeds that we actually received, when we were done with the refinance, we received $300,000 in refi proceeds because we didn’t use a lot of leverage. We were very conservative with how we leveraged it, but we had raised a million dollars to buy that deal. We received $300,000 when we refinanced it, and we went around and we distributed that $300,000 back to all the investors, right? We did what’s called in terms of the technical term in the industry, a return of capital. That’s what it’s called in the industry.
So we did a return of capital of $300,000. So now investors, they get 30% of their invested money back. They feel nice because they’re like, oh, we got some money back. But we like the idea of keeping our money in this deal and riding it out. They have all of the same percentage equity in the deal as they did when they closed, right? So it’s not like they have less equity. We’re just delivering some capital back. So now their investment in the deal is 700 grand total throughout all of the investors. And what that allows us to do as a sponsor is we get some money back.
We don’t necessarily make a lot of money as a GP when that happens, unless we are distributing all the capital back plus some more, right? That’s when you’re in a situation where you’ve done a really great deal, right? I think a lot of us have done smaller deals like that, where you buy that five unit property and you do your refi and you get more than the money you had into it out when you refinance it. Which is always like, our goal in doing a really good deal in that situation because you’re now making a distribution that exceeds basically the investment they have in the deal. That’s when you start to get into the split. In this situation, we didn’t get there, right?
We just had $300,000, had a million dollars invested, so we weren’t even close, but we still distributed them back $300,000. And what happens then is you have a lower preferred return obligation into the future. So on that deal, we had an 8% preferred return. So when it was a million dollars in the deal, we had to pay out 80 grand each year in distributions to the investors. That was what we were obligated to distribute before we could make any money from a cash flow standpoint.
Now, on 700 grand, now we only have to distribute $56,000 a year. Right? And we’ve increased the NOI of the property. We have a really nice loan on it that’s interest only. So our loan payments are lower. We got a good rate. This is like six months ago that we refinanced it. So now we can easily distribute more than the required 56. So if we’re distributing $100,000 a year, first 56 goes to the investor. The other 44, we then split 50 50. So now us as the sponsors are, we can take $22,000 a year in cash flow. Investors are getting the other 22 above that 56. And that’s where we start to make money in terms of being an operator, right? We start to make some money from cash flow.
And then one day when we sell it and we have Paula, $2 million that we receive at closing that we can then go out and distribute to investors, we only have to pay back the 700, and then we got like a million three that we’re then splitting 50 50. So we’re paying off less investor capital in the future. So that’s the argument for refinancing and the beautiful end game of this, right? This is the ideal situation is you get into a situation where you buy, call it a mid-sized multifamily property, whatever it is, 50 units, 30 units, 60 units. Wherever you’re at in your business, you raise the money to buy it. Maybe you do one big refinance and you crush it. Or you do a couple over a two, three year period of time and you get all the investors their money back. Right?
And while they still have equity in the deal, you now are not obligated to pay them a preferred return. So all the distributions that are going out are just split according to whatever your split is. Right? And that’s our end game. What this deal is, our goal is we can do another refinance in another year for another higher value and get them the rest of their $700,000 back. And now we got to give them 8% of zero, right, which is nothing. So when they’re not due a preferred return and we own 50% of that deal, of a $7, $8 million deal in that time frame, whenever that time comes around, and all of the money that’s distributed is just split 50 50, right? 50 to all the investors, 50 to us as the sponsor. There’s a little bit more to doing that, but yeah.
The same way that banks sometimes have like a prepayment penalty? Is there sometimes that same kind of thing if you pay back that equity that you raised early on so that you don’t have to pay out a prep or typically is that something that investors like to see that you’re able to do that sooner?
Axel Ragnarsson 50:20
Yeah, it’s a good question. I think the tricky part about having these conversations, I kind of have to have them in a generalist way. Right? Because all of this is what you negotiate with your investors, I think, so you could structure your deal with your investors where if you get and I’ve done deals like this, especially on smaller deals, where maybe you have, like a private money lender that’s instead of lending you the money, he’s just throwing some money in as an equity investor. Right? It’s a partner on the deal where it’s like, if I can get you 20% in a year, I have the right to buy you out of the deal. Right? And then I just have the deal myself. Or I’ve done deals where it real high preferred return, like a 12.5% or 13% preferred return with no split above that, right. Just zero. I get everything above that. Right?
First 13% is going to go to you like you’re almost like a big second position lender, but you’re investing as an equity investor. Anything above that, I get. Right? We’re not doing any split above that. So it doesn’t necessarily answer your question specifically, but in terms of what I would say is the specific answer to your question, I think in general, investors like the idea of keeping their capital rolling. But most investors, if they’re going to passively invest in a deal, something that’s multifamily their goal is typically right. And this is a very broad general statement.
Every investor is different, but at least the investors we work with and most investors I see that invest in this stuff, they like the idea of the consistent distributions. That’s why they want to invest in multifamily, like the idea of cash flow. They want to see that quarterly check hit in their mailbox. So their preference, while it’d be great to get a nice chunk of that money back, they still like the idea of having money in the deal into the future. Right? So we’ve had a lot of situations where we sell a deal 18 months in because we created all this value and we want to go do the same calculation on the accelerate. Right?
We want to get them their money back so we can split the promote and we can get our nice big check as the operators and the sponsors, but they’re like, oh, now I got to go find another deal to put the money in. And they’re kind of like bummed about it. So it depends on your investors and it depends on what you negotiate with them. But I wouldn’t say prepayment penalties. I don’t think that’s necessarily something that you’ll see in these deals.
I think that’s maybe an investor asks for it or something like that if they really, really want their money in a deal long term. But I would say that would be a pretty unusual structure to have. But I think what I’m trying to get at is every conversation is different. It’s all what you negotiate, right? I think as you get into the really large deals where you’re raising $10 million, there’s not a lot of variance, right?
You kind of have your prep, you got your split, and it’s hard to get away from that. But with these small deals where you have like one investor, a couple of investors, you can typically negotiate a wide range of structures and it’s really everything that you can conceive and create and then an attorney will put together, long story short. And Rob, to answer your question. Yeah, Rob. And I’ll answer yours. Jeremy too. GP and sponsor, same thing. Yeah, that language is used interchangeably. Sponsors typically used to describe somebody who’s sponsoring a deal, who’s raising the money and operating the deal. So those are the same.
And then Jeremy so we do cost segregation studies on everything that we buy, especially for something that we own for five years. I mean, we’ll do it even on stuff that we plan to only own for a couple of years. Really our playbook, right? I’ll talk about what I personally do when I invest every single property I buy. I do a cost segregation study on whether it’s 3 units or 30 units or 100 units, because I want to take all of that bonus depreciation in that first year, get all of those deductions to help offset any capital gains or any income I have as a real estate professional. And then if I go to sell that deal, every once in a while I sell it and I have to pay the recapture, but I still get the benefit of paying less in taxes until we get to that point.
But typically what I like to do, and this is like the wealth playbook hack, is you do your bonus depreciation and then when you sell you 10 31 exchange so that you don’t have to pay your recapture tax. And that’s like building wealth on absolute steroids in terms of you literally just never going to pay tax. It’s like it’s out of control. It’s the biggest loophole in the tax code there is. The IRS, they’re just giving us money by allowing that to be something that we do. So when we do deals with investors, we still approach it the same way we’ll always do a cost segregation study.
We’ll elect to take bonus appreciation because a lot of our investors like that pass through depreciation and they like having those deductions that first year. But if we do sell sometimes we aren’t going to attempt to anyone exchange. We have a lot of investors because there’s a lot of technical issues that make it difficult to do. So then we’re going to be paying some of that recapture tax. But what we always do, elect to do them. And then really the value of doing it depends on our exit oftentimes, if that makes sense.
Sharad Mehta 54:51
Really good information. Any other questions, guys? We’re at the top of the hour, so I want to respect Axel’s time. Any other questions, you guys have just had?
A quick question, if that’s ok?
Axel Ragnarsson 55:02
Yeah, yeah, go for it.
When does the preferred, I guess, stop? Is this when the return of capital happens, or is the preferred give or take ongoing in perpetuity?
Axel Ragnarsson 55:13
It’s right basically when all capital is returned, then the prep is there’s nothing to calculate it on. So it’s basically we’re at a point where there’s no more investor capital in the deal, so we have no preferred return to calculate. So that’s like, my North Star as a business owner is like, I want to buy mid-sized deals with investor capital and whether we can buy a home run deal and do one refinance and get them all their money back or it takes just a couple of refis over two, three, four year period of time.
I want to get all that money back to our investors and then I just have my GP equity stake in that deal. And all of the money that is distributed out of that deal, whether it’s upon sale, whether it’s a refi, whether it’s cash flow distributions, is being split just according to whatever that split is. And there’s no preferred return obligations. Takes patience, right, to get to that point.
But if you get there with a few sizable deals, that’s like, where the real, real passive income truly starts to kick in. Like this four unit deal that I was using as an example, if we do another refine, we get them that 700 back, whether it takes us one or two or however many more, and all investors have received all of their capital back, all of their original invested capital back, they are no longer due a preferred return.
And then if we’re distributing 100 grand, 150 grand a year, half is going to them, half is going to me and a partner that I have in that deal right into perpetuity. Right? Which is an unbelievable deal for the investor as well. The investors love that outcome because they’ve gotten all their money back and now they’re just playing with house money and they’re just getting distribution. So that’s like the true textbook win-win for both parties, in my opinion. So long answer to your question. The short answer is yeah, once they receive all their money back. So I was a little long winded.
Sharad Mehta 56:54
Yeah. So if we can also so this is your contact information to get in touch with you. I think Jeremy said he has a deal in your market across….
Axel Ragnarsson 57:03
Yeah, Jeremy, that’s pretty funny. What are the ODS of that? That’s closing a deal across from a property I own. Shoot me an email, man. We got a chat. That’s hilarious. I couldn’t have imagined that would be something that would happen on this call. That’s funny.
Yeah, I actually saw you a couple of weeks ago at the meetup in Manchester, but didn’t get a chance to talk one on one with you. But yeah, I’d love to.
Axel Ragnarsson 57:23
Yeah, I was going to say you look familiar. I feel like that was where I saw your face. Yeah, the mustache is memorable. Well, shoot me an email, man. We’ll chat soon, but that’s cool.
Sharad Mehta 57:33
And we’ll also email this out to everyone. And is it okay to get a copy of the slides that you have? I know you sent it to me. Is it okay to share it with everyone?
Axel Ragnarsson 57:44
Sharad Mehta 57:45
Axel Ragnarsson 57:46
I’ll shoot them over to you when we’re off the call over email there, and then you can send them around. Okay. I’m going to do a quick plug here because I think everybody who listened to this is going to get some value out of this podcast episode. I did it’s ten minutes. I’m obviously just plugging my own stuff here, but if you go listen to this, I think this is a great representation of what we’re talking about here. Just like, you can passively listen to it, but it’s funny because it’s literally just top of mind.
So I put it up, like, two or three days ago, and this is just the title of it, so You Can Make More Money. It’s kind of comparing all of this in terms of just doing deals by yourself, no partners, and then doing deals with partners. And I walk through some very, very specific math that further outlines what we were talking about on this call in this quick little episode here. I think it’s 15 minutes long, where I’m talking about….
Sharad Mehta 58:41
Can you drop….
Axel Ragnarsson 58:41
Yeah. I’ll just drop a link…
Sharad Mehta 58:43
That’d be great. Yeah. Jeremy said Multifamily Wealth is a freaking awesome podcast, and he gets a tons of value from it. Thank you, Jeremy, for that.
Axel Ragnarsson 58:51
I appreciate that, Jeremy. Thank you. Here, I’ll just I’ll throw the iTunes in here, and you can always look it up and put it in the chat.
Sharad Mehta 58:59
And we’ll make sure we email it out to everyone also. Yeah, guys, for anybody who wants to get a copy of that, it’s in the link, it’s in the chat. So just click on that, and it’ll take you to that specific podcast. Cool. Any last questions for Axel before we thank him for his?
I have one final question. I’m really just focused pretty heavily right now on underwriting. I mean, just subscribing to all the national brokerages because they have full financials attached to all their deals. Just practicing underwriting on a lot of bigger deals. And I’m curious, did you build out your own financial model as you’re underwriting some of the bigger deals that you’re doing, or is there one that you prefer that you found somewhere else? There’s a few that I’m using right now, and I’m trying to figure out which one I like most, but heard that it’s also beneficial to actually build one out yourself.
Axel Ragnarsson 59:53
Yeah, it’s a good question, man. I did build one out way back when, but I’ll be the first to say that I’m not like, the Excel guy, so I had a hard time continuing to continue to build it out and to kind of build the functionality that I needed. Once I’m trying to model out, what happens if I refinance in year three. And once I started getting into that level, I kind of hit a wall. So I think it’s totally fine to buy a model, and typically you got to buy them. There’s actually a great free one.
I’ll give you two that you could go and check out. I use what’s called Synthesis Analyzer by Chris Jackson, but it was like $100 when I bought it three, four years ago, and now he’s charging maybe like, 500. So it’s getting a little expensive. But if you want a really great free resource, look up Rob Beardsley, lone Star Capital Underwriting model. I don’t know if you’re familiar with him or not.
Yeah, that’s the one I’ve been using, and I read his book a couple of times and kind of just been taking some underwriting courses and stuff. So yeah, that one’s that one’s pretty solid.
Axel Ragnarsson 01:01:00
Yeah, he is great. They use it to do institutional level deals. The synthesis one by Chris Jackson I love because I think it’s just aesthetically pleasing. It’s very clean to work through, and he’s got a ton of great videos, I think. Honestly, man, if you give my honest opinion, it’s like the model matters way less than just understanding the fundamentals behind the model. So I would just pick one that you feel comfortable using and that you get the reps in with and just starts to treat you well. And then I just stick with it. The biggest thing is once you underwrite, which you’re already doing, so this is great, but once you underwrite, like, 15, 20 deals in a market, you’re going to have a great relationship, fundamental understanding between price per unit, rents per unit in terms of market cap rate, average expenses per unit.
And then with those big building blocks, you’re going to be able to underwrite so much of the stuff back of the napkin, and the model is going to matter less because it’s not going to matter until you’re actually bringing one of the very few deals into the actual model and spending that time. And I don’t normally plug my own podcast as much, but I’ve been doing just, like, topical episodes around this stuff. Do you use yield on cost when you underwrite deals? Is that something that you leverage on?
Yeah, that’s one of the metrics on Beardsley’s model.
Axel Ragnarsson 01:02:20
Yeah, that’s like, the most, like, every single deal that we underwrite, whether it’s five units or 100 units, we just run a yield on cost calculation, and that is the back of the napkin calculation that tells us whether or not we should be getting into a big model. It’s obviously pretty time consuming, so I would really embrace that. And you can build out a very simple yield on cost spreadsheet, 20 minutes, where it’s like purchase price CapEx, current financials pro forma, financials stabilized, rent CapEx, spend. Right. And then with those, then you can just build out, this is what I’m all in for. This is my NOI, you got your yield on cost, and that takes you five minutes. Right? And then from there, you start jumping into the bigger models, and at that point, again, it’s whatever one you like the best. But again, I think I answered a different question than the one you asked, but that’s kind of my thoughts on underwriting. That’s how we approach underwriting. Yeah.
Sharad Mehta 01:03:14
Cool. Max dropped another link in the chat for podcasts. I think that might be relevant to kind of the question that you were asking.
Axel Ragnarsson 01:03:22
Yes, it is. It’s how we use yield on cost to underwrite deals. Again, it’s another, like, ten minute episode. I do a lot of these, like, the solo ones on there, which is me talking for a little bit.
Sharad Mehta 01:03:34
Axel Ragnarsson 01:03:35
If you want some help underwriting, I think that might be helpful.
Sharad Mehta 01:03:37
Cool. All right. Thank you, Axel. This was really, really good, man. Yeah, I got to learn a lot. And then we’ll share your contact information in an email that we send out, and then we’ll include the copy of the slides. Thank you again for coming on the call, man. Really appreciate your time.
Axel Ragnarsson 01:03:55
Absolutely. No, I appreciate the invite. And quick answer to that last question in the chat before I hop. If you look up Rob Beardsley Lone Star Capital Underwriting, I got to imagine it’s going to show up somewhere. Gabe, if you have his book, you probably have the link in there. Yeah, there you go. You came to my rescue. I appreciate that.
Yeah, it’s on his website. And then also his book is so easy. It’s short and sweet and gets to the point, and it’s like $10 on Amazon.
Axel Ragnarsson 01:04:23
Yeah, they’re both sitting behind me on my shelf here. They’re like hour long reads. They’re killer. Anyways, guys, have a good one. Sharad, thanks for the invites. Hope everybody got some value, and I’ll take my slides over.
Sharad Mehta 01:04:35
Thanks, man. All right, thank you, everyone, for the call. Appreciate it. Hopefully you guys got tons of value out of it, and if there’s any yeah, we’ll be looking to bring Axel on through. I was thinking another call just to, kind know, start it with a little bit more advanced stuff, and then I think it’d be good to have just kind of the basic, you know, if you’re starting out, what kind of list you should pull, what’s the best way to reach out. I think that would be good to do that call also, so I’ll reach out to him about that. And if there’s any other call or any other topic you would like for us to cover, please definitely let us know.
We already have a bunch of calls booked out for next few weeks with experts from different background, different expertise in real estate investing. But we want to make sure we’re kind of bringing diverse experts and then adding as much value as we can to you guys. But if there’s anything in particular that you guys would like to hear about, please let us know so we’ll make sure we get that call arranged for you guys. Any other questions I can answer for you guys before I hop off?
Hey, I have a quick question. Can you reference any previous calls for bewbies to watch that I think would be helpful? Thanks.
Sharad Mehta 01:05:44
Like, for multifamily or just general investing?
Just general investing calls.
Sharad Mehta 01:05:52
Okay, let me see. I’m going to put this link. This is where we put all our calls and also on our YouTube channel. And I can’t access YouTube on my computer. I block it on my computer. But if you email it to me at Sharad@REsimpli, I’m going to put my email address. Then I’ll have someone on my team get you some specific ones that you can watch. I think the one that we did last week or the week before on the Lead Manager training for Lead Manager. I think that’s a really good one to get started. There’s one more, and the name it’s escaping me a little bit right now, but if you email it to me, what I’ll do is I’ll email you back with some of the ones that you can get started with. And thanks, Gabriel, for putting the link to the book. Appreciate it. Cool. Absolutely.
All right, thank you so much, guys. This was a really good call. I’ll see you all next week on the call. Thank you!