First Big Deal in CRE - 5M for two apartment complexes - OPM
TLDR: how do I design a deal to buy out investors at 5 years and keep the property in my portfolio?

I have seven doors of residential with one of them a fourplex. I self manage those properties. I’ve been saving up to have a small piece of a bigger pie and a great opportunity for two apartment complexes has come up. I have a lawyer, an agent, and a contractor on the team and plan to use a local property management company. I have a pre approval from the bank. The properties are each in pretty good shape and about a 7.5% cap rate combined. The seller’s agent said they are looking for the $8m range. Based on underwriting $4.8m seems more accurate. I need investors for the 25% down. I would like to come out in 5 years doubling the investor’s money with some value add and keep the property in the company’s portfolio - eventually resulting in me leaving my current job and working on commercial deals full time.

I was thinking I could do some of the property maintenance just for materials cost and not my time and even manage one of the properties at no cost for my time. I have a full time job and a family but think it’s better for the investor if I put in the sweat equity. It will be a better return and the investor will know I’m committed.
[{"id": "i5fi05l", "text": "I'm an UW with 10-15 yrs of experience (the range is for anonymity). What market are you in? \n\nAlso, pay yourself a management fee. We have to UW it regardless of whether you are realizing it or not. The best way to do this is something like a 3% management fee and then an additional 2% 'asset management fee' (use those words) that would be subordinate to the debt (and maybe partner distributions).\n\nI'd be happy to take a look at it for you and give you my thoughts free of charge. \n\nWhat kind of terms are you getting from your bank? LTV / DCR constraints? If it's a bank deal, I'm assuming it's full recourse. There's a number of life cos that will do smaller deals with limited or no recourse. There's also Freddie Mac SBL deals, but spreads just blew out 35 bps last week. Are you looking to invest in upgrades?\n\nShoot me a message and I'll see if I can help at all.", "replies": [{"id": "i5flafz", "text": "Thanks!", "replies": [], "depth": 2}], "depth": 1}, {"id": "i5fkmcv", "text": "Your first problem is that the sellers want 8 and it underwrites to 4.8", "replies": [{"id": "i5flyws", "text": "Yes! I don\u2019t see where they got their cap rate. They did not include capital expenses for updates and explained there were capital improvements required - I added it in at 5% of rents. So this price point is where someone can make an 8% return with a bank loan - and with interest rates rising, that\u2019s only going to get worse going forward.", "replies": [{"id": "i5fu233", "text": "It is and you have all the leverage. Don\u2019t budge. They think your weak. In this business you move at incredible speeds always except two times when you move the slowest on earth, buying and selling.\n\nDon\u2019t budge. Say the offer is fair and if we start negotiating again I will actually come in lower cause market is shifting to secure passive income assets and my reassessment of the market actually puts my cap rate at 4.5%.\n\nDon\u2019t budge.", "replies": [], "depth": 3}, {"id": "i5hjxkt", "text": "You should be deducting capital expenditures below the line, not as part of rents.  Otherwise you're capitalizing those costs into perpetuity.", "replies": [{"id": "i5hsszx", "text": "Right, but estimates should be built into NOI. At least that\u2019s what I\u2019ve done in residential to estimate cash flow. Capital expenses also have tax implications which are generally not included in NOI.", "replies": [{"id": "i5idmeo", "text": "You\u2019re going to be making those same repairs year after year for eternity?  Strip out any one time repairs or deferred maintenance items and deduct below the line.", "replies": [], "depth": 5}, {"id": "i5kvro3", "text": "Yeah you can\u2019t do this any capex is below the line and shouldn\u2019t be accounted for in value.\n\nThat being said your price gap is absolutely huge. You\u2019re never going to get a seller to come down that much. What are you capping the properties out at?", "replies": [{"id": "i5mg865", "text": "Yes, this is a perpetual expense. Every year there will be capital expenses. And yes, I can put those in the NOI because I\u2019m doing the valuation. But thanks, I understand why the seller would not put them in - it makes the value seem higher. \n\nSame reason EBITDA is foolish. Those are all real expenses and without them you don\u2019t see true cash flow from your business.", "replies": [{"id": "i5mj44h", "text": "If it\u2019s a recurring expense it\u2019s not capex it\u2019s R&amp;M.\n\nIf you\u2019re just saying a reserve for capex and not specific items and you\u2019re carrying a reasonable amount for a reserve then you might be able to get the seller to agree to a value under that methodology, but it\u2019s a contentious subject.\n\nYou can value it however the hell you want I\u2019m just saying you\u2019re not necessarily going to get a seller to agree to it.", "replies": [{"id": "i5sivxy", "text": "\\^\\^ this. It's an age old battle between buyer and seller. You can put as much one-time Capex above the line to reduce NOI and possibly sell a better purchase price as you can but will the seller bite? It's interesting when the sales broker values with one time Capex expenses above the line. We don't say anything at that point.\n\nSeparately though, while in operations you may not want to put things like roof replacement, parking lots, HVAC replacements, interior renovations etc above the NOI line. Especially if you plan to try and capture bonus depreciation as well as do a cost segregation. Your investors might be happier too, since you won't be running a continual negative NOI. Hopefully you pan to raise Capex funds as a renovation and deferred maintenance budget from your investors.\n\nOngoing maintenance, appliance repairs, HVAC repairs, roof shingle repairs, etc typically get coded above the line.\n\nBut like u/sektrONE says, it's your property, run it how you want.", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i5fm6sm", "text": "An agency supplemental loan will help you recapitalize and potentially buy out your partners as would a straight cash-out refinance. Don't count on the magic of cap rates to get your value from the lender. You'll need to improve the property with capital expenditures, especially those that increase revenues. To avoid misunderstandings and bad feelings we put a minimum return after they've been paid back (typically 20-30% depending on risk) upon a capital event like a refinance in the operating agreement. People invest in private equity for the upside..they can and will get pissed if you treat them like debt.", "replies": [{"id": "i5fqh3g", "text": "Thanks :) What did I say that made it seem like I\u2019d treat an investor like debt? What I\u2019d love is a partner with more experience that I can learn from. \n\nWhen I\u2019ve dealt with startups in the past you have investors that just want the return in the promised time, and you have the partner that wants to help, teach and learn to move the business forward.", "replies": [{"id": "i5ftceh", "text": "That remark was more from my perspective and not anything you wrote. We actually had to directly deal with this during a capital raise and one very important investor straightened us out very graciously.. and we were thankful for the lesson.\n\nI think the overarching thought would be to disclose everything on the OA and PPM if you are doing one so everyone is on the same (written) page.\n\nI agree with finding appreciative capital and even better if you find a mentor investor. Good luck!!", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i5ftlx4", "text": "Write into the documents/agreement the right to take them out at a time or metric such as a certain equity multiple.", "replies": [], "depth": 1}, {"id": "i5fy2yd", "text": "**about a 7.5% cap rate combined.**\n\nHow do you figure that?", "replies": [], "depth": 1}, {"id": "i5v6sqq", "text": "There is no such thing as a negative NOI.", "replies": [{"id": "i5w67ub", "text": "Rents at 100/Mo and expenses at 200/Mo = negative NOI.", "replies": [{"id": "i5wzwin", "text": "Do you know what direct capitalization is?  Can you show the math to get a negative NOI?", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}]