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As you are putting together real estate deals using other people’s money, you might have to make some adjustments to your thinking to make sure that you are also being compensated for the work you are doing.

Of course, it is in the forefront of your mind to look out for the best interest of the other investors you have involved in a deal. Your investors need to get paid. But so do you.

Understanding the pay-yourself-first method

When you are putting together a deal to buy an apartment building, you’re doing a lot of hard work. By the time you have a building under contract, you’ve gone to see multiple buildings, you’ve crunched numbers and made decisions.

You’ve done your due diligence, negotiated the deal, and brought in the investors.

You’ve put in long hours and you deserve to be paid.

But many times, people who do this work of syndicating a deal don’t compensate themselves appropriately.

When I bought my 12-unit apartment building,I put the entire deal together with a handful of investors. I ended up not putting any of my own money into the deal and got paid $15,000 at closing.

Here’s how to pay yourself when doing deals.

First, there are three ways you can pay yourself:

Get Paid Upfront at Closing

Your deal may allow you to pay yourself an acquisition fee at closing. The amount will be whatever the deal allows and whatever seems reasonable to you and your investors. The broker gets paid 3% – 6% of the purchase price. So, it's reasonable to pay yourself 3% for putting the deal together.

Say you’re buying a building for $1M. A 3% acquisition fee would be $30,000.

Paying yourself an acquisition fee increases the overall cash required to close, and this of course reduces your investor’s returns. So, you'll need to work the acquisition fee into your projections and see if you can still achieve your desired returns for the investors.

In general, you should try to pay yourself something at closing. Shoot for 1%-3% if possible. If the deal doesn’t allow for it, either don’t pay yourself or find another deal.

Getting Paid While You Own the Building

Now, there are actually are two ways you can pay yourself while you own the building.

The most obvious one is cash flow distributions.

You should retain at least 20% equity in the property for being the managing member (with your investors getting at most 80% for putting up the cash). This will then entitle you to at least 20% of any cash flow distributions and profits from appreciation.

The other way is to pay yourself an “asset management fee”.

This concept is borrowed from money managers who are paid a small percent (1-2%) of the assets they manage. You, too, could pay yourself 1% of the total cash invested. This would be paid out before any kind of preferred rate of return distributions for your investors.

In our example of a $1M building, let’s say you raised $300,000 of equity and cash to purchase the building. A 2% asset management fee would be $6,000 per year, or $500 per month while you own the building.

Getting Paid When You Sell the Building

When you sell the building, you need to pay closing costs and sales commissions. You need to repay the outstanding loan and the initial investment to the investors. Whatever is left over after that is the “Net Proceeds from Sale”.

If you own 20% of the building, you are then entitled to 20% of the Net Proceeds. So, that’s one way you get paid at closing.

You can also pay yourself a “Capital Transaction Fee”. This would be a small amount (1% – 2%) of the sales price that would be paid to you at closing.

If you sold the building for $1.5M, a 2% fee is another $30,000.

Keep your Investors in Mind

Regardless of how you decide to pay yourself, make sure you disclose how you’re compensated to the investors up front. This is usually done in the LLC operating agreement and/or the Private Placement Memorandum.

Make sure your compensation is reasonable and that your investors achieve their projected rates of return. If you are the only one being paid and the investors are not, it will leave a sour taste in their mouths and they’re not likely to invest with you again.

You deserve to be paid

You are providing real value to your investors and are doing all the work, so don’t be afraid to compensate yourself reasonably when you buy the building, while you own it, and when you dispose of it.

In our $1M apartment building example, you paid yourself $30,000 upfront, $500 per month while you own it, and another $30,000 when you sell it. Plus you’re getting 20% of any profits.

Then, you're on your way to doing another deal!

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