I want to build an 18-unit apartment complex, but I donít have enough cash to do it on my own. My net worth is around $400,000, and I have $100,000 I can put toward this project. It is estimated to cost $1.2 million. Would lining up investors, who will take a percentage of the profits, be the same thing as acquiring debt?
It wouldnít be the same as taking on debt†because if there are no profits, the investors get nothing. Itís more like taking on partners and what you would call an equity position ó meaning theyíre owners in the business. They may have only limited rights as owners, but essentially youíre taking on partners.
Thereís a method that was used in the old days thatís still available today called syndicating a piece of real estate. You would set yourself up as the general partner and set the investors up as limited partners. They would be limited in their input, because the general partner runs the show. They can be given the lionís share of the tax write-off, and the depreciation schedule. Traditionally in those models, the general partner takes less of the depreciation schedule but gets a fee for running things and has a position of ownership.
Thereís a restriction under Blue Sky Laws on the number of limited partnership units allowed before it becomes a situation where youíre selling stock. Check with your state and current securities laws to be sure of the exact number to avoid any impropriety. You can do a limited partnership†or syndicate a piece of real estate, but they can both be very messy and time consuming for the money you get out of it.
Honestly, I donít think itís a good method for you to buy an apartment complex at this stage of your investing life. Itís more like a way for you to get into the business of running a bunch of limited partners with a ton of paperwork and bookkeeping thrown in. It doesnít sound like a lot of fun to me.
If I were in your shoes, Iíd use the $100,000 in cash to buy a money-making property ó maybe a nice rental house. Then, save your money, invest and buy another one. And again, save the money, invest and buy another one, over and over again. Itís a gradual process, but I donít teach or advise people to go into partnerships or borrow money.
Best of luck, Jay.
ó Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money Makeover. The Dave Ramsey Show is heard by more than 13 million listeners each week on 585 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.