What? Cash Flow During Construction?

This past weekend, I was in Denver speaking at an investment conference. I received the same question repeatedly from several attendees at the conference. Since this question comes up so frequently, I thought I would share the answer with our listeners. Many investors who invest in multi-family apartments are looking for cash flow. How can you deliver cash flow to investors on a new construction project when the property isn’t generating income yet? Several of you indicated that you didn’t undertake new construction because your investors would want to see a rate of return from the point of investment and would not be willing to wait 2 years to see income coming back from the investment. The answer I’m going to give you here is a game changer. We’ve been using some variation of this approach for close to 8 years now, on virtually all of our projects. When you undertake a new construction project you put together a budget for everything to complete the project. That includes all of the elements of the physical construction, often called the hard costs. You also need to budget for all of the soft costs. The soft costs include your architectural design, your holding costs such as property taxes, insurance, loan interest, and any fees such as building permits. If you’re borrowing funds from a bank, you’re going to have a line item in your budget for those interest reserves. If your investors need to see cashflow during the construction period, you can construct your budget to include a payout during the construction period. You will include a second interest reserve line item in your budget to pay your investors. Before you run out and copy what I’m proposing here, you will want to seek professional advice from an attorney who specializes in securities law to make sure whatever you offer is fully in compliance with the law. You will probably also want to get accounting advice to make sure you are not creating an offer that has adverse or unexpected tax consequences. If you plan to use retirement funds, you’ll also want to double check with your advisor who specializes in self directed retirement accounts to make sure there are no issues with using retirement funds for such an investment.