How a month 22 refinance can return 40% of a $65,000 LP check while the investor keeps the same equity

A case worth studying for anyone weighing a first LP position. A 96 unit garden style property in a midsize southeast market, with a limited partner coming in at $65,000. For an investor whose background is construction, the only part of the deal that feels fair to judge is the renovation budget, and in this case that turned out to be the part that mattered. The sponsor's plan was $9,800 per unit interior, 62 units to be touched over 24 months. Price it off the scope sheet the sponsor sends on request: flooring, counters, cabinet faces, appliances, paint, plus a light bathroom refresh. In many markets that scope runs $11,500 to $13,000 with labor in the current environment, and the right move is to say so on the call. The sponsor's answer here was an in-house crew doing three properties in the same submarket and a line item of $340,000 in contingency at the deal level. The investor asked for the contingency number in writing and it appeared in the next investor package. How it went. Interiors landed at $11,200 average, so the sponsor was over budget by 14% per unit and used about $190,000 of the contingency. Renovated units leased at a $215 premium against $180 underwritten, which more than covered the overage. Distributions started month 7 at 5% annualized on capital and went to 8% at month 16. Month 22 the sponsor refinanced out of the acquisition loan into agency debt and returned $26,000 of the $65,000. The investor still owns the same equity percentage. So $39,000 remains at risk earning distributions on the original $65,000 basis, which is the part that explains why people do this. The part that nearly broke it: the in-house crew lost its lead superintendent in month 9 and renovations stalled for about eleven weeks. Had lease up stalled instead of construction, the refinance timing goes away and the investor sits in year four waiting. What to keep from it: pricing the capex scope yourself instead of accepting a per unit number, and asking for the contingency in writing.