The benefits of owning real estate, without the hassle
What is a Multifamily Syndication?
A multifamily syndication is a real estate investment where multiple investors pool their money to purchase and improve multifamily assets. General Partner(s), specialize in these types of investments and are the primary operators of the deal - they locate the asset, negotiate terms, coordinate the transaction and financing, and manage the project once the asset has been acquired.
Passive investors (Limited Partners) carry no liability in a multifamily project but serve as the bank for a portion of the overall investment. Financing for the acquisition will come from traditional lenders, while the capital for repairs and upgrades comes from the investments of limited partners.
What’s the goal of a syndication?
Most syndicators target “value-add” assets, where they can make improvements to the property that will have a direct impact on monthly rent per unit and overall value of the property. The goal is to increase rent during the hold period, which, depending on the project is typically 3-7 years. After those 7 years, a target goal is to return the investors’ equity with healthy returns (often times 2x their investment), which is distributed in monthly or quarterly cash flow distributions, and payout after sale of the asset.
So, it’s like flipping a house?
Kind of…since you’re making necessary investments to improve the value. However, the major difference with multifamily assets is how their value is determined. A single-family home’s value is determined by the property’s condition and comparable homes sold in the area in the past six months.
The value of a multifamily asset is determined by rental income, or cash flow (similar to the valuation of a business). The more cash flow, the higher the asset’s value. This is important because it contributes to the stability and predictability of the investment since the value isn’t as dependent on the market alone - remember 2008?!
Why should I passively invest?
Access to larger investments: A syndication allows investors access to participate in multi-million dollar deals, where returns are bigger, that they could not otherwise invest in on their own.
Diversify your portfolio: Stock market diversification spreads risk across various asset classes. Commercial real estate adds depth to your diversification and can reduce overall portfolio risk because real estate does not tend to follow stock market trends and has more calculated and predictable returns.
Tax benefits: Real estate can be tax-efficient when you utilize tax strategies. Tax write-offs and depreciation lower taxable income. Speak with your accountant to best understand how to leverage your investments in syndications for tax benefits.
How do you passively invest in a syndication?
There’s a reason it’s called a passive investment - there is very little operational responsibility of the Limited Partners in the deal. However, this doesn’t mean you just cut a check and collect once the deal is done. It’s the responsibility of the investor to identify the right GP, know what questions to ask them, and understand how to evaluate one of their offerings or deals. Choosing which GP to invest in is more important than choosing which deal to invest in.
What questions should I ask a General Partner?
Some of these questions will help you understand a GPs strategy and if it aligns with your interests as an investor. Others will help you understand how they operate and communicate.
What markets do you target? If they don’t have a specific answer, proceed with caution. Market selection requires a lot of research and is a big variable in determining the success of an investment. One example is calculating population growth. If population is decreasing it will have a negative impact on supply/demand in housing, vacancy rates, and ability to increase rent. Another is the employment diversified. If employment in a market is heavily dependent on a single industry and that industry is in trouble, it has a widespread effect on housing. Bad answer: “I’m looking to get my hands on any type of building in any market.” This isn’t a calculated approach and carries a lot of risk Good answer: “We’re acquiring B and C class assets of 100 units or more in the Raleigh and Jacksonville markets.” This shows you the sponsor has done their research, understands the opportunity in their market, and how to make a calculated investment
How long will you be holding the asset? The acquisition, improvement, rent increase, and resale take time (you can’t just kick out all the tenants to increase the rents). Expect a 3-7 year hold period with most projects lasting 5 years.
How often should we expect to hear from the sponsor? A GP should have regular communication (quarterly at a minimum). This communication will highlight the progress on the project (renovations, rent increases, etc). You should also receive monthly distributions (see cash on cash return below).
Do you personally invest in the deals? Every operator should invest in their own deals. Some put their own cash in, while others may reallocate fees from the deal to reinvest into the property.
What sort of fees does the GP take in the deal? Every deal has fees that typically go back to the GP and is a way they are compensated for orchestrating the deal. These include acquisition fees, asset management fees, property management fee, refinancing fee, etc. These are common, and more information on typical fees are accessible on the internet.
What sort of returns could I expect?
This is where investors should spend time understanding how these deals are structured, since their returns could be calculated and explained in a few different ways:
● Equity multiple: The total cash distributions received from an investment, divided by the total equity invested. An equity multiple of 2.50x means that for every $1 invested into a project, an investor could be expected to get back $2.50.
○ Example: 2.1x equity multiple: $100k investment = $210,000 return
● Internal Rate of Return (IRR): While equity multiple calculates your total return from the investment, IRR calculates the annualized return and the time value of money. Said another way, making $50k off a $50k investment is much better in 3 years than it is over a 5-year span.
● Cash on Cash Return: CoC is another method of calculating your returns. A cash-on-cash return is a rate of return often used to calculate the cash income earned on the cash invested in a property. Typically, these are between 8-12%
○ Example: If CoC is 8% on a $100k investment, on average you'll receive $8k each year in distributions (typically paid out quarterly or monthly).
● Preferred Returns: Preferred return is part of the deal structure says LPs to get their money out of the deal first (sometimes referred to as pref, hurdle, or first money out). Preferred returns are shown as a percentage, and typically in the 8-10% range.
I don’t have disposable cash to invest. Do I have other options?
Yes. Passive real estate investors often leverage their retirement accounts, and/or cash value of insurance policies to take advantage of these sorts of investment opportunities. One way is setting up a self-directed IRA with an independent custodian. Once that is done you can invest using your IRA/401K/ROTH-IRA. Your financial professional should advise on how best to leverage your available capital. Are syndications risky? While risk comes with any investment, it’s always mitigated with real estate since it’s the most stable investment available. Taking that one step further, multifamily assets are the most stable real estate asset class (compared to SFH, commercial, etc), making it a sound target for investors. One of the major benefits of investing in stabilized (above 90% occupancy) multifamily assets, is the ability to use permanent, low risk financing. Looking back at the crash in 2008, the single-family market had a 4.0% default rate, versus the multifamily market only had a 0.4% default rate. In the heat of the Covid-19 pandemic, there were many unfortunate families that lost their jobs and income, making them unable to pay their rent. This has a profound impact on a SFH with one resident, but that impact is absorbed when spread across an apartment complex
How can I join your team of investors?
Schedule a call to learn more about syndications and investment opportunities:jmontesano@minyum.com, or call/text at 203.641.9287.
.png)
Comments