Real Estate Investing Basics

What You Could Be Overlooking in Apartment Syndication

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4 Articles Written
syndication-team

Everyone says apartment syndication is a team sport; you are not going to be successful without partners. They are absolutely correct. Apartment syndication has multiple moving parts that sometimes requires full-time attention. The most recognizable players, who form the general partnership (GP) of a syndication, are the deal finder, the loan guarantor(s), the person who finds the investors, and the asset manager.

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Oftentimes people perform multiple roles. But the larger and more complicated the syndication is, the harder it can be to execute more than one role. One example of a more complicated syndication is when there is a value-add component.

How to Scale Renovations

One of the most common value-add syndications is when the general partners do renovations to an existing property with the sole goal of increasing rents. A careful analysis is performed to understand the correct formula of how much renovation is needed to yield the greatest return, given the specific market’s constraints.

Due to this one-size-does-not-fit-all approach, the scope of the renovation can vary. Regardless of the scope, oversight of the renovation is paramount not only to the execution of the renovation, but also the overall success of the project. This begs the question: Who should manage this component?

Related: The Big 62-Point List of Apartment Syndication Terms Serious Investors Should Know

For smaller sized renovations, it can easily be absorbed by the asset manager. However, for larger sized renovations, there should always be a member of the GP with applicable construction management experience monitoring this component.

For seasoned GPs this may be a deviation from what you are currently doing, as most teams outsource this responsibility to a construction manager of the property management company, or another third party. But stay with me a bit longer to find out the reasons why you should not be outsourcing this responsibility.

home-renovation

Why You Shouldn’t Outsource

For starters, if you hire a construction manager, you and your ownership interests are not aligned. Unlike a property management company—whose compensation is correlated to the success of a property through monthly rental income—an outsourced construction manager actually gets paid more when a project performs poorly. (An example would be going over budget.) This is due to the fact that construction management compensation is based on a percentage of the project total. If the total increases, the management fee does too.

Even if you find one construction manager who is willing to not be paid more if a project goes over budget, they have no incentive to be under budget. Another example is an outsourced construction manager does not understand how time affects apartment ownership.

In other words, do you think an outsourced construction manager understands how delaying your renovation can significantly affect your net operating income (NOI), and thus, your overall property evaluation? Furthermore, if the plan was to sell the property in five years or less, project delays could set back your exit strategy.

Include a Construction Manager on Your Team

Businessmen are meeting with contractors about business plans.

Having a construction manager as part of the GP ultimately provides another layer of protection on an apartment syndication. The construction manager is motivated intrinsically by the same factors of all partners. They can also provide alternative renovation suggestions resulting in cos and time savings. And because construction managers are on the GP, they also understand the business behind owning and operating an apartment.

Related: 20 Must-Have Team Members for Real Estate Investing Newbies

As there are already a lot of roles that comprise the GP, adding a construction manager can seem like an unnecessary addition. One way to simplify the roles is to look for an asset manager with construction management background. Either way, recognizing the importance of having this experience on your team will not only add a layer of protection to your investment, but also the cost and time savings will be reflected in your overall returns.

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Questions? Comments?

Please share with a comment below!

Ashley Wilson, co-founder of HouseItLook LLC and Bar Down Investments LLC, started investing in real estate in 2010 with a single rental property. HouseItLook, located in the suburbs of Philadelphia, Penn., specializes in flipping early-1900s homes needing full-gut renovations. Bar Down Investments runs construction and asset management on large multifamily projects, while simultaneously offering investors opportunities to invest in real estate passively. Today, Ashley has overseen over $3 million in construction and completed over $36 million in transactions, including both single and multifamily real estate. Ashley has been featured on numerous podcasts, including episode 277 of the BiggerPockets Podcast, and was a contributor to BiggerPockets' Facebook Live.

    Wenda Kennedy JD from Nikiski, Alaska
    Replied about 1 month ago
    I agree. I do my own construction management for my investments. I'm not on the scale that you are talking about here, but the problems are basically the same. No one is going to care about my projects more than I do. My bottom line is most important to me. We do a lot more detail work on our projects since we are holding them to rent. We don't want to make ourselves problems down the road by half-stepping anything within the rehab stage. But, conversely, we don't want to overdo any item because we know that we are preparing the property for a tenant. It's kind of a "Goldie Locks" balancing act -- not too much or too little...
    Ashley Wilson Rental Property Investor from Radnor, PA
    Replied about 1 month ago
    Wenda, you bring up very valid points. First, challenges faced on large apartment complexes, at their core, are very similar to a single rental. Second, I agree the balancing act one must do when running construction management is like "Goldie Locks". That point further drives home the point in the article. Having someone who is knowledgable about this balancing act, from the standpoint of both a construction manager, as well as, an investor, is capable of achieving optimal results. Thank you for reading!
    Daniel Nickles Real Estate Agent from Oklahoma City, OK
    Replied about 1 month ago
    You make a great point! I can see the benefit to this positioning. On the flip side, what is a possible pitfall for bringing a construction manager to the GP side? Maybe they don’t perform to standard and need to be replaced. Have you run into this issue before? If so, what actions did you take?
    Ashley Wilson Rental Property Investor from Radnor, PA
    Replied 30 days ago
    Great question Daniel. Personally, I have not run into this issue, as I am the Construction Manager for our properties:) Like any position on the GP, you need to make sure that each person is properly vetted. Similar to if you bring in an Asset Manager to manage your property, and he/she does not work out, you would need to replace the person. The GP equity would then need to be adjusted, or alternatively, compensation would need to be created; the same would hold true for a CM. As the CM is primarily working on the CapEx budget, you can pull from the contingency funds, and reallocate them as a stipend to the CM. While this is not ideal, and actually counters my posting, at the end of the day, you need to get creative to find the best solution to replace people who are not working, regardless of whether the person is a CM, or an asset manager, or anyone else. Ultimately, I don't know anyone who has owned a home for just a year where something didn't need to be repaired, etc. When you extrapolate that across 100+ units, over multiple years, it is in everyone's best interest that someone in the GP is well-versed on construction.