{"id":54954,"date":"2017-05-22T05:00:17","date_gmt":"2017-05-22T11:00:17","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=54954"},"modified":"2021-03-16T10:16:49","modified_gmt":"2021-03-16T16:16:49","slug":"2014-03-10-syndicated-apartment-building-deal-case-study","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/2014-03-10-syndicated-apartment-building-deal-case-study","title":{"rendered":"Case Study: How to Give Investors a 9% Cash-on-Cash Return in a Syndicated Apartment Deal"},"content":{"rendered":"<p>Some of you have me asked questions like, \u201cHow is it possible to make a deal with investors not only cash flow but achieve 13%+ returns for the investors? I can\u2019t even seem to make this work with a 10% cap rate!\u201d<\/p>\n<p>Certainly, when you\u2019re sharing the pie with others, it should be big enough to share. In this article, I want to show you that a 10-cap deal is big enough to share, leaving a good return for you and your investors.<\/p>\n<p>While we should look for deals to which we can add value to (and maybe double the value of the building in 3-5 years), let\u2019s pick a \u201cboring\u201d 10 cap deal with no particular upside. If it works with something like this, then it should work even better with something with an upside.<\/p>\n<p><iframe loading=\"lazy\" src=\"https:\/\/www.youtube.com\/embed\/wK-tlUvjVUQ?ecver=1\" width=\"560\" height=\"315\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<h2>Let&#8217;s Begin Our Case Study<\/h2>\n<p>Assume we\u2019re buying a 10-unit apartment building at a 10% cap rate on actual financials. The average rent per unit is $1,000 per month and increases by 3% per year. The historic vacancy rate is 10%. We\u2019ll need $1,000 per unit in renovations. Our expenses will be 45% of income and those will increase 3% per year.<\/p>\n<p>This puts our net operating income (NOI) at just about $60,000. To buy this at a 10% cap rate, we will pay no more than $600,000.<\/p>\n<p>Pretty normal stuff so far, nothing out of the ordinary.<\/p>\n<p>Because we will be syndicating this with a handful of investors, our attorney fees will be substantially higher than a \u201cnormal\u201d deal. For example, we need to pay for a \u201cPrivate Placement Memorandum\u201d (PPM) to comply with SEC securities laws, and that can get expensive (my attorney charges me $6,000 but it\u2019s common to cost more than that). Largely because of this, my estimated closing costs are $41,000, a hefty number, but I use it to be realistic and also to demonstrate that the deal still works even with that kind of expense.<\/p>\n<p><em><strong>Related:<\/strong> <a title=\"The Benefits and Challenges of a Real Estate Syndication\" href=\"\/renewsblog\/2013\/07\/02\/real-estate-syndication\/\" target=\"_blank\">The Benefits and Challenges of a Real Estate Syndication<\/a><\/em><\/p>\n<h2>A\u00a0Summary of What We Have So Far<\/h2>\n<p><a href=\"\/renewsblog\/wp-content\/uploads\/2014\/03\/CaseStudy_MB2.jpg\" target=\"_blank\"><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-54969 alignnone\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2014\/03\/CaseStudy_MB2.jpg\" alt=\"CaseStudy_MB\" width=\"349\" height=\"496\" title=\"\"><\/a><\/p>\n<p><span style=\"line-height: 1.5em;\">You can see that the cap rate is just about 10% and is yielding a cash on cash return of a little less than 12% (given the $230,000 of equity we put into the deal).<\/span><\/p>\n<p>Obviously, if you didn\u2019t require investors and you could do the deal yourself, great! But I\u2019d like to show you how this deal can produce a reasonable return for you and your investors, even if you didn\u2019t use any of your own capital.<\/p>\n<p>Let\u2019s say you structured the deal such that the investors get 75% of the building and you gave yourself 25% for putting the whole thing together. (In general, I need the deal to work with me owning at least 20% of the building, otherwise it may not be worth it for me).<\/p>\n<p>Based on our financials above, the net operating income in the first year is $60,000. This leaves about $27,000 of cash to distribute after debt service of $32,000. The investors receive 75% of the cash available after debt service, which is $20,000 or a 9% cash-on-cash return.<\/p>\n<p><span style=\"line-height: 1.5em;\">So far, this is a GREAT cash-on-cash return for the investors! What about any profits from a re-sale down the road?\u00a0<\/span>Let\u2019s assume we sell the building after five years at the same cap rate when we bought it (10%). As we said earlier, our rents and expenses both rise by 3% per year. I plug these numbers into my 5 year financial projections and I see that the NOI will be $67,000 after the 5th year. At a 10% cap, the building\u2019s value is $670,000. Our tenants have paid down about $42,000 in principal during this time. So we&#8217;ve added a little bit of value in 5 years (but not much).<\/p>\n<p>Adding together distributions, loan amortization and appreciation, our investors\u2019 average annual return is 11%.<br \/>\nThis is certainly not an incredible return but consider that this is for an extremely stable asset. Investors today are very interested in investing with you for a stable, compounded return like this. I have found that in general, investors will invest for an 11% to 15% average annual return.<\/p>\n<p><em><strong>Related:<\/strong> <a title=\"Syndication: Is It Even Worth The Trouble?\" href=\"\/renewsblog\/2014\/02\/18\/problems-syndicating\/\" target=\"_blank\">Syndication: Is It Even Worth The Trouble?<\/a><\/em><\/p>\n<h2>Conclusion<\/h2>\n<p><span style=\"line-height: 1.5em;\">I hope I\u2019ve made the point that you can syndicate a \u201cboring\u201d old 10 cap deal with no upside whatsoever.<\/span><\/p>\n<p>However, we should strive to and can in fact do better than that!<\/p>\n<p>If we could increase rents by just $100 per unit per month in the second year (and then increasing by 3% after that), our crafty syndicated deal analyzer shows us that the average annual return for the investors jumps to 15%. Now that\u2019s better!<\/p>\n<p>Let\u2019s not forget about ourselves, the hard-working apartment building syndicator. Our boring 10-cap pays us an average of $10,000 per year in cash flow and a little bit at closing. Not shabby for not having any of our own money in the deal and having a property management company run the whole thing.<\/p>\n<p><em>Questions? Comments?<\/em><\/p>\n<p><strong>I\u2019d love to answer questions about making syndicated deals work for your investors as well as for yourself!<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>When you\u2019re sharing the pie, it should be big enough to share. Here&#8217;s how an apartment deal can leave a good return for you AND your investors.<\/p>\n","protected":false},"author":1501,"featured_media":88901,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5527],"tags":[],"class_list":["post-54954","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-commercial-real-estate-investing"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/54954","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/1501"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=54954"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/54954\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/88901"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=54954"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=54954"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=54954"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}