I'm thrilled to share that I closed on my first real estate syndication deal today! I wanted to share this with the community to hopefully encourage others out there that larger-scale investing is possible without expensive courses or prior knowledge, it just requires making a goal and then taking consistent, persistent action with that goal in mind!
I stumbled on BP 13 months ago, listened to Episode #238 with "Swanny" (still one of my all-time favorite episodes), and was instantly hooked on real estate. I wasn't sure which niche I wanted to pursue, but decided to pull out some equity of our primary residence, then bought a student rental in Greeley last October as a start.
In December I put an atypical duplex under contract, but had significant issues with the financing end of the deal. After getting input from several folks here on BP, I ended up canceling the contract. At the same time I started to narrow my learning focus into multi-family, through content produced by BP, Grant Cardone, @Michael Blank , and @Gino Barbaro
In February I started reaching out to local brokers and building relationships, while also talking to several folks about partnering together if a deal could be found. In April, after evaluating over 40 deals, I finally identified a 64 unit complex in Colorado Springs as an attractive target. This property was built in the late 60's, had good bones and a new roof and pool, but was still owned by the original builder, and had been mismanaged for several years. Rents are 10-15% below market, and there are a number of straight forward exterior items (signage, overgrown landscaping, new paint) that we plan to address as part of our turnaround strategy. I ended up partnering with two folks that had prior experience in the development and SFR arenas.
The seller proved to be very difficult to pin down, and we spent most of May and part of June pushing for a response to our offer. We finally entered into contract June 10 with 2, 30 day extensions to facilitate a 1031 for the seller. Shortly after entering under contract we secured funding through Bellco Credit Union, though it was recourse debt, we got a 4% rate, 10 year term, 30 year am, with a 1 time adjustment at 5 years. We selected a local property management company with quite a bit of experience in the Springs submarket after vetting several local firms.
The final purchase price was $7.55 million, and we ended up raising just over $2 million through a 506(b) syndication structure. Oddly enough, the money raise ended up being the easiest part of the whole process!
Our plan is to hold for a minimum of 5 years, then either refinance into agency debt and hold for 5 more, or sell and distribute the profits. Our projected IRR with conservative rent growth numbers is just under 20% for our limited partners.
I'm so thankful to have resources like BP to learn from, and other folks like @Steve K. and @Bill S. that provided valuable insight early in my journey, thank you! I have much still to learn, and I look forward to creating more value for our investors in the future. Hopefully I'll meet some of you in person at a meetup in the Denver area soon!
@Sam Rust dude! that is awesome! congrats on the big win. I hope to do syndications one day myself, so it's great seeing new players break into it.
What was your experience in getting the SEC compliance things in order? General costs, things to look out for, overall difficulty?
Nice work Sam. Congrats on getting that first deal done. I've recently started educating myself on multifamily and have been analyzing deals on loopnet. Can you summarize the underwriting?
At 7.5 million thats about 112k per door. What kind of rents are you anticipating? Does the model only work with rent growth? What other value adds are you planning and where do your expenses fall? Congrats again and continued success.
@Sam Rust that's great. Congrats! Can you tell us a little more about your underwriting? Coc, how you structured equity, prefs, exit cap rate, etc?
Thanks for sharing your knowledge!
@Sam Rust Thanks for sharing your success story! Congrats on your first syndication deal! Persistence and dedication always pay off!
If I may, a few questions:
1. You mention 10%-15% LTL - which is it? Those two numbers are a very long way apart from one another.
2. Your PP, what is the Cap Rate on in-place basis?
3. Aside for capturing the LTL, is there any other value-add?
4. If so, what will be the Cap Rate upon your all-in basis since re-positioned?
5. Finally, what are you able to project relative to the IRR on a 5-year hold and a 10-year hold?
Just trying to get a baseline on CO.
Congrats and now onto the next one. I appreciate you sharing! God bless!
@Heath Ryans The SEC compliance piece hasn't proved to be that difficult. I found a local lawyer that specializes in syndications and had a reasonable package deal. I spent around $10k, which is pretty reasonable compared to what some of the bigger firms charge.
The complex in question is an even split of 1/1 and 2/1 units. When we performed our market study before placing the complex under contract, the 2/1's were 15% under market, and the 1/1's were 11%, so averaging 13% when the property was placed under contract. Since then we've had the good (and unplanned) fortune of rents growing quickly, upon closing our rents are 21% under market. In fact, units that came vacant this summer rented out above our underwriting, without being renovated.
Cap rate on an in-place basis was roughly 5.7% going in, we project that once re-positioned it will be 7.3%. We plan to add several other revenue streams, including renting out onsite storage that was previously included with units, covered parking, revenue gain from a new laundry facility (just completed), and adding amenities such as a grill patio and play structures.
We project the IRR for a 5 year hold to be 23%, and a 10 year hold at 20%. This is based on selling at a 6% cap rate. Obviously we won't hit our projections if rents don't grow, but the property does cash flow immediately, and we believe strongly in Colorado Springs as a market.
@Lucas Miller We kept it very simple, 80/20 split, no acquisition or management fees, 7% pref. I wanted the GP's interest to align as closely with the investors as possible; this made the money raise quite a bit easier.
@Sam Rust Congrats, Sam! First of all, I strongly agree with you on the Colorado Springs pick. Millennials have been storming in and looking for places to rent. The military presence also provides a nice population of renters.
But best of all is that you went BIG on your first deal. That's something I'm sure all of us here at BP admire. Keep up the hustle!
@Sam Rust interested. 10k is about half what i have heard it to cost. Did you include that in your costs when you were raising money or did you pay that out of pocket?
@Heath Ryans , I bought in as a LP as well, and used those initial funds to cover the DD costs, including the syndication attorney. Most of the larger firms I spoke with started at $25k, I don't believe they would have delivered any additional value in this deal.
@Troy Williams , I listened to several podcast episodes that featured attorney's discussing the various forms of syndication. Jillian Sidoti and Kim Lisa Taylor are two attorney's that are fairly well known in the space. Probably my favorite episode was Taylor on Wheelbarrow Profits, that episode dropped 3/29/18.
@Sam Rust Congrats! Thanks for sharing your success, and a bit of your underwriting. Good luck on keeping with your investment strategy, and get ready for the next one.
Do you mind touching on how the raising $2M was the 'easiest part'. Who were your investors, friends, family, or other?
@Sam Rust Thank you for sharing your experience. It is great motivation to see people out there hustling and finding deals on multi-family right now when it is so common to hear how competitive the space is. Good luck going forward!
@Sam Rust Great for you. Now the hard part running the business!!! LOL every new investor struggles through the structuring, closing, raising funds, then to find out running the business, evicting a good portion of the bad tenants the seller stuffed in, fixing units. filling with higher rent payers... It'll be fun for you guys.
BTW the biggest mistake I did was not to factor in enough payout for the managing partners. I think your syndication is light on the fees for the partners. After a year, you'll not structure the next deal so light. :)
I don't think you'll buy a complex with so many 1/1's either!!! Unless the local section 8 has a ton of VA / single men you'll have high turn over in those 1/1s. But after a year you'll know the facts on that too.
Hope it goes well for you!
That is awesome to knock it out of the park in the first 13 months, way to go!
quick question about 506(b), I researched that a person " cannot use general advertising methods to reach potential customers". You mentioned that the funding of the partners was one of the easiest parts, how did you reach these potential investors?
Congrats! I hope to also do a few of these deals in the future. That is my goal after I get a few smaller multis under my wings. Keep it up!
At what point do you think it’s worth it to try to put it together percentage wise. Like let’s say you only have 200k to put in. Would it be worth it to create this syndication at only a 10% equity for yourself When you can do a smaller deal on your own?
Well done Sam!!
dang go big or go home
@Sam Rust - Did you transition from I&C Automation to REI? Or are you perhaps another Sam Rust? Anyways, congrats on the deal!
Sam, Congratulation! It's nice to see you can landed in a multi-family deal! Thanks for sharing all the info.
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