SO HOW MUCH WILL I MAKE INVESTING IN AN APARTMENT SYNDICATON?

81 Replies

This post has to start with a disclaimer. No one can guarantee returns, and there's a risk associated with any investment. Having said this, it will give those who are curious a rough ballpark of the kinds of returns you might expect.

1) We start with the hold time. Apartment syndication is a non-liquid investment. It can range from 3 to 10 years, but you will find the most common hold time to be 5 or 6 years.

2) The first source of income is the cash-on-cash return or COC%. The cash flow is what's left after you factor in vacancy costs, mortgage, and expenses, and it's the pot of money that gets distributed to investors, usually quarterly. The most common COC percentage I see most deals shoot for is 8%. That is, if you were to invest $100,000, the projected cash-on-cash returns for each of the five years would be about $8,000. Thus, Cash flow comes out to approximately $40,000 throughout a five-year hold.

3) Projected Profit Upon Sale: 40-60%. In a value-add scenario, the units get updated, the tenant base improves, and rents get raised to market rates. Operational efficiencies can also result in lower expenses, so with higher rents and lower costs, we increase the NOI. Higher NOI ÷ the prevailing cap rates result in increased profit at the sale. How much? It is very tough to predict, but you will often see a 60% increase over a 5-yr hold. Divide that 60% by five years, and you have another annual 12% from the profit at the sale to add your 8% COC%

The math comes out to a 20% average-annual-return multiplied by five years for a 100% total return. The ballpark result is doubling your money every five years. Not an exact science, but it does give you an idea.

Thanks @Johnny Lynum . Of course returns will vary, but this is a common ballpark. Hold times may stretch in this tight market, but consider this all a median.

@Rick Martin. Well put and definitely informative for anyone new to wanting to get their feet wet with syndication. After reviewing a few offerings myself and reading books, I would say its fairly accurate give or take a few % and $.  

Save me some time and trouble, why not just give us an ACTUAL syndication with numbers?

Other thing is, you bought in 2013-2014 you really had to screw up not to double your money.  It may not always be like that.

@Steve Morris I don't think Bigger Pockets would like it if I posted some past deals here on the forum, but I am happy to have a conversation if you want to reach out.

To your second point, people were getting 3x and 4x multiples in that time frame. No one has a crystal ball as to what will happen in the coming years. We can only underwrite conservatively, with little to zero rent growth, properly evaluated reversion cap rates, healthy DSCR's, and low break-even occupancy. If the market fundamentals of that submarket appear strong, and the numbers project well even with all the aforementioned conservative analysis, I for one will not be standing on the sidelines.

@Rick Martin thanks for sharing. Are you finding that in today's times (2021+) it's becoming increasingly difficult to hit 20+% returns/IRR? With the MF market being ultra-competitive these days, especially in the value add space, I see more and more deals accepted with lower targets such as 13-15% AAR.

I have invested in ~20 syndications in the last ~1.5 years (spread over multifamily, office, mixed use, industrial, student housing, senior housing, etc), and the projected returns are 1.5-3.5 equity multiples over 3-10 yr hold periods, which equates to 12-18% IRR. None have exited yet.

I don’t have the time or desire to be actively involved, so syndication works well for me for diversifying my investments (from stocks into real estate).

Need to be careful of the syndicators’ tricks - they may show substantial skin in the game by making a significant equity contribution but they may be collecting more in fees at closing, they may offer some coc returns during the hold period but the payment would not come from cash flow from operations but from a cash reserve created using LP contributions itself, they may claim during equity raise that lending is firm for a ground up development but say after closing that ‘construction financing’ needs to be finalized, etc.

I haven’t had any bad experiences yet. I don’t invest with mom and pop syndicators but that doesn’t mean sponsors who have been in the business for 20+ years and have more than $1B in assets would not try to scam the investors either. Need to do the due diligence and always ask the sponsor to clarify any doubts. I rarely reject any deal because of the business plan, but sometimes the proforma assumptions itself can be dubious.

I think a good syndicator will put a balanced deal forward, because they would value the investor’s time as much they value their own.

One other thing is many syndications try to do a refi in year 3 to return some of the capital back to investors and that can boost IRR.

One other thing is many syndications try to do a refi in year 3 to return some of the capital back to investors and that can boost IRR.

Some of these deals (yes, I know of some) that bought in 2015 +/- were able to do a cash-out refi (when banks were kinder) and take out enough to give each member their capital contribution back.

Who knows if it'll last since there are not a lot of really killer deals now and you make your for-sure money on when you buy.

I don't think Bigger Pockets would like it if I posted some past deals here on the forum, but I am happy to have a conversation if you want to reach out.

Well, I don't think they'd care if you redacted the deal.  I see a lot more blatant pitches for business than that.

I just am getting more and more deals with the same pitch brought to me by clients I done deals with.  90% are built on prayers and salesmanship bloviation.

Great post @Tushar P. You are speaking from experience, and those things you point out do happen. Investors do have to know what questions to ask during their due diligence, and how do they know what to ask, if they have never been through it? There are some excellent resources out there for the Passive investor. Brian Burke's comes to mind. I myself have a free ebook with a lot of the ins and outs.

To your last point. This is the syndicator's livelihood. We are not going to get rich off one or two syndications. We're in this for the long haul, and the only way you are going to do that is to build a long, honest track record, and be a diligent steward of people's money. Otherwise, you shouldn't be in this business. Not to mention, you won't have many return customers.

@Anish Tolia it's a great point. Since IRR factors in time, it can be a misleading metric. Many investors like that return of capital so they can redeploy it, and increase the velocity of money. Conversely, you can see a 2x equity multiple, but if it is spread out over a 10-yr hold, the return has lost its power and velocity. A return of capital can also increase your COC%, because now you have less money in the deal. The 5 yr returns that are based on a $100,000 investment should be carefully reviewed and confirmed, and it is always a good idea to ask several "what ifs?"

@Steve Morris we are all entitled to a health dose of skepticism. A pro of participating in a syndication is how truly passive it is. A con would be the loss of control. A real estate syndication may not be the right fit for those that have the time to be an active investor, and wish to invest in smaller assets, with less diversification of risk.

@Andrew Schutsky yes. I have not seen many 20% IRR of late. I have passively invested in many deals myself, and personally, I want to have decent COC, and double my money within 5 to 6 years. If the majority of my return is coming at sale, then obviously this entails more risk. To @Andrew Schutsky's point, IRR can inflate with a quick return of capital, so at the end of the day, I evaluate my deals on pure dollar value, and how those dollars are flowing back to me, and in what time period.

@Rick Martin thanks for pointing out the resources. I wonder if these are more geared towards how to become a syndicator rather than what the investors need to be careful about. 

The ‘construction financing’ thing happened to me in one of the deals but maybe it happened because of covid. I guess commercial real estate lenders were in panic mode just after the lockdown. In the end, financing was secured, so all good. 

Based on my experience so far, there are some syndicators whom I will invest with without thinking much, while others I will think twice. Some I will decide not to invest within 5 minutes of looking at the deal. Though right now I have not had more than one investment with any syndicator.

IRRs are important, but they are really a shot in the dark. So much of the IRR is dependent on "the end" (i.e. high sale price) or "the beginning" (i.e. having little / to not equity locked up through an advantageous early refi).

Cash on Cash is more "clear cut" - 6% to 12% is common depending on the asset class and the location. 

@Rick Martin Great review. Syndication is a good way to get into real estate investing for people who are targeting higher returns than a stock market index fund and are willing to live with the lack of liquidity and control associated with these deals.

@Jacob Johnson that is a pretty great description. It brings a group together to invest in larger assets that can take advantage of the economies of scale and diversify risk for the investor. If one person leaves your 100-unit, you are 1% vacant. If one person leaves your duplex you are 50% vacant. Investors invest in fixed increments, whether it be 50k, 100k, or more (sometimes less), and get cash flow, appreciation, and tax benefits, without all the headaches of being a landlord. Some enjoy being a landlord. Others are too busy or don't have an interest in it. Another often overlooked key is you get in on the investment pre value add, so you essentially get equity going in.