Money Needed For Fund/Syndication
Hey BP,
In your opinion, how much should you have in the bank when starting a Multifamily syndication/fund?
The amount would be a function of the size of properties you are acquiring. There are a number of hard costs to purchasing one assuming you are doing a single purpose entity (close ended single property offering) including:
-Paying an SEC attorney 15-20K to draft the PPM documents.
-Earnest money (often non refundable day one) between 100-200K depending on the deal size.
-DD which could be 10-20K depending on scope and size.
The good news is that multifamily is a team sport and this doesn't need to be all you. In fact I've met several investors that offer to be loan guarantors and put up "risk capital" like the EMD, etc.. in exchange for a fee and/or percentage of the deal.
Starting an open ended fund, while it sounds attractive, can come with it's own set of problems and associated costs/management and is not typically a place to start if you haven't purchased any multifamily before as you would be asking investors to wire money based on a vision of the future rather than a hard asset.
Hope this helps you.
#1 Market Trends & Data Contributor
Quote from @Jordan Santiago:
Hey BP,
In your opinion, how much should you have in the bank when starting a Multifamily syndication/fund?
As investor in your fund, we expect you to have at least 20% of skin of the game in your fund so we can trust you.
To keep it simple, 25% of property value in reserves minimum. Now it depends on the asset class but that is what my standard is.
#1 All Forums Contributor
- Investor
- Virginia
@Jordan Santiago
Depends on deal size but min $250k
#4 Multi-Family and Apartment Investing Contributor
- Cincinnati, OH
- 2,977
- Votes |
- 3,350
- Posts
#4 Multi-Family and Apartment Investing Contributor
- Cincinnati, OH
Deal size will have a significant impact on your cash needs on the front end, as Brandon alludes too. Even though a lot of the setup costs will be reimbursed by the partnership, you need to write those checks before the partnership can bring in equity.
Additionally, you have loan covenants. You may need to have 10% liquid, so if you are taking out a $2mm loan, you need $200k liquid. This will vary lender by lender, and loan type, but you often need to show some sort of liquid capital to secure a loan. Again, this could be allowed at the partnership level or it may be guarantor liquidity.
Then you get into the deal itself, I wouldn't call this "what you need in bank to start a syndication". This is generally how you structure the syndication and roughly come up with the capital needs you need to raise. Using Brett's example, 25% of a $2mm purchase is $500k. So if you use this ratio, and your down payment is $500k, you are funding your future capex from equity at $200k, and you want an additional 25% reserves, you need to raise $1.2mm for a $2mm purchase. This would need to be a pretty rough property, to need 25% in reserves, over and above down payment and capex spend. Having underwritten many deals, I would say 10% of purchase price would likely be a more realistic number, but again, each deal will have its own needs, risks and therefore reserves.
There is no right answer to this question..
It depends on the deal size and what you are looking to do.
At minimum you generally want enough to cover upfront DD costs and EM.
