What are typical apartment syndication returns for an investor?

24 Replies

What CoC returns do you typically see as an investor who puts money into a syndication deal for apartments? (As a passive investor, not the person who puts the deal together).

How does it compare to investing in your own SFRs? Is it more or less lucrative, or about the same?

It seems to me like most syndicated deals are about buy -> improve -> sell. Are there deals where the owners hold indefinitely to reap the cash flow? If I'm looking to hold long term for the cash flow, are syndicated deals a good option?

This post has been removed.

Originally posted by @Jeff L. :

What CoC returns do you typically see as an investor who puts money into a syndication deal for apartments? (As a passive investor, not the person who puts the deal together).

How does it compare to investing in your own SFRs? Is it more or less lucrative, or about the same?

It seems to me like most syndicated deals are about buy -> improve -> sell. Are there deals where the owners hold indefinitely to reap the cash flow? If I'm looking to hold long term for the cash flow, are syndicated deals a good option?

Above post is pretty standard, but if it's a larger deal with more equity required I would expect a better split. In my view, if the deal is lower on cash flow but has higher upside (IRR), go with the 8% pref and the higher split.

@Jim Groves

  I like your website is it free to join... ?   it was neat to be able to click on different platforms links and get taken right to the portal.

Personally I think this is the new wave of HML and commercial deals that have a hard time getting banks or insurance company loans.

@Jeff L. it depends on the deal, how much money the syndicator is putting into deal, etc. but generally a preferred return between 6% - 10% then some split after that either 70/30, 60/40, 50/50. 

As far as lucrative comparison to single family - again, it depends. If you're flipping homes then I suspect that would be more lucrative than passively investing in a multifamily deal (generally speaking) but it would not be passive. If you are putting a 25% down payment on a SFH and comparing that to putting the same money into a syndicated deal then I think you would come out ahead from a cash flow standpoint with the syndicated deal.

And most are the model you described but some (myself included) have done syndicated deals where we look to buy and hold for the long term. But that's not typical. 

Your returns depend heavily on the investment strategy. A yield play will return a lower rate because it is already operating well and there is little upside other than inflation of market rents and perhaps some tweaking of expenses like water conservation. On the other hand, a value play is riskier and has the potential to return much higher rates. You may not see cash flow for 3-18 months on a value play. Returns also depend on the area and the ability of the sponsor to either manage the property well or hire and manage a property management company. On-going operations will make you or break you in this business.

As ar as comparing an apartment investment to single family investments, I believe you have more opportunity in apartments because of the way they are valued.

Single family properties are appraised based on what other similar properties in the neighborhood have sold for. The fact that your property is rented quickly at the highest rental rate in the neighborhood has little to know impact on the appraised value of the property.

Apartments are valued based on Net Operating Income (NOI). If you can increase economic occupancy (the number of people actually paying rent each month), improve conditions and raise rents, and operate the property where you are maintaining everything and adding things like water conservation that reduce expenses you can dramatically increase the value of the property on just a 10% increase in NOI.

My personal opinion is that apartments are a better vehicle for long term passive income.

Originally posted by @Jay Hinrichs :

@Jim Groves

  I like your website is it free to join... ?   it was neat to be able to click on different platforms links and get taken right to the portal.

Personally I think this is the new wave of HML and commercial deals that have a hard time getting banks or insurance company loans.

Yes @Jay Hinrichs, the site is free to join. I don't charge money for access, I'm looking to build a community where we can all contribute local knowledge to the deals that are being crowdfunded. The rating model doesn't work yet for typical HML deals, as it's designed for current or near current cash flow properties. I'm working on something that should hopefully work for non-cashflowing assets.

@Jim Groves

  I am going to sign up.. I know Nav and Jilliene personally.. I think I did Nav's very first deal or if it was not his first it was close. they have both come a very long way. And I predict a bright future for those two.. as long as there first bunch's of deals work.. and the market has helped there.. there was a thread about one of the portals that did a deal in Milwaukee that had some issues and that led to some mud slinging...

No lender can be perfect all the time.

Thanks for the info @Nicolas Paez, @Jim Groves , @Joe Fairless , and @Lynn Andris! Exactly what I was looking for.

8-10% preferred seems pretty standard for a passive private money investor I guess. It's lower than what I look for in SFRs, but it has room for additional profit from the split and has larger scale.

Joe, I'll PM you about your previous deals...I'd love to see some numbers of what was promised to your investors and what the actual yield turned out to be.

Lynn, intuitively I feel like apartments are a great vehicle for passive income. I just wonder if that only applies to the person putting together the deal, or if it's still superior (compared to SFRs) for the passive cash investors.

@Jeff L. My passive investors look for 7-12%, depending on location and style of deal. Single family flips are quicker, but returns on large multifamily can be just as lucrative. 

You can use a syndication for a long term hold, it really depends on type of deal and investors in the deal. I have a deal under contract I am trying to lock in 10 year debt, for a strong cash flow, it would be a long term deal. I also have a value add deal where it is a buy, renovate, stabilize, and sell. 

The bottom line, it is deal to deal. I think you can crush a syndication on a long term cash-on-cash return.

@Jeff L. I think you'll find syndications throwing off returns on a COC basis in the vicinity of 8% in the sponsor's offering documents. If a sponsor is offering an 8% pref, which is fairly common, they want the property to perform very close to that pref because, in most syndications, any undistributed pref accumulates which ultimately reduces the sponsor's promote.

Notice that I said that you'll see returns near 8% in the offering documents. This is a very important distinction because the actual performance will likely vary from the sponsor's projections. Thus, the most important thing for the investor isn't the return shown in the offering, but the sponsor's track record...their actual performance versus their projections. This should be an important element of your due diligence of investment sponsors. The sponsor can make or break the deal and can be more critical than the property itself.

In my experience investors are most interested when the COC is 6% or higher and the IRR is in the 12% to 20% range, depending on the perceived risk of the business plan. Return of capital in a relatively short period (3-5 years) is also a common goal of the investors. We have fewer clients looking to tie up capital for very long time periods and I suspect that other sponsors see the same thing amongst their investor base. This is one of the reasons why it's so common to see shorter hold periods in the syndication world.

@Brian Burke ,

working on my first syndication and trying to nail down the right model. In a longer term hold, when you talk about "return of capital", are you talking about ROI (so an investor puts in $100k, they need to get back their $100k through the cash flow, ie their 8% preferred return, plus split of the overage, over 5 years for example) or are you talking about another setup, for example the investors gets back their capital through a refinance, and how does that work? (ie who gets how much from the refinance proceeds, and do the investors typically still keep any equity in the project after their capital has been returned through a refi?)

Thanks.

Jean

@Jean G. , by "return OF capital" I mean exactly that...getting their investment back, which, oddly enough, can be defined in more than one way.

I tend to define return OF capital in such a way as the investor is receiving a capital distribution of their initial investment through either a sale or refinance.  Some sponsors define it such that every distribution made, including that of preferred return and surplus profits during the hold period, count as return OF capital.  There is nothing wrong with that and certain deal structures and strategies warrant it (you just have to model it each way and see how the numbers look).  It just has to be spelled out in the operating agreement and PPM which method you are using.

So doing it my way, let's say that we have $1MM from investors and we do a refinance and net out $900K in capital.  The investors get 100% of that $900K.  They still have $100K in the deal, although if they have been distributed $100K from cash flow by that point some operating agreements would treat it as though they have no capital in the deal.

As to your question about whether investors retain their ownership after they have been cashed out...in my offerings they do.  I have heard of other sponsors that exit their investors out via a refinance.  That strategy puzzles me...why would your investors want to relinquish their ownership just as the deal turns from good to great?  I say give them their money back, keep the ownership just as it was, and they'll happily re-invest the proceeds from the liquidity event in your next deal.  You get two investors for one, and the investor gets two deals for one.  Everyone wins.  If you take them out, only the sponsor wins.  How does the saying go?  Bulls make money, bears make money, hogs get slaughtered...

@Brian Burke ,

thanks so much! I've asked several people to explain this to me over the last few days (from lawyers to other investors) and from those who even understood my question, you're the only one to provide an answer that makes sense. So thanks a lot!

So you're advocating to leave the equity as is after return of capital, and I can see how that makes sense. It could probably also make sense to reduce the investor's equity to some extent after return of capital, so not remove them, but tilt the balance a little more in the sponsor's favor (and I only thought of this because it was mentioned in a podcast if I recall)

But if you're leaving the investor in the deal indefinitely as you suggest, is it acceptable to not talk specifically about return of capital at all in a situation where there is no preferred return? In other words, if you have no preferred return to extinguish, then why bother tracking the cumulative amount paid out at all? The investors get their share of the profit paid indefinitely and it amounts to whatever it amounts to over time. Up to them to keep track of whenever their capital was returned, if that's an important measure to them? I myself would just see it as money being invested with x% annual return. When you put your money into a savings account, you're also not tracking when your principal has been returned?

Any thoughts on that?

Jean

@Jean G. , CAN you rebalance the equity after returning the investor's capital?  Sure you can, as long as that's how it was presented, described, and disclosed.  SHOULD you?  Yes!  Everyone should.  It will make it easier for me to raise capital if all of my competitors do stuff like that and I don't. Point being, raising capital begins with attracting capital and investors have a lot of options. You want the option that you offer to be the best option so that YOU are the one attracting that capital.  I doubt that many investors would view a rebalancing as attractive.

Next question, "is it acceptable to not talk specifically about return of capital"?  YES. It is acceptable...but it is not possible. When you start raising capital you will find that 100% of your investors will ask this question, if not first, within the first three questions:  "how do I get my capital back?"  If they don't ask that, they will ask "what is the exit strategy?" which is really the same question.  You have to have an answer, and they'd better like it, or you won't get the investment.  While it is not necessary to track return of capital if there is no preferred return to calculate, you should still spell it out in your waterfall so your investors can get comfortable.

Finally, you are correct when you say that when you put your money into a savings account you are not tracking when the principal is returned. But...that has nothing to do with illiquid real estate syndications. With a savings account you can have your money back in seconds.  In a syndication, there has to be a plan.  If podcasts and books mislead you to believe that people don't care about the plan and how they get back the money that they worked so hard to accumulate you'll quickly learn differently once you start meeting with investors.  

@Brian Burke ,

thanks a lot, this is great content and information not easily found out there, specially since you do a lot of these and know how to actually attract investors (I listened to your podcast a while ago)! I completely agree with your position on re-balancing. If an investor took the risk to invest with me, they should also reap the rewards, and I can certainly see how you will get that capital right back to invest it again into another deal once you have repaid it. I just wanted to make sure I understand how it's commonly done. You can be sure that I will follow YOUR recipe since it has obviously worked for you, and you are kind enough to share it.

Last question (I hope):

In the same spirit of being fair to investors: if you sell the asset before the investor's capital has been fully repaid (maybe you dispose it early because it's the right time), what happens with the proceeds? In particular, if there was a preferred return and let's say the investor put in $400k, got $300k back via preferred return so far and an additional $150k back as share of remaining cash flow over the years (so he actually got $450k back in aggregate), and there is a profit when the asset is sold, would you first give the investor $100k (the remaining portion of his capital not paid via preferred return) before splitting the rest of the sale profits according to what was agreed, or would you consider that the capital was already returned (as he got a combined $450k), and proceed directly to splitting the proceeds of the sale?

I hope the question is not too convoluted...

Jean

@Jean G. , well...just because I said it doesn't make it right...or right for everybody...but the way I do things has allowed me to raise well over $25 million almost entirely by word of mouth and referrals so it has worked for me. Your mileage may vary.

As to your question, it's not too convoluted and neither is the answer. First, don't focus only on the cash flow from the sale. Instead, you have to look back all the way to day one of the investment and do a fresh analysis of the total cash flow that came in (including from the sale) and add up all of the distributions that have been made to the investors and sponsor.

Next, you will allocate 100% of the cash until the investors have received their investment back, then 100% of the cash until they have been fully paid on the pref, and from the sum of those two numbers you will subtract their total distributions that were made to date.  The result is their first distribution. What is left over is split according to your profit sharing waterfall.

@Brian Burke

I guess I thought that you use the preferred return to repay the capital, so anything paid as preferred return reduces the capital contribution account, but given what you just explained it doesn't seem to work like that as I have to pay them their preferred return on the entire capital plus their capital.

So the question is: what extinguishes the preferred return (ie counts as repayment of capital, whether the entire capital or a little bit of it) during the holding period? Is it only if I specifically repay their capital through liquidities of the company that are not paid as preferred return or part of the waterfall, for example liquidities from a refinance?

Jean

Thank you the great post. I have found a lot of helpful information here. I totally agree with Lynn about apartments being a better vehicle for long term passive income.

Originally posted by @Jean G. :

@Brian Burke

So the question is: what extinguishes the preferred return (ie counts as repayment of capital, whether the entire capital or a little bit of it) during the holding period? Is it only if I specifically repay their capital through liquidities of the company that are not paid as preferred return or part of the waterfall, for example liquidities from a refinance?

Jean

 That depends (don't you love answers like that??).  It has to be spelled out in the operating agreement.  Some operating agreements will say that any cash flow to the investor first reduces the investor's principal, thence it credits toward accrued preferred return, thence you enter split territory.

Other operating agreements say that OPERATING cash flow is first credited toward current preferred return, thence to undistributed accrued preferred return, thence you either reduce principal or enter split territory (one or the other)...and any CAPITAL EVENT cash flow (refinance or reversion proceeds) first reduces principal, then preferred return and so on.

While subtle, there is a difference.  The first example will result in less preferred return because principal is reduced with every distribution.  It's more favorable to the sponsor, less favorable to the investor. 

A third method is to have operating cash flow first go to pref, then any undistributed accrued pref, then to principal and never enter split territory until all principal has been returned.

Lots of options...it's all up to you and your operating agreement needs to specify how it's going to be done.  After reading all of this, you probably now see why there is no "typical" deal structure and you can't cut/paste operating agreements and PPMs off of the internet or someone else's offerings.  :)

Hi @Brian Burke

Thanks a lot, that answers my question precisely. In other words it works how all partners decide that it will work and I can see the advantages and disadvantages of each method for the 2 parties (like that you pay less total pref if you reduce the principal along the way and the other way around).

This also explains why the lawyers have no opinion on this when I ask them, since it is basically a business question and the lawyers will write it whatever way the sponsor and investor decide on a case by case basis...

Thanks again for the great content. If you're every wondering about your next blog post, a summary of this would be very useful for anyone looking to syndicate. Otherwise I may write this up myself after I've done it a few times...

Jean

@Jean G. and @Brian Burke I've read this string from top to bottom a couple of times now. Great thread. 

@Brian Burke Who's helping you on the back end? Attorney for the syndication, CPA for the books and reporting? As I build my network these are my blind spots. 

@Jason Kern I have a few attorneys, one firm handles transactional law related to purchase agreements and loan agreements (actually I use three different firms for this depending on where the property is), another firm handles my syndication legal which includes PPMs, subscription agreements and operating agreements, and I have another firm for general business law.  On the accounting side, I use a large local accounting firm, I'm fortunate that I've been a client for many years so I work directly with one of their senior partners and his team.  As they say, it takes a village...

That said, we maintain our own books and generate our own quarterly reports.  That's simply because I know what investors want to see in their reports and it's just something I don't farm out.  I have an internal staff who carry out the systems that I built for those tasks.

To fill the gaps in your team, you might look to a large accounting firm in your area and meet with one of their real estate specialists.  You could PM me and I could give you names of a couple of syndication lawyers, and perhaps they could provide referrals on the accounting side as well.

Hi @Brian Burke & @Jean G, Thanks for raising and answering questions, Takes a lot of research and experience to raise the question and answer it in a perfect way.

Great post and Lot of helpful information 

Join the Largest Real Estate Investing Community

Basic membership is free, forever.