Want to get into multifamily passively
Investor · Brielle, NJ · Member since 2015 · 121 posts · 21 votes
Want to get into multifamily passively
Most Popular Reply
Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votesI appreciate the mention, @Joel Owens!
@David D'Ambrosio, I don't blame you at all for wanting to avoid the middleman. My observation of the crowdfunding platforms was that there were a lot of inexperienced sponsors listing deals because they had no investor base from which to draw, so they turn to the internet. The concept has come a long way, though, so maybe that's changed as of late.
But my opinion is still that investors invest with groups they trust. Those that they develop a relationship with. It's not a "deal" decision, it's a relationship decision, and the crowdfunding avenue takes the relationship out and just makes it transactional. I think that's why they struggle on the equity side and have better success on the debt side.
Not to mention that most established investment sponsors have a fairly robust base of investors, and if they are doing their job well, a steady stream of new investors coming in from word of mouth and referrals. That's the primary reason that I don't use the online platforms for investor recruitment. I just don't need to.
As you seek a group or groups to invest with, be sure to look for ones that have been around long enough to have seen a few cycles. Don't let them get their initial experience with your dollars.
Ask about actual performance versus projected performance. Anyone can tell a story with projections and mold that story to their advantage. But doing so ensures a short life in the passive investment business as those projections are ultimately not achieved. But I see it all the time.
As to hold times, there are a couple of reasons why investment sponsors tend to favor shorter hold times. On the self-serving side, they participate in the upside so they don't get paid (much) until the property is sold.
But most of the other reasons are external. First, the question most passive investors ask is "when will I get my money back." There are far fewer investors favoring undefined or long hold times than short. Then there is the equation of return on equity. Sure, your cash on cash return is high in year 8, but the return on equity is typically very low by then. A sale, followed by recycling the capital into a new offering, increases your return by layering in the gain from the previous sale along with your original capital. And with a value-add strategy, there is typically a large lift at the beginning of an investment cycle as the property is rehabbed and income is increased. After that the increases slow dramatically, so capturing the exit sooner results in a higher IRR. And then there is the issue of deterioration. For very long hold periods the property is going to need a second rehab somewhere along the line, and that could result in a capital call where the investors have to put money in, and investors really don't like to do that!
That said, I tend to underwrite all of my acquisitions to a ten year hold. Not because the investors are looking for long term cash flow (but some are), but because at some point in the not too distant future there is likely to be an adverse market cycle. The investment's business plan must be prepared to hold long-term in order to ride the cycle to the other side, to sell at the next market cycle peak. Now if the market cooperates and the property can be sold for a huge return in three years, that's great, but there has to be an alternative plan, and a longer hold cycle along with stress tests and conservative underwriting are the best line of defense.
Good luck in your search!
35 Replies
- 9yKim Lisa TaylorPro MemberAttorney · Saint Augustine, FL · Member since 2016 · 246 posts · 234 votes
Great comments from the group. My advice for anyone looking to invest passively is to get your own education on how a group investment/syndicate works, and get educated on investing in the particular asset class in which you want to invest. I - as if you were going to set up your own group investment. If you learn what the sponsor knows (or should know), you will be able to better discern who is doing it the right way and who isn't. Steer clear of people who don't follow the law or deal in the "gray areas as they may be putting your investment at risk to save a few bucks up front. Also, if the person you are planning to invest with offers training, going to their training is a good way to get a feel for what they know and their character before you invest with them.
- Investor · Great Neck, NY · Member since 2016 · 679 posts · 467 votes9y
Out of state investing has worked well for us. Being that we live in expensive areas, it's a pretty good route to go. PM me if you have any specific questions.
- Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes9y
Hi David,
Couple articles that might help you as you look into MF apartments and sponsors.
https://www.biggerpockets.com/blogs/9145/53820-why...
https://www.biggerpockets.com/blogs/9145/53959-vetting-an-apartment-deal-sponsor---10-tips-from-an-insider
- Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes9y
@David D'Ambrosio A Turnkey apartment is an interesting concept. Basically you are talking about a stabilized property of which are many that I see everyday. When you buy a Turnkey SFH you typically pay market or above market price. You can do that everyday on MF properties.
At this point in the market we are not looking for market rate properties. We are looking for properties that are well below market on the rents, vacancy, or overall performance.
- Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes9y
@David D'Ambrosio Turnkey apartments are essentially stabilized properties. When you buy turnkey, you are buying at or above market. I can find those all over. We are walking away from the stabilized properties in favor of value add properties that we can add value to. You can also look into NNN leases which are very passive, with steady income as long as you have a strong tenant.
- Investor · Brielle, NJ · Member since 2015 · 121 posts · 21 votes9y
thank you all for all your input
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes9y
Hi David,
All real estate cycles. Within those cycles various areas and asset classes are cycling at different times.
Cycles bottom to top historically take about 8 to 10 years to happen. They do not happen all at the same time which is why as years go by various opportunities presents themselves.
For a syndicator on multifamily 3 to 5 years ago you could simply buy something at a high cap rate, with lower rents, and more vacancy ( 80% occupied ). As the market started to cap rate compress the property naturally increased in value and with reducing costs, increasing rent growth, and lower vacancy the sponsor had a very nice payoff on the back end.
These days most of those properties are gone for multifamily. You either need to be doing ground up development to create equity or buy some kind of existing value add deal to turn around. The stabilized properties where most of the work has been done already the sponsor is basically becoming a glorified property manager and taking a small fee. Some sponsors will do it to eek out a living but most I know will not agree to such situations. Being a sponsor takes work and the sponsor should be rewarded for being more hands on. The passive investor is just that passive. If they want a larger piece of the pie then they should step in and be active as the sponsor and leader in the deal.
I have seen sponsors buy more stabilized assets already where they feel over the next many years they can increase value by about 150 to 250 basis points. Those I generally see are very large properties in the tens of millions or higher so a smaller percentage upside of something really big can become large returns.
- Investor · Colleyville, TX · Member since 2016 · 3 posts · 0 votes9y
Hi David,
Reading through all this, it looks like you have lots of good advice that has been thrown around. I do agree that you should be looking for a private fund to go into. Full Disclosure, we do have those that we place people in including one in residential real estate and one in commercial real estate.
Having sad that the reason, I think you should seek out a fund and more importantly a seasoned fund manager is really 3 fold:
- It allows you to get into bigger deals than you could do on your own.
- It is generally passive, you will most likely subscribe as a limited partner.
- Private fund have oversight with (generally) quarterly reporting and an annual audit as opposed to just partnering on a straight deal.
I hope you find what your looking for in an investment and if you ever need anything I am happy to help.
- Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes9y
We have thought of selling our $2,500,000 of rental houses (owned outright) and participating in syndications, but we would be very little fish, so have very little power. The tail does not wag the dog. How do you-all deal with that very real problem? I met with one of our clients who runs a syndicate which buys large properties for institutional investors. They do no even bother with little fish, and it would not be a good idea for them to do so. For us, it seems better to obtain more appreciation form the houses. When major tax cuts come and the economy takes off, selling the houses and buying one or two apartment buildings may be a good idea.
- Professional · Murrieta, CA · Member since 2013 · 405 posts · 458 votes9y
I invest in a lot of crowdfunding deals and I represent some crowdfunding portals/platforms. I also represent many deals that are presented on platforms. I want to say this upfront so it is understood that I am not promoting anyone who has paid me money.
If I was going to invest in MF passively, I would start with Crowdstreet - Darren Powderly (the many in charge over there) is a CCIM that understands the space. I have invested in some deals on CS. I have also invested on Fundrise, Realty Mogul, WeFunder, Groundfloor, and others. To me, you are going to find the most solid, single syndication deals on CS. I have very much enjoyed investing with Fundrise as well, but CS is more inline with what you are looking to do. Good luck!
Join the conversationCreate a free account to reply, vote on answers and follow this thread.