Teach me how to structure a multifamily syndication deal

[Kay Ferdous]

Hi guys,,,

I've been flipping houses for couple of years now and would like start transition to syndication of multifamily units.

My question is how would you structure a deal such as this. For example down payment on this property is $712500

I would like to put in about 200k and would raise $500000

My investors would be more than happy if I can show a rate of return anywhere from 8% to 12% annually.

And I would like to charge 1% at closing for putting the deal together.

as you can see that Deal little over 26% ROI..

How would you break this deal so that investors get about 8% to 12% possibly 15% and my partner and I get the rest? Thanks.

Sales Price	$2,850,000
Loan Amount	$2,137,500
Down Payment	$712,500
Interest Rate	5.75%
Loan to Value	0.75
Term Mo.	360
UseAnnual Figures
Gross Income
Gross Income	$580,000
Vacancy Factor
Avg. 7%	$40,600
Total	$40,600
Effective gross Income	$539,400
Expenses Annual Figures
R/E Taxes	$0
Insurance Premium	$0
Maintenance	$0
Water/Sewer	$0
Common Electric	$0
Snow Removal	$0
Management	$0
Gas	$0
Trash	$0
Total Expenses	$200,000
Net Operating Income (NOI)	$339,400
Principle and Interest Pmt	$149,686.44
2nd Mtg Pmt (if applicable)	$0
NOI/PI	$149,686.44
Debt Service Coverage Ratio	2.27
Monthly mortgage payment	$12,474
Net income after mortgage	$189,714
Return on investment (ROI)	26.6%
Cap rate	11.9%

[Brian Burke]

@Kay Ferdous before you take in the hard-earned money of your friends and family, do yourself and them a favor and become an expert at multifamily operations and finance. Once you’ve done that your conversations with the investors will flow so much more naturally.  And more importantly you’ll be in a better position to not lose their (and your) money, and to deliver the returns you are forecasting. 

Case in point being this deal.  If you tell your investors to expect the deal to throw off a 26.6% return (at the deal level) you are heading down a road of disappointment.  Here’s why:

You are basing your return off of $712,500 of invested capital which represents a 25% down payment. More likely, you’ll need to raise closer to $1MM, maybe more.  Closing costs, finance costs, syndication, lender, and real estate legal fees, utility and escrow deposits, first year insurance, cash reserves and any needed immediate capital improvements and upgrades all need to be funded in addition to the down payment. One of the biggest things that causes syndications and syndicators to fail is raising too little money. Then you are either stuck or in the uncomfortable position of making a capital call.  If you calculate the returns off of this larger capital stack you’ll find the returns look a lot different than you predicted above. 

I don’t know where this property is, how many units or when it was built, but chances are your economic vacancy will be a lot higher than 7%.  And on the expense side, you are forecasting a 37% expense ratio.  This could be right, or it could be 50%. I don’t know, but be sure you study the expenses carefully and adjust the property taxes for any reassessment that might take place post-sale. 

I’m not saying all of this to pick on you, but to save you from the grief I went through when I was first learning this business. It’s a lot harder than it looks and harder than the books and gurus say. I wrote an article on my colossal fail on the BP blog, here’s a link if you’re interested:  https://www.biggerpockets.com/renewsblog/colossal-fail/

As to your question on structure...put your investors in the front of the line. You take the back seat. Instead of pondering how to get your investors 8-12% so you can have the rest, first just focus on getting them the 8-12%. The rest will fall into place. 

Here’s how this is done:  your investors get 100% of the cash flow until reaching an 8% return. Once reaching that hurdle, you split the profits over the 8% 70/30 until your investors receive a 12% return. Once reaching that hurdle, you split profits over the 12% 60/40 until your investors receive a 15% return, and everything over that is split 50/50.  

This structure incentivizes you to maximize performance and aligns your interests with that of your investor, while prioritizing the cash flow to meet your investors expectations. If you invest cash into the deal too, treat your cash just like your investor’s cash, you receive the same waterfall pro rata. 

I see a lot of my “colossal fail” mistakes in the description of your deal. I learned so much from that experience that I went on to successfully acquire and operate hundreds of millions in multifamily real estate, but there is just no need for anyone to go through that experience to become a successful multifamily operator. Forecast more conservatively and you can grow with a lot less pain.