Looking for low LTV apartment syndication opportunities to Invest

14 Replies

I am fairly new to multifamily investing, and am looking to build a base of diversified syndicated multifamily investments. Almost every syndication opportunity I have researched so far uses a 75%LTV value-add strategy. I certainly think this is a great strategy, and will be making some investments in these type of deals. However, I am really looking for deals that utilize lower or no leverage acquisition strategies. I am fine with trading IRR for lower risk, but not sure how to find these types of deals. I would appreciate anyone pointing me towards these type of deals.

The memory of the housing crash is still very fresh in my mind, and I want to be more conservative with at least half of my capital.  Perhaps I am being too paranoid, I worry about a large apartment investment deal being forced to liquidate during a downturn, perhaps this doesn't happen often.  I would love some feedback from anyone that invested through the housing crash or other significant downturns, and has any thoughts on how many syndicated deals got into a worst case scenario, and couldn't just hold through the downturn.

Thanks

I hear you...nothing goes up forever.  I look for four things to mitigate risks when evaluating a deal:

1.  Population trends and job-creation engines in the market.

2.  Property must be sustainable at a 75% occupancy rate.  Before acquisition, it should be at 90%+, so already cash-flowing.  

3.  Must be a SOLID B- to B.  Most major markets are getting saturated with Class A properties.  When things get bad, people trade down.  When things are good, people trade up.  Again, more options to attract good tenants.  People have to have a place to live.

4.  Underwriting must include enough reserves to weather a pretty major downturn, and extendable financing so that there is not a situation where an immediate exit is required.  

Plan for the worst.  Then plan for worse than that.

Hope that helps!

I might suggest that you ask the sponsor for the names of people that invested with them in the past and generally in more than one deal.  I am invested in 6 deals among 3 sponsors and I can tell you that they are all different.  The larger one’s seem to take longer to pay the preferred.  And the smaller one’s pay immediately as if it were their money.  I am only 2 years into this so I have not gone full cycle but I would bet the smaller operators will return more roi than the larger ones.  I went into these deals for two reasons

1) being part of a large multi family deal means more reward

2) the experience of the syndicator 

So far I am disappointed with the largest operator and happier with the smaller one.

JJ

@Jeremy Diviney   I love where your head is at.  Over leveraged assets is what crushed so many people in the last correction.  

We are syndicating deals in self-storage not multifamily but we typically shoot for a 70 % LTV in our value add projects. I can say that the S.S. market is a bit different than M.F. but I think that gives us enough cushion for the next correction if any of our debt comes due.

Interestingly according to according to the National Association of REIT (NAREIT) the self-storage asset class also outperformed other sectors in the most recent recession. 

From 2007-2009 the self-storage sector produced an average of -3.80%. For comparison, apartments were down -6.7%, retail down -12.3% and for a baseline the S&P 500 was down over 22%.

When the economy is good, and disposable income is on the rise, people buy more “stuff” and need a place to store it. In the midst of the recession, when homeowners were losing their homes to foreclosure or downsizing to apartments, they also needed a place to put their stuff. Where do they go?  Self-storage units!   At the heart of this issue is the fact that Americans have a culture of buying too many things and we can’t seem to get rid of most of it. The demand curve for self-storage seems to be inelastic which helps pull the sector through major downturns. Estimates are that one-third of storage space is filled with items that have been there for over three years.

I think LTV should be a part of your downside protection but I think the type of asset class also has a lot to do with it!

Hi Jeremy,

For a good data point, during the 2009 crash which was pretty severe as crashes / downturns go, MF apartments nationwide held up very well.  Freddie Mac reported MF mortgage delinquency was less than .5% nationwide while single family was about 4% nationwide.  I use this a lot when I talk risk with investors.  If you avoid speculative markets (back then it would have been Vegas, Phoenix, Miami as examples as speculative) and focused on value add apartments the research would suggest almost nil in apartment owners being delinquent.  Call it scale, needing a place to live, etc, they just hold up, 

New construction, class A is a different story so avoiding them if you are conservative is a good idea.  You have build, cost, delay risk, lease up time risk, etc.  While value add if you buy properties that have good occupancy in solid, growth markets should limit your risk. 

You want to focus on the market (growing pop/jobs > natl avg); deal (conservative underwriting, simple value add plan) and experienced teams. So, we certainly feel comfortable w/this approach w/safe leverage > 1.3 DSCR - Debt Service Coverage Ratio; 1.0 is B/E; 1.2 is min for bank loan; higher the better). . Couple articles for further education.

https://www.biggerpockets.com/blogs/9145/53820-why...

https://www.biggerpockets.com/blogs/9145/53959-vet...

Hi Jeremy,

For a good data point, during the 2009 crash which was pretty severe as crashes / downturns go, MF apartments nationwide held up very well.  Freddie Mac reported MF mortgage delinquency was less than .5% nationwide while single family was about 4% nationwide.  I use this a lot when I talk risk with investors.  If you avoid speculative markets (back then it would have been Vegas, Phoenix, Miami as examples as speculative) and focused on value add apartments the research would suggest almost nil in apartment owners being delinquent.  Call it scale, needing a place to live, etc, they just hold up, 

New construction, class A is a different story so avoiding them if you are conservative is a good idea.  You have build, cost, delay risk, lease up time risk, etc.  While value add if you buy properties that have good occupancy in solid, growth markets should limit your risk. 

You want to focus on the market (growing pop/jobs > natl avg); deal (conservative underwriting, simple value add plan) and experienced teams. So, we certainly feel comfortable w/this approach w/safe leverage > 1.3 DSCR - Debt Service Coverage Ratio; 1.0 is B/E; 1.2 is min for bank loan; higher the better). . Couple articles for further education.

https://www.biggerpockets.com/blogs/9145/53820-why...

https://www.biggerpockets.com/blogs/9145/53959-vet...

Kris and David, 

Thanks both of you for the great information.  David, I especially appreciate the MF default statistics you provided.  Makes me feel a bit better about value-add strategies as a passive investor.

Thanks

David is spot on with these metrics.  MF and SF are two different investment types with different risk profiles.   Holly's point on jobs and population trends is key when underwriting any deal you're looking to invest in.  You should know how to research this for yourself so you can check the sponsor's data points (happy to help you with that). 

I would say that a solid C class is just as safe as a B class property in terms of weathering the storm.  When people start losing their jobs vacancy rates are highest in A class, then in B class.  C class property vacancies have the least impacted in a down turn.  

Also, we're underwriting our deals right now with 10 year Fannie/Freddie debt and only looking at deals with substantial upside/value-add which also further improves your LTV once your Capex plan is executed. This gives us time to weather whatever the next few years may bring.

Lastly,  be sure to do a comprehensive check on anyone you invest with.  Run background checks, get references, and validate that they personally invest in the multifamily deals they sponsor.  

Happy to jump on a call.  PM me if you'd like to further discuss.

Originally posted by @Steeve Breton :

David is spot on with these metrics.  MF and SF are two different investment types with different risk profiles.   Holly's point on jobs and population trends is key when underwriting any deal you're looking to invest in.  You should know how to research this for yourself so you can check the sponsor's data points (happy to help you with that). 

I would say that a solid C class is just as safe as a B class property in terms of weathering the storm.  When people start losing their jobs vacancy rates are highest in A class, then in B class.  C class property vacancies have the least impacted in a down turn.  

Also, we're underwriting our deals right now with 10 year Fannie/Freddie debt and only looking at deals with substantial upside/value-add which also further improves your LTV once your Capex plan is executed. This gives us time to weather whatever the next few years may bring.

Lastly,  be sure to do a comprehensive check on anyone you invest with.  Run background checks, get references, and validate that they personally invest in the multifamily deals they sponsor.  

Happy to jump on a call.  PM me if you'd like to further discuss.

Steeve, when you say that vacancy rates are highest in class A, when jobs start going, is that accross th board in your experience, or does it really vary from market to market. 

Also, when underwriting deals with 'value-add' do you factor that into the LTV, meaning, are you borrowing the construction costs as well?

Agree 100% percent about vetting the sponsor, and running background checks, there are too many out there trying to syndicate that don't really have enough experience to know what they're doing...the investors end up getting burned.

Originally posted by @Holly Williams :

I hear you...nothing goes up forever.  I look for four things to mitigate risks when evaluating a deal:

...

Plan for the worst.  Then plan for worse than that.

Hope that helps!

 I like that phrase :)

@Jeremy Diviney : just wanted to mention that if you'd like to respond to a post and have that person get a notification, type the @ symbol with no space, then their name. A little box will come up with some names with those letters and you click on the right one. If the letters turn blue, you know you did it right.

Best of luck!

Really helpful info here... all around.
I'm considering purchasing 'something like a 15 unit building' and I'm very early on in my learning, let alone beginning any sort of a actual search for the a building. My capital is $480K cash on hand, I want to be totally involved with every aspect of the transaction. 
What sort of stuff do you see on your edge of the Commonwealth, Steeve?  Any advice to share? What's the real question I need to ask?


Originally posted by @Steeve Breton :

David is spot on with these metrics.  MF and SF are two different investment types with different risk profiles.   Holly's point on jobs and population trends is key when underwriting any deal you're looking to invest in.  You should know how to research this for yourself so you can check the sponsor's data points (happy to help you with that). 

I would say that a solid C class is just as safe as a B class property in terms of weathering the storm.  When people start losing their jobs vacancy rates are highest in A class, then in B class.  C class property vacancies have the least impacted in a down turn.  

Also, we're underwriting our deals right now with 10 year Fannie/Freddie debt and only looking at deals with substantial upside/value-add which also further improves your LTV once your Capex plan is executed. This gives us time to weather whatever the next few years may bring.

Lastly,  be sure to do a comprehensive check on anyone you invest with.  Run background checks, get references, and validate that they personally invest in the multifamily deals they sponsor.  

Happy to jump on a call.  PM me if you'd like to further discuss.

@Yonah Weiss , yes, varies by market but generally the more expensive apartments will experience higher vacancies during a protracted recession because the class A renter can chose to live in a class B property.  Class C renters are generally more blue collar and perhaps less likely to be laid off... and if they do leave the Class C property they are backfilled by Class B renters.  The Class A building has nobody to backfill vacancies. 

@Warren Currier ,  I stopped buying in MA a few years ago.  Last purchase was in TX and recently underwriting deals in Atlanta, TN, OH, NC.

Thanks,

I'm considering purchasing a 10 to 20 unit building in Massachusetts. 

Is MA an unwise choice? 

I'm very early on, NOT actually engaged in searching for the a building today.

My COH will be $500-800K, 

I want to be totally involved with every aspect of the transaction, the ownership.

I will create a high-quality place to live, a destination to be desired.

In your opinion:

What are the questions I should be asking?

Thanks,

If anyone wants some boots on the ground or a local agent in the Atlanta area to help out in anyway.. I am more than willing to work for free for the education. I am wanting to get into the multifamily space when I snag the right opportunity. Just connect and message me for my #.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.