Multi-family investors/syndicators, what say you?

41 Replies

I have been thinking of investing in multi-family syndications as a way of moving away from active direct investments into more passive investments to simplify life.

I found this article in the link below very interesting.....I especially like the last line.... "We can't pencil in anything over 17 [IRR]," Rivas said. "Unless we are drinking a lot of Kool-Aid, then it's a 25."

However, most syndications i have looked at seem to promote their skill in re-positioning to raise rents and adding value...and I am seeing plenty of sponsors promoting IRRs in the 20 ballpark...Maybe the big syndicators haven't caught on yet?

What say you?  is it better to wait until the risks of increasing supply and economic slowdown subside? 

https://www.bisnow.com/dallas-ft-worth/news/capita...

If you wait, who knows how long you'll be waiting. Some people have been waiting since 2014. Instead, buy right. You can increase your cap rate through big value add projects. Have plenty of cash reserves on hand. If you have variable interest rates, make sure they're capped. 

As for the returns, you need to look at the hold period. We underwrite to a 10 year hold, and a 14-15% IRR. The 5 YR is a few points higher, and the 3 YR is another 8 or so points higher. So make sure you're not comparing a 5 YR IRR to a 3 YR IRR, because that's a huge difference on these value-add projects that bump up the shorter term IRR.

@David S. The IRR is easily gamed especially by newer Sponsors who are desperate to raise capital.

If you peel back the layers and start asking pointed questions, the average syndicator's experience is:

  • No underwriting background. In fact, either copied a "mentor's" model (btw, this mentor has no background in underwriting) or paid some Internet guy $100 to download their underwriting model i.e. ZERO financial analysis background (also biggest cause for concern because if a syndicator is taking shortcuts here... you know where this is going)
  • No property management experience
  • No investment management experience
  • On average, the only "experience" is flipping / wholesaling houses... I actually lol every single time I read this under experience

Regardless, the IRR is dependent on many factors including:

  • purchase price, 
  • exit price (this factor is the biggest contributor to IRR),
  • rent growth strength, 
  • ability to re-position, 
  • debt terms - LTV, rate, term, IO years, amortization years

Articles you might find useful:

Focus on developing relationships with the right syndicators (full disclosure: I am one) with the right background/experience working with the right teams. 

Waiting for a demand/supply slowdown might not be the most prudent long-term move. The investment decision depends on your investment horizon, strength (or weakness) of the market and the investment strategy. 

@David S. my deals fund fast, my investors funded $9.5 million in 2.5 weeks and it isn't because of my IRR. Investors decide to work with me as I am credible and trustworthy.

@Omar Khan provided a great read on vetting a sponsor. 

My suggestion is not to IRR shop, rather find an operator/sponsor where there is alignment of your financial goals and transparency.

Good luck!!

I agree with @Omar Khan and @Brian Adams

In this part of the cycle we stay away from chasing IRR. The high IRR deals out there today will be the failures of tomorrow when the tide goes out.

Instead we chase intrinsic value with solid cash flow. In other words we focus on quality, newer assets located in great sub-markets. At the top (where we are today) I'd rather acquire a B+/A- asset with an 7-8% yield and a long (15 (agency) to 35 (HUD) year) fixed rate debt instrument.

@David S. I second  @Omar Khan @Brian Adams  and @Ivan Barratt to avoid IIR shopping. Also in addition to vetting a deal sponsor, take an alternative route and ask that are currently equity partners in someone else's deals as to what their experiences have been so far. Who would they recommend?! Does their syndicator follow the rules spelled out in this article: https://www.biggerpockets.com/blogs/10850/75569-ca...

Best!

@David S. You want to be in the market and not sitting on the side lines as long as you have a hedge.

1) cashflow via a stabilized asset
2) value add potential via forced appreciation

If you have two hedges it allows you to act aggressively.

Hey David.  I invest both actively and passively and have allocated more capital to passive investments lately.  Deal flow is king in this market and you either need to have it or to invest with someone who does.

Done correctly, passive investing does not simplify life during your learning curve but it does afterwards.

If you can predict economic cycles, forget about real estate and short (or long) the stock market...much easier than messing with REI.

Stick with good sponsors, cash flow, add value, prudent debt, and reserves...good recipe at any point in the cycle.

And if you are investing passively, consider assets classes other than just MF.

Tons of great answers so far. To speak to your 20% IRR comments, I would look cautiously at those deals. Is what they are projecting in line with reality? Plenty of companies out there right now reaching and assuming our market will continue it's upward projection until they sell. If that happens, then you make your 20%, but if not, then you lose 20%. I know for me personally, even in deals that I feel will make investors 20%+(which are the only deals that I buy), I will approach the numbers more conservatively, so that I am showing under 18%.

Yes, all great advice so far. No doubt vetting the sponsor is equally as, if not more important than vetting the investment property. Alignment of investment philosophies, trust and transparency are crucial. That trust will be developed only from talking to many.

@omar Kahn what are some practical steps someone who is a flipper, wholesaler and single family landlord can do to gain the necessary experience to syndicate a multifamily deal?

Originally posted by @Logan Bowers :

@omar Kahn what are some practical steps someone who is a flipper, wholesaler and single family landlord can do to gain the necessary experience to syndicate a multifamily deal?

Start networking with local syndicators and see what sort of value you can bring them. Most likely you won't be able to help them underwrite (I see many newbies offer that) or able to bring them deals that they don't already know about. So maybe you have capital or have a way to connect them to your network that has capital. Once you partner with them you can learn and gain experience and some credibility.

Hello and thank you for your question and making me want to give you my opinion David!I have not read that article yet but I do have a couple of things to say to you on your question and ability to make us speak out on something we are interested in.  One of my first thoughts or opinion is that to say that real estate has cycles and that you must have the ability to go somewhere other than your back yard.  I am currently reading a book that the author was doing his research that apartment buying and selling was the number 1 real estate investment in real estate.  Most of the people that are involved in apartments say that the "season" and the economy does not matter much. 

They also say that you have to own a minimum number of units to have the ability to afford a manager or a management company and that they keep you from being involved everyday.  Nobody knows what future will be but people will always need a place to live.  Having useful amenities will help you get complexes rented.  Try to be the first one in your area to make any large move that can make you more money and be able to justify it.   Also have a good first impression.  Always be researching ways to increase your income instead of lowering the expenses. Not that expenses are not good to lower but they are not number 1.

Always do lots of research that keeps you current and continue with the education.  Knowing more than the ones next door will help keep you on top.  I definitely believe in purchasing something that you can add-value to.  Study what is popular in that area.  I hope that this makes sense to you.  Good luck to you!

@Ivan Barratt . you said above that "At the top (where we are today) I'd rather acquire a B+/A- asset with an 7-8% yield and a long (15 (agency) to 35 (HUD) year) fixed rate debt instrument."

What is your rationale for this?, given that there seems to have been a lot of new supply that has come on and which has resulted in many having to offer significant rent concessions?

Most of the syndications I have reviewed recently involve upgrading C class buildings so they can raise rents and therefore values to generate good returns. Many seem to have extensive experience in creating value out of C class buildings. On the other hand, I wonder if due to all the media surrounding  A class buildings, whether if C class is the place to be if everyone is moving down to chase apparent, potentially  higher returns...So that maybe there is more competition for C class buildings than there may be for A class buildings.

I am sure there are good sponsors for all class of properties in any part of the RE cycle. I guess i am trying to decide for myself what kind of multi-res syndication i should invest at at this stage of the cycle, a C class property with great value add potential or an A class building that may be selling at a discount if that makes sense.

We typically operate in the B asset space (A and B Locations).  There are opportunities in every market cycle however there WILL be a day of reckoning in C properties. 

Originally posted by @Ivan Barratt :

I agree with @Omar Khan and @Brian Adams

In this part of the cycle we stay away from chasing IRR. The high IRR deals out there today will be the failures of tomorrow when the tide goes out.

Instead we chase intrinsic value with solid cash flow. In other words we focus on quality, newer assets located in great sub-markets. At the top (where we are today) I'd rather acquire a B+/A- asset with an 7-8% yield and a long (15 (agency) to 35 (HUD) year) fixed rate debt instrument.

A class deal at 7-8 CAP. Do they throw in free unicorn dust when you buy? :)

@Sam Grooms great question. Hunt Club may look close on a map but it's in a distinctively separate, inferior sub-market to fountain parc.


@Cody L. Thanks for the laugh!!  Who doesn't like unicorn dust!? I was referring to the "yield;" more specifically the "going in levered yield" (aka "cash on cash return" or "cash yield") versus the cap rate (aka "unlevered yield).  

Good call out on your part. It would have been simple and clear if I had just said cash on cash year one of 7 to 8% (or better).    :)

Originally posted by @Ivan Barratt :

@Sam Grooms great question. Hunt Club may look close on a map but it's in a distinctively separate, inferior sub-market to fountain parc.


@Cody L. Thanks for the laugh!!  Who doesn't like unicorn dust!? I was referring to the "yield;" more specifically the "going in levered yield" (aka "cash on cash return" or "cash yield") versus the cap rate (aka "unlevered yield).  

Good call out on your part. It would have been simple and clear if I had just said cash on cash year one of 7 to 8% (or better).    :)

unicorn dust = broker proforma...

I'm a huge nerd for this type of question, but everyone here hit the nail on the head. 

The dirty secret of IRR is that it is implicitly tied to the assumptions on cash flow. The assumptions that are baked into the analysis are the meaningful piece of the puzzle. Make sure you check each one very closely.

The even dirtier secret of IRR is that it really doesn't mean much without an understanding of the risk premium associated with the asset. As an example, a 10% IRR would have different meanings for a fully stabilized class B 100 unit asset vs. a 30 unit class D full rehab project.

Hi @David S. ,

There are still plenty of great deals to be had, you need to be in a solid market based on fundamentals vs speculation at this stage in the cycle.

My firm and I have been syndicating 100-unit+ deals for many years now. We held on through the last recession and learned many lessons. Syndication's can be a great way to passively invest in real estate.
Best of luck!

@Kira Golden . Always interested in syndicators that survived the last great recession. What lessons did you learn?

 I agree we need to be in solid markets based on fundamental and not speculation. My concern is almost all investors know the same thing and are competing so fiercely resulting in very few good deals.

Which brings me to  @Ivan Barratt . Can you elaborate on what you mean by "there WILL be day of reckoning in C properties"?

@David S. simply put there are many new operators driving up the price (and driving down the returns) on value add C properties. Further, many are using shorter term, 5 year balloon, bank debt.  WHEN the market corrects there will be some more losers within that specific segment and it will create more buying opportunities for well capitalized, stronger operators.

At this point in the cycle it's the contention of some (me included) that one should focus on higher quality assets in well located sub-markets and further reduce risk with 10+ years of term (rate) on the debt. :) 

Originally posted by @David S. :

@Kira Golden . Always interested in syndicators that survived the last great recession. What lessons did you learn?

 I agree we need to be in solid markets based on fundamental and not speculation. My concern is almost all investors know the same thing and are competing so fiercely resulting in very few good deals.

Which brings me to  @Ivan Barratt . Can you elaborate on what you mean by "there WILL be day of reckoning in C properties"?

 I am also always very interested to hear from experienced syndicators who have been doing it for 15-20 years and started before 2008. I'm guessing they are not on BP - or at least very few of them are! If anyone knows one, please tag them :)