I have looked at Multifamily Investment over the last few years. I’m trying to understand what’s the average return, IRR, cash on cash and also average five year return if you invested $100,000. Is there a industry norm for syndication, returns etc, fee for management, initiation fee etc. Understandably,everybody has different strategies. Also trying to understand what’s the average percentage taken by multi family management syndicator for management, 1 to 2%? Averages for these; 1. Deal initiation fee at closing 2. Syndicator management fee monthly 3. Percent split on profits 70/30 or 80/20, waterfall? 4. COC return, average IRR. 5. If investor puts in 100k what do you expect to make at 5 years including the invested amount. Thanks in advance!

1. 1-2%

2. 1-2% 

3. 80/20 all the way to 50/50 after hurdles

4. 8-10% CoC. 14% 10YR IRR, 17% 5YR IRR.

5. 1.5-2x equity multiple on 5 YR. 

These vary widely between sponsors and deals, but this is what I see as an average. 

@Sanjoy V. this varies widely, of course, as each deal is different. And not all syndications are created alike. Just because a sponsor projects a higher IRR than another sponsor doesn't mean that deal will perform better. It could simply be that one syndication sponsor is more aggressive in their assumptions than the other. The only thing certain about any projection in a syndication investment is that they will be wrong.

For class B&C multifamily assets acquired today, you should expect to see CoC returns in the low to mid single digits in the early years, growing to low double digits by year 5 or so. If the project is a particularly heavy value-add, in other words requires a lot of renovation and even a resident profile change, you could see zero CoC return for the first year, maybe even a bit longer.

Factoring in proceeds from sale, you should see IRRs in the mid-teens.  13% to 17% depending on the length of the hold and the risk profile of the investment.  Assuming everything goes according to plan...massive economic events could easily disrupt those returns.

As to your questions on fees:  Sponsor's typically charge acquisition fees ranging from 2% to 3% of the purchase price.  Asset management fees tend to be 1%, but the big question is 1% of WHAT?  Some charge 1% of gross collected income, some charge 1% of the capital raised (annually), some charge 1% of the purchase price (annually), some charge 1% of the "estimated market value" of the property (annually) and some charge 1% of the debt plus invested equity (annually).  So watch out for just "1%", be sure you understand how it's calculated because the dollars would vary massively.

Waterfall splits can range all the way from 80/20 to 50/50.  And there could be steps in between.  For example, a lot of my offerings have been 100% to an 8% return, 70% to a 12% return, 60% to a 15% return, and 50% above a 15% return.  Structures can vary from sponsor to sponsor and even deal to deal from the same sponsor.

Your question 5 refers to the equity multiple.  A multiple of 1.5 would mean that you put in $100,000 and get $150,000 back (total--that includes the return of your principal, so a $50,000 profit).  Typical multiples range from 1.2 all the way to 2.5.  It depends on how long the intended hold period is.  Shorter holds can yield higher IRRs but lower multiples, and vice-versa.  For a 3-5 year hold, in most cases you could expect to see 1.4 to 1.7 multiples, whereas a 10-year play might be a 2.3 to 2.7.  This is one of the reasons a lot of investors favor shorter holds.  If you can do two 5-year holds and get a 1.5 multiple on each, that would be 3.0 over 10 years.  It's tough to get a 3.0 from a single ten-year hold because a lot of the wind pushing the multiple is the value-add, and you only do that once on a 10-year hold, versus getting the benefit of two value-add pushes if you do two sequential 5-year holds.

@Brian Burke Brian, I must say you responses are so thorough and professional always. So detailed and go beyond what the member is asking. Thanks a lot for your thoughtful responses and value you add to the forum.

@Sam Grooms Thanks Sam for your step by step answer

@Sanjoy V.

There is no need for me to go into the details to answer your questions to merely repeat what @Brian Burke . However curious to hear: which side are you planning to take? 

I've seen one of your prior posts where you mentioned that an attorney discouraged you from taking on a large MFH deal by yourself without any prior experience. 

If this is still your plan, I'd encourage you to find an experienced partner/mentor who'd be willing to partner up with you in exchange for the value you can bring back to them. 

If however you're now considering joining syndications in LP capacity, then simply reach out to few deal sponsors and ask to start sending you deals (based on your accreditation status of course). This will give you a much better idea on what's available on the market right now than just looking at the averages.

Best!

Thought I would add my $0.02 worth. I am a passive investor in many MF deals in 6 states, mostly TX. Of the 10 deals that have sold, my average annualized IRR is 30%; this includes the CoC and the big lump at the end. I typically see about a 8% CoC during a deal, but some pay better and some don't pay - don't think of it as eat'in money if you like to eat regularly.

Realize that this is a process, that is, the purchases started in 2011 and have continued and increased since then, so comparisons are a bit tenuous. The best deal was bought in 2014 and sold in 2017 (79% IRR). The worst was bought in 2011 and sold in 2104 (5% IRR). There were a several that under-performed because of a poor Sponsor (the above 5%, 13%, 18%, and 20% IRRs). One under-preformed because of the poor management company (16%). And I know my 30% is a bit inflated as the better deals sell faster; there are a couple of other under-performers coming. BTW, the other WOW IRRs are 59%, 45%, and 35%.

In all, MF has been berry-berry good to me!  And Brad Sumrok is our mentor!  

Regards,

Charles LeMaire

@Charles LeMaire I hope you don't mind my candor.  Be careful...having that many under performing investments in this market run is unusual and it won't be pretty with those types of sponsors when the market turns.  Passive syndication investing is not a strategy of averages where one deal offsets the other...it's not unusual for complete loss of capital with the wrong sponsors or market conditions.

There's enough market risk right now in investing...I can't imagine taking on sponsor, management, and execution risk too.

And suddenly I feel the need to justify my choices.  Male ego or a desire for clarity, I will let the reader choose.  

Above Brian Burke suggests IRRs of 13% to 17% - I have seen his posts before and he always seem to have good knowledge and insight. I mentioned the IRRs I had experienced and note that the 5.44% IRR and a 13.2% IRR are below Brian's average. @Mike Dymski suggests I have a large number of under preforming deals.    

To be clear, I am saying IRR (sort of like the CD rate at the bank), not total return. IRR takes time into account, total return does not, but it looks way bigger. On the 5% IRR, the total return was 18%. On the 13%, the total return was 40%. On the 16% IRR, the total return was 57%. On the first, I feel the Sponsor sold too soon. On the second, we had to toss and replace the Sponsor as he lost focus. And the third was a combination of new city codes and a poor management company. But even these poor performers put some money in the pot for the next deals.

BTW, on the high end, I got a total return of 181% ($100K in and $281K back) in 19 months and a total return of 380% ($125K in and 475K back) over about 6 years. 

I'm not particularly unhappy with the results.

Regards,

Charles LeMaire

It sounds as if @Charles LeMaire has had some great results from the offerings he's invested in.  And he should--anything bought in the 2011 to 2014 time frame should have produced some pretty outstanding returns given that rent growth in many markets (especially TX where it appears some of his investments have been located) has outpaced even the best forecasts, and cap rate compression has boggled the mind of many.

I know that all of the assets I acquired during that period performed enormously well, throwing off actual IRRs between 28.7% and 63.3% for hold periods ranging from 21 months to five years.

Even assets acquired in the 2014-2016 era have, in many cases, performed beyond imagination.  I recall people telling me I was crazy to buy in 2015.  But those buys don't look so crazy now, as the market has continued to perform well.  I think seeing 20%+ IRRs on those acquisitions is entirely possible.

But my interpretation of @Sanjoy V. 's question isn't how well investments performed as the market rose from the bottom.  As exciting as it is to reflect on those times, returns like that on assets acquired today are much more likely to be the exception than the rule (unfortunately!).  

The opinions in my earlier post here reflect what I believe investors should expect from investments made today.  If the market cooperates, it's possible for those yardsticks to be beat.  If the market stops giving us these gifts, even the best sponsors will struggle to produce those returns.  And the worst sponsors will give the best ones a few REOs to buy.

What, I think, is important to comprehend is that the question is highly dangerous and misleading. Asking - what are the typical returns - necessarily looks backward. In other words, the best and most honest answers you get are inhibited by the fact that the returns were, not are.

The issue with this is two-fold. Fist, there is the reality that past performance is never indicative of future. Such is the FDIC disclaimer...

This, however, is wildly exaggerated by the fact that the cycle has changed, and the growth seen between 2011 and 2018 is unlikely to continue en-mass going forward. So, the notion of a 50% IRR driven by the incredible compression of Cap Rates is unrealistic going forward for the most part.

Having said this, since we are talking about syndicated deals, which are a function of raising capital, the viable question is - how much return do we need to project so that the risk/reward is attractive enough to investors, enabling us to raise funds?

I seem to require 14%+ IRR projection on 10-year, which usually means 17%-18% on a 5-year hold. At those numbers, people seem to be willing to deploy. From here, of course, the investors evaluate how these returns are projected, is it all back-end, why, why not, etc. forward-looking analysis, not backword.

I suppose this lines up with @Brian Burke , although I can't imagine how this happened since we never, ever, ever agree on anything. And when we disagree, and one of us is wrong and the other is right, he is never right...haha

Hope this helps some :)

I agree with @Brian Burke if you look at these Dallas deals in 2011-2014 a lot of operators just did a fraction of their business plans and sold due to market appreciation not forced appreciation. Good for them but past performance is not an indicator of future success.

It varies widely from syndicator-to-syndicator and the state of the overall real estate market and economy but @Sam Grooms provided the current industry norms.

@Sanjoy V. Sam does a great job on the range of what you may see in one of today's offerings. More than the numbers, I would look at the people. Who is syndicating the deal? Track Record? Have they been through a downturn? Who's the PM company on the deal? Where is it located (submarket)(school zones) etc? You absolutely want to believe in the syndicator and the team he/she has put together. A great deal can fail miserably from and inexperienced operator.