Passive Investors - What is your minimum ROI?

[Dean Hunter]

Multifamily Passive Investors -

For those of you here who are passive investors in multifamily properties what is the ROI you are looking for?

I am preparing my first offering and want to offer a generous preferred rate i.e. 20%

The project requires a five year hold. If you are a passive investor in multifamily what kind of ROI terms are you being offered and what are you looking for?

[Brian Burke]

The only deals that project returns higher than 20% IRR are the ones where the person doing the underwriting made a mistake or forgot something. Achieving over 20% IRR is very rare unless you hit a market cycle just right and I think it's tough to assume that buying today is going to be hitting a cycle just right.

So assuming that the deal as a whole throws off anything less than a 20% IRR, if you have a 20% preferred return you as the sponsor will make exactly $0.

My concern as an investor in such a deal is that first you probably didn't underwrite correctly, and second that you structured the waterfall such that I receive all of the profits and once you figure that out you'll abandon the project and I'll have to take over and finish it.

To avoid that perception, and potentially that reality, you should consider structuring your offering with terms closer to market and triple-check your underwriting to ensure that you are underwriting conservatively, with full awareness that conditions today are about as good as they'll ever get and when things get worse you can not only survive, but produce a result somewhere in the same universe as you projected.