How Do Syndicated Apartment Holds Fail?
Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes
How Do Syndicated Apartment Holds Fail?
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Investor · Phoenix, AZ · Member since 2017 · 583 posts · 919 votes
7y@Jay Hinrichs alluded to management, but here are some ways to fail strictly related to underwriting:
- Underestimating operating expenses
- Underestimating expense growth
- Overestimating repositioned rents
- Overestimating rent growth (post stabilization)
- Underestimating capital expenditures
- Not enough reserves
- Not enough contingencies
- Not inflating exit cap rate enough
- Not inflating interest rates enough (if not fixed)
As an investor, you need to be able to understand and "check" all of these out during your due diligence.
62 Replies
- Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes7y
I'm very fortunate to have such wonderful advice here, thanks all, esp. @Ian Ippolito and @Brian Burke and @J Scott
- Flipper/Rehabber · Houston, TX · Member since 2019 · 12 posts · 2 votes7y
@Ian Ippolito wow . Awesome answer .
- 7yPeter TverdovBusiness MemberDeveloper · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
I just see too many people in this game who act like experts. People who have been investing the last several years in a bull market with historically low interest rates. My favorite is the IRR numbers I see 5 years from now. Biggest bunch of bs there is. You have NO WAY of knowing what your sale is going to look like in 5 years, none. The entire thing is an assumption and everything needs to go right to work over 5 years.
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes7y
Originally posted by @Brian Burke:
I've raised over $100 million from hundreds of investors throughout my decades in the syndication / operator space, and I can assure you, DD is absolutely possible, and mandatory. To this day, we speak with every new investor and most repeat investors before they make their first or repeat investment. I've had investors travel from as far as Australia to meet in our office just so they could see that we were real.
We spend all the time we need to answer every question posed to us. Every sponsor worth the title should be doing the same.
Given that the quality of the sponsor drives the outcome more than the real estate itself in most cases, this level of DD should be performed on every contemplated investment. Even if Ben invests in my deal, you should do your own DD on me because maybe Ben didn't... :)
I'm having my morning cup of coffee and having a chuckle...
This thread is lovely.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Account Closed:
Everyone and their brother here is saying DD.DD on a syndication n syndicator is practically impossible to do for those average man or girl who wants to invest.
Not many Leads are going to have coffee with an interested investor for one thing................lol.
If you really have to invest in one do a survey of BP modS. Ask them privately via PM how many Turnkeys have you bought in this meteoric RE market. Then apply that answer to how many syndications theyve invested in.
Why should a operator invest with a pal. To get that extra alpha . Also to show you really beelieve in the syndication concept for the investor.....................lol.
Lets Say Brian is putting a deal together. I hear Ben is investing 25% as a limited partner. Now thats a deal i want in on.
your talking apples and oranges most syndications require accredited status or limit to a small number of non accredited.
Turn Key is open to any investor.. regardless of financial suitability as described in the accredited investor criteria.
Of course no way of knowing but I have to think it very rare that a sponsor is putting in 25% in cash into their syndicsated deals if they are they don't need investors .. Investors are the 25%.. not the sponsor .. sponsor might put a token in like 100k or so But I don't think its common or there are many that are putting in that amount of their own capital.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Ian Ippolito:
@Account Closed,
I agree that doing proper due diligence takes a lot of work to learn how to do, and even more work to actually do it. However, I feel that if an investor is not willing to put this in, then they really should not be investing in real estate, and should consider investing in public markets or something else.
If it helps, below is my diligence process. I’m very conservative so you may not need to do everything. But maybe it will give you some ideas.
For vetting a syndication, different investors do it differently because every investor comes from a different financial situation and has different goals and risk tolerance. For me, I'm a very conservative investor and may look through a hundred deals a month, and at the end of the year only invest in 4-5. So things that are a red flag for me may be fine for someone more aggressive. Here's how I do my due diligence: 1) Portfolio matching: (takes 30 seconds per deal) a) Have an educated opinion on where you think we are in the real estate cycles (financial and physical market cycles) b) Then only then pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I think we are late cycle, so I lean toward the safest part of capital stack which is debt (or debt free equity). I won't go with the riskiest opportunistic strategies, and will stick to core and core plus mostly with some value-added. I won't be investing in the riskiest/most supportable asset subclasses such as hotels, and tilt my portfolio the ones that have historically been more stable such as multifamily and single-family housing. I also don't want refinancing risk, so any deals with only 3 to 5 year debt are out for me. For someone that's not as conservative, or a different view on the next recession, they might have a different opinion than me on all of this 2) Sponsor quality check: (takes about 45 minutes per deal) I believe that a great sponsor can take an average looking deal and make it great, and that in mediocre sponsor can take a fantastic looking deal and make it bad (especially if there is a severe recession). So I start with the sponsor first. Again, others might disagree. a) Track Record: Get the entire track record for the strategy. As easy as this sounds, it's not simple and usually like pulling teeth. Many times they will claim it's wonderful and then try to hide their worst deals by only showing completed deals. Make sure to get unexited deals. Or if they are doing value-added multifamily, they will show you their hotel experience. That doesn't cut it for me. I want a specialist that's an expert, and not a jack of all trades and master of none. Also, in a mainstream asset class like value-added multifamily, I see no reason to take a risk on a sponsor that doesn't have full real estate cycle experience and didn't lose money. Again, other might feel differently here. b) Skin in the game: as a conservative investor, I understand that the dirty secret of industries that the waterfall compensation is in the line with me and incentivizes sponsors to take more risk. So I require skin in the game (average is 5% to 15%) to offset this. Contrary to popular belief, this is not set because I believe it will give me a higher return. I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses. Someone that is more aggressive, may want lesser even though skin in the game. Also, if the sponsor is new, I am fine with less skin in the game as long as it is significant to their net worth. On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me. c) how open to scrutiny are they? I always discuss investments with others in an investor club because other people might think of things that I might miss. And even though virtually every sponsor agreement allows me to share investment information with others who might be advising me on it (especially when club members are bound by an NDA), I still ask the sponsor if I can share it, because it's a test. Most are fine with that, but a few will have problems with it and claim there are legal issues, etc.. That's a red flag for me. d) death by Google: I Google everything I can about the sponsor. I check the SEC, FINRA, ratings websites for inside information on the principals in the company. I also look for lawsuits and see what happened in them. Many times it's an easy red flag. Sometimes it's ambiguous, but even then, why should I bother with the company that has numerous unresolved lawsuits, versus another company that is virtually the same but has none. Again, others might feel differently here. 3) property level due diligence: (takes seconds to weeks per deal): here is where I drill in with the low-level details. a) pro forma popping: I examine all the assumptions, and see if they are overoptimistic or not. I look at every single item in the pro forma and imagine that it is complete BS, and see if I can challenge it. If there's a hole, it may be a red flag. b) sensitivity analysis: I examine all the assumptions, and make sure I can live with the worst case scenarios. c) "Stall and see": if they are getting money over multiple years, and there is no penalty for investing later, I would usually wait so I get some real performance data, versus having to look at theoretical pro forma information. d) Recession stress test: I will not invest in anything, until I subject it to recession level stress and see if I can live with the result. And I take the worst recession I can find in the recent past. Sometimes there is only great recession data, and that recession was pretty mild on some asset classes, versus previous recessions. So I will usually 1.5x or 2.0x the stress. If the deal collapses and I would lose everything, I'm out. Others might be fine with taking risk, but least by doing this a person can get an idea of what might go wrong. e) Legal document analysis: it will usually take a few days to go through the legal document properly, as almost inevitably there are tons of gotchas that either have to be explained, or mitigated with a side letter. That is the very short summary of what I do. If you want more information, p.m. me and I can give you a lot more detailsBetween you and Jeremy Roll your the most thorough out there.. and this led to issue in crowd funding space when the platforms were subscribing deals in a matter of hours.. no way proper due diligence could be done.. and look at all the deals that have gone turtle especially on the lending side
- Flipper/Rehabber · FL · Member since 2019 · 15 posts · 2 votes7y
@Jay Hinrichs would be interested to know what your source is for finding out whether a deal went “turtle” or not. Thanks.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Craig Bliss:
@Jay Hinrichs would be interested to know what your source is for finding out whether a deal went “turtle” or not. Thanks.
commercial brokers.. public records. IE diL NOD lis pendance
- Investor · Phoenix, AZ · Member since 2017 · 583 posts · 919 votes7y
Originally posted by @Peter Tverdov:
I just see too many people in this game who act like experts. People who have been investing the last several years in a bull market with historically low interest rates. My favorite is the IRR numbers I see 5 years from now. Biggest bunch of bs there is. You have NO WAY of knowing what your sale is going to look like in 5 years, none. The entire thing is an assumption and everything needs to go right to work over 5 years.
It's absolutely all based on assumptions. But everything doesn't have to go right for your 5 year projection to be correct. If you underwrite conservatively (excess cap inflation, excess interest rate increase, pad your expenses to give your NOI some room, leave some upside in your rent projections, double your economic loss from today's averages, etc.), you can significantly outperform if everything goes right.
- Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes7y
Hi again all,
Integrity, honesty, and guarding your money with your life is the kind of person you want to invest with. The people that invest with me @Account Closed on this past week's podcast gave me a shout out saying at the beginning of the podcast that Podcast 238 is at the top of the list on most listened too EVER!! Thank you Brandon!!!! It aired in 2017 and people constantly contact me and tell me they could really relate to what I was saying. I have been educating and leaving my phones open most days from 3:15-6:15 PST. I live in San Diego. since, 2017 when Podcast 238 first aired.
There are many people, I can't count how many I have helped, since 2017 when podcast 238 aired. How do you get people to invest in your deals? Help as many people as you can, without expecting anything in return and it will come back to you big time!!
That phone line is always open if anyone wants advice. Message me and that is another way I could help you too. I am a teacher at heart and will always be.
Swanny
- Rental Property Investor · Tampa, FL · Member since 2015 · 1k+ posts · 969 votes7y
Like the majority, if not all, investments, a return isn't guaranteed. There are always risks of not only receiving a return lower than projections, but losing the majority/all of your initial investment.
Even if you find the best sponsor with the best track record, there are still risks that are outside of their control. So, before investing, to minimize the risks, know the syndicator (and their team), know the deal, and know the market.
- Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes7y
@Theo Hicks , I am going to Rod Khleif's "multifamily bootcamp" in Denver this week. Any feedback on him, his method, or his syndication acumen? Was definitely thinking of parking some capital with his new enterprise, REM Capital.
- Rental Property Investor · Huntington, NY · Member since 2016 · 102 posts · 74 votes7y
@Ian Ippolito. Thank you for such a detailed description of your DD (even if you described it as the brief version)! I always ask for the full underwriting performed on the project and at times get a little resistance because the operator does not want to share the excel sheet or calculator used. The typical resolution is converting the excel to .pdf. Do you run into similar situations and if so, how do you handle that?
How do the operators here handle that request? Do you share your full underwriting in your proprietary calculators?
- 7yIan IppolitoBusiness MemberInvestor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
Originally posted by @Gwyeth Smith:
@Ian Ippolito. Thank you for such a detailed description of your DD (even if you described it as the brief version)! I always ask for the full underwriting performed on the project and at times get a little resistance because the operator does not want to share the excel sheet or calculator used. The typical resolution is converting the excel to .pdf. Do you run into similar situations and if so, how do you handle that?
How do the operators here handle that request? Do you share your full underwriting in your proprietary calculators?
You’re welcome. Yes the PDF works, but is a bit of a pain to work with because then I have to get it back into excel which isn’t always as easy as copy and paste.
Another option is that they can copy and paste it from one worksheet into a second one and use “copy as values”. The strips out all the proprietary formulas they are trying to protect
The Real Estate Crowdfunding Review - Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes7y
Originally posted by @Jason Merchey:
@Theo Hicks , I am going to Rod Khleif's "multifamily bootcamp" in Denver this week. Any feedback on him, his method, or his syndication acumen? Was definitely thinking of parking some capital with his new enterprise, REM Capital.
Rod's message is valid, but not particularly viable, in my opinion. The message is:
I had millions. I lost everything because I bought strictly for appreciation (which was obviously a bad idea) and disregarding CF, and when the market crashed I couldn't hold on. So, now I buy for CF.
The challenge with this is the following:
While we need some amount of CF to stay through the cycles, you are not going to have meaningful CF unless your basis hits at least 7.5 - 8 cap upon your acquisition. However, the high growth markets today tend to trade underneath that. Phoenix, where I buy, is at 5 on stabilized assets.
This means that Rod's rationale necessarily pushes him out of the highest growth markets, and what follows is this question:
We are late in the cycle - is it really a good idea to buy outside of growth markets to begin with, regardless of what kind of CF you can pencil? Or, is it a better idea to pay a premium in a market that is growing like crazy?
This is a question Rod answered for himself, and so have I. Our answers are opposite. You have to decide what makes the most sense to you.
- Investor · Phoenix, AZ · Member since 2017 · 583 posts · 919 votes7y
Originally posted by @Ben Leybovich:
Originally posted by @Jason Merchey:
@Theo Hicks , I am going to Rod Khleif's "multifamily bootcamp" in Denver this week. Any feedback on him, his method, or his syndication acumen? Was definitely thinking of parking some capital with his new enterprise, REM Capital.
Rod's message is valid, but not particularly viable, in my opinion. The message is:
I had millions. I lost everything because I bought strictly for appreciation (which was obviously a bad idea) and disregarding CF, and when the market crashed I couldn't hold on. So, now I buy for CF.
The challenge with this is the following:
While we need some amount of CF to stay through the cycles, you are not going to have meaningful CF unless your basis hits at least 7.5 - 8 cap upon your acquisition. However, the high growth markets today tend to trade underneath that. Phoenix, where I buy, is at 5 on stabilized assets.
This means that Rod's rationale necessarily pushes him out of the highest growth markets, and what follows is this question:
We are late in the cycle - is it really a good idea to buy outside of growth markets to begin with, regardless of what kind of CF you can pencil? Or, is it a better idea to pay a premium in a market that is growing like crazy?
This is a question Rod answered for himself, and so have I. Our answers are opposite. You have to decide what makes the most sense to you.
You can cash flow in Phoenix, you just can't buy the cash flow. It must be created. You'll need a large value add to get your sub 5 cap purchase up to a 7.5/8 cap, but it's achievable. At that point, you can realize your gain and sell, which is what most value add investors do. But you can also hold on for cash flow. You now have an 8 cap in Phoenix, one of the best growth markets in the country, instead of a secondary or tertiary market. That's some powerful cash flow that has a lot of room to grow.
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes7y
Originally posted by @Sam Grooms:
Originally posted by @Ben Leybovich:
Originally posted by @Jason Merchey:
@Theo Hicks , I am going to Rod Khleif's "multifamily bootcamp" in Denver this week. Any feedback on him, his method, or his syndication acumen? Was definitely thinking of parking some capital with his new enterprise, REM Capital.
Rod's message is valid, but not particularly viable, in my opinion. The message is:
I had millions. I lost everything because I bought strictly for appreciation (which was obviously a bad idea) and disregarding CF, and when the market crashed I couldn't hold on. So, now I buy for CF.
The challenge with this is the following:
While we need some amount of CF to stay through the cycles, you are not going to have meaningful CF unless your basis hits at least 7.5 - 8 cap upon your acquisition. However, the high growth markets today tend to trade underneath that. Phoenix, where I buy, is at 5 on stabilized assets.
This means that Rod's rationale necessarily pushes him out of the highest growth markets, and what follows is this question:
We are late in the cycle - is it really a good idea to buy outside of growth markets to begin with, regardless of what kind of CF you can pencil? Or, is it a better idea to pay a premium in a market that is growing like crazy?
This is a question Rod answered for himself, and so have I. Our answers are opposite. You have to decide what makes the most sense to you.
You can cash flow in Phoenix, you just can't buy the cash flow. It must be created. You'll need a large value add to get your sub 5 cap purchase up to a 7.5/8 cap, but it's achievable. At that point, you can realize your gain and sell, which is what most value add investors do. But you can also hold on for cash flow. You now have an 8 cap in Phoenix, one of the best growth markets in the country, instead of a secondary or tertiary market. That's some powerful cash flow that has a lot of room to grow.
Really? You can do that? You are crazy! People, he is crazy.
- Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes7y
Help me understand. Is it not the logical route to buy at a certain cap rate, and try to sell it for a lower cap rate? I get that 8% ROI is "more money" than 7% ROI, but I thought that lowering the cap rate was the way to increase the sale price. For example, $100k of NOI at an 8-cap is a $1.25m sale price, more or less, whereas $100k in NOI sold as a 7-cap is a $1.43m sale price.
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes7y
Originally posted by @Jason Merchey:
Help me understand. Is it not the logical route to buy at a certain cap rate, and try to sell it for a lower cap rate? I get that 8% ROI is "more money" than 7% ROI, but I thought that lowering the cap rate was the way to increase the sale price. For example, $100k of NOI at an 8-cap is a $1.25m sale price, more or less, whereas $100k in NOI sold as a 7-cap is a $1.43m sale price.
Never...let me say this differently...NEVER buy on cap rate! Underwrite to returns. Cap rate is not a metric of return.
- Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes7y
After reading the responses, I have to say I am a bit torn between syndicated apartment buy/fix/holds versus something smaller, more local, which involves me or me and a partner managing the process personally and actively. I guess the comparison and the likelihood of either succeeding and to what degree depends on so many factors it's hard to make a judgment about which path I should take in mid-2019. Well, food for thought.
@Matt Faircloth I welcome you to share your thoughts since you are definitely in the running for syndications I'm considering! I also heard positive things about Brian Burke, Joe Fairless, and I have met with a local outfit named Park Capital Properties (Asheville). A person I have talked to a number of times, a lender, feels like syndications are just too distal and uncontrollable for his liking, perhaps not unlike Rome venturing out so far that it couldn't manage the provinces effectively. Yet, the diversification between different syndicators and locales could be a strength (and I currently own no multifamily). I'm going to Rod Khleif's bootcamp later this week. Maybe I'll go there, learn Khleif's technique and hear his opinions and give him the ol' smell test, and then check this thread again on Sunday night!
- Investor · Phoenix, AZ · Member since 2017 · 583 posts · 919 votes7y
Originally posted by @Jason Merchey:
Help me understand. Is it not the logical route to buy at a certain cap rate, and try to sell it for a lower cap rate? I get that 8% ROI is "more money" than 7% ROI, but I thought that lowering the cap rate was the way to increase the sale price. For example, $100k of NOI at an 8-cap is a $1.25m sale price, more or less, whereas $100k in NOI sold as a 7-cap is a $1.43m sale price.
First, cap rate and ROI are not the same thing. Second, cap rate is just the relationship between price and income. If I buy at a 5 cap, that was the relationship between price and income at the time of purchase. Now, as I improve the property, my price is constant, but my income goes up. Therefore, my cap rate as it relates to my purchase price goes up. My income is now equivalent to purchasing at an 8 cap. Yes, I can turn around and now sell it for a 5 cap, which is a lot lower, and realize a huge gain. But you can also decide to cash flow, now that your income is up to an 8 cap's income level, if you want cash flow instead of a lump sum (the gain).
As for trying to buy high and sell low, that's just speculation. So while it may be logical, its not a strategy.
- 7ySergio AltomarePro MemberRental Property Investor · Greater Philadelphia · Member since 2012 · 135 posts · 60 votes
@Jason Merchey as @Michael Swan said, you want an operator that will not only protect your money like a pit bull, but put their own money on the line as well. Having skin in the game will make sure the sponsor is honest and has done the due diligence on the project to ensure he will protect his own money as well. And as @J Scott said, it's up to you to ask yourself the right questions about the due diligence that was done, and and risk analysis if things change.
I also look at a worst-case scenario of a property continuing to perform as it is, in which case your money should be worth at least that, albeit discounted.
Lastly, depending on the projected return, you should only be prepared to put up money that you're willing to lose based on the risk / return.
My company has not found the deal worth syndicating in two years, as we manage our own properties and have not found numbers in the area that we could make work based on where we are at in the market cycle. As such, we have shifted to self storage as what we believe is a hedge against the next market downturn.
Good luck!
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes7y
@Jason Merchey - I may be alone willing to stick my neck out, but nothing particulatly new in that. Your comments in this thread reveal an alarming lack of understanding of what it is that we do, let alone how we do it. I do think you have the capacity to get up to speed, but education is what you should be focusing on now.
Good luck!
- Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes7y
Another good point @Sergio Altomare is that I sign on every loan. The smaller deals are recourse loans and I sign for them and ALL my assets are on the line if something goes wrong. The larger deals are Freddie type loans and those are non-recourse loans. I still sign on those too. It gets real really fast when you take in money from others. Personally, all my deals follow David Lindahl's Multifamily Millions book for repositioning Value plays.
I figure why reinvent the wheel when David Lindahl (at one time a landscaper) could do this, so could I as a lowly paid teacher in a parochial school. The most I ever made as a teacher, also as an adjunct professor at a community college too at the same time, working about 60 hours a week, with a Masters and 8 years of education was $60,000 and my wife as a special Ed. aid in the classroom made $20,000 max or $80,000 combined family income.
If I could do this and David Lindahl could do this, so could I. Now I have approaching 10 apartment complexes and 4 or 5 of those are with my money and others that wanted to go in on my deals. Everyone in my deals needs to read David Lindahl's Multifamily Millions book too. I am living pages 47-130 in the hard cover everyday. There are sooooooooooo many golden nuggets for repositioning apartment complexes in that book. I highly recommend that book. I don't belong to David Lindahl's program at all. That book is the bible I follow and keep it right next to my chair at home and look up things weekly in that book.
NO I am not a rep of his company etc.... I just really get the concepts in that book.
Swanny
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