Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes
I'm looking into investing a good amount of cash in my first syndicated apartment deal. Buy-fix-reposition-hold. I am imagining there are about 25-50 fairly sophisticated individuals involved on the equity side, maybe $5-10m in debt. My question is, what are the odds of a total meltdown in the process? In other words, do competent and experienced syndicators pretty much always do what they say they are going to or make it up to you in the coming year, or is some kind of significant permanent loss of my investment an actual concern? I am trying to conceptualize the risks of giving money over to a syndicator and property management outfit for 4-6 years.
Rental Property Investor · Greater Philadelphia · Member since 2012 · 135 posts · 60 votes
7y
@Michael Swan funny, I am reading MFM right now. I have read several other syndication books, but it's nice to read reinforcements of how and why we do what we do. David does a nice job of covering a lot of topics and succinctly. I'm going to consider using it as a requirement for my investors. Thanks for the idea!
Rental Property Investor · Charlottesville, VA · Member since 2012 · 1k+ posts · 726 votes
7y
@Jason Merchey I've invested in 7 syndications over the last few years but it was all money I can lose and it won't affect my life substantially. That's when you want to invest in syndications not if you're risking a large amount of your net worth on 1 deal. Especially now.
Most of the deals I look at today are flat out frightening. We're at the top of the cycle AND everyone and there brother thinks they would be a good apartment syndicator.
In some I look at their cost of capital is very close to or more than the the cap rate they're paying for the property. Essentially this means they're borrowing say $1 million dollars at 6% interest for an asset that pays a 5 cap or $50k per year. So their plan is to lose $10k per year right? Well they say they're going to paint and put in new flooring which will make the rent grow so it's not a problem.
That strategy has worked well for the last 5 years but I doubt it will last much longer.
Also, just about every syndication I look at gets 2-4 years of interest only on their loan. That means that the deal looks much better than it is in reality for the first few years. What happens when the economy turns down at exactly the same time their interest only period stops?
The last point I would make is that all of those many people who have started syndicating will not stop syndicating just because the market gets frothy. It is their occupation now and they need to keep doing it up to and past the point where it makes sense.
Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
7y
Look I know some of you think @Account Closed I appreciate the heroic efforts to defend your investors, but when cyclical and secular factors are against you in a bad market, even strong reserves may not be enough to overcome a loan that’s due. I guess unless you’re grant cardone and have 10x-ed the value of your properties already.
@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!
If you say so. It also explains why I haven't considered investing with you - the arrogance.
Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes
7y
Originally posted by :
The last point I would make is that all of those many people who have started syndicating will not stop syndicating just because the market gets frothy. It is their occupation now and they need to keep doing it up to and past the point where it makes sense.
Rental Property Investor · Scottsdale, AZ · Member since 2010 · 390 posts · 599 votes
7y
@Jason Merchey stick to small multi where you control the in and out and can run your own assumptions. Its not easy to evaluate a multifamily syndication with all the offerings being floated. This is indeed a competitive space and many sponsors will tell you its all about the deal and not the sponsor. That is just a way to hide the obvious as its nearly impossible for someone that has not owned or been through a cycle to evaluate appropriately. Having owned RE, even on the smaller scale and comparing sponsor assumptions to your own experience will give you more education than any bootcamp. I own large multifamily in my own portfolio and can confidently tell you that a vast majority of sponsors are floating garbage wrapped in a powerpoint. Here are just some examples of paper assumptions that will never be reality:
1. Economic vacancy - under 10% all in very rarely exists and certainly not in the long run. Most sponsors will show you a 7.5% while the "unsophisticated" seller is running 12-15% with units priced $300 less than the sponsors proforma. If you have owned large multi long term you know this is not possible.
2. Acquisition fees - I've seen sponsors trying to charge upward of 3-4%. This is a big clue they are doing it for the up front fee. You want them to profit on the back end with you not on the purchase. Look at the sponsors take at exit. It should be 2-4x+ of the acquisition fee on the front end.
3. Entire business plan based on significant rent bump. They will tell you all units are classic and "unsophisticated" seller left all this on the table. Look closely at the sellers T12. Over 100 units very few sellers are stupid. I would bet you they have renovated units and the rents they are getting are within $75-$150 of what the market will allow. Think long and hard if someone is pitching a $300+ bump. This is a rare bird and does not exist with a combined sub 10% economic loss. Tenant incomes are not keeping up with rent growth meaning the return on capex will not be as expected.
4. Sub 6% exit cap. I'm not sure who the end buyer of a fully renovated complex at max rents is. I've never met that buyer and neither has a sponsor that has never executed an exit. It is essential to pick a sponsor that has executed on a successful exit otherwise your money is his experiment.
5. Exit per unit price higher than class A rebuild cost. If you can build a brand new class A in your market for $150k who is the buyer at a $250k/door exit. Your betting on significant rent and construction cost increases.
6. Cherry picked rent comps. This is an easy one to manipulate. Look at sq foot rents on a unit type and SQfoot basis. Is there one cherry picked complex getting that rent or most in the submarket? I would bet its one cherry picked complex and your not seeing what is really going on at that complex. Again, most owners are not stupid and are trying to maximize rent and income.
I could go on and on. Look for deals where the NOI can carry the debt with a healthy DSCR day by year 2 without a reliance on year 3 refi or exotic bridge debt. Be conservative on the rent bump and don't rely on a full multimillion capex reposition to get those rents. That strategy adds layer upon layer of risk and most sponsors that are taking that risk have not been in a scenario at year 3 + 1 + 1 where they have to refi that debt, spent $2M in capex to find they were off on rent and or economic vacancy. Being off on rent by $100 on a big deal will lead to a $3M swing in value. Sponsor will be ok with that bc they front loaded $800k in acquisition fees which will then be used to fight LP lawsuits.