Total Return for Multifamily Syndication Investment?

Multi-Family and Apartment Investing
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Total Return for Multifamily Syndication Investment?

Shafi Noss
Lender · Nationwide · Member since 2018 · 571 posts · 310 votes

Hi everyone,

I was talking with an investor friend the other day and he asked me a question I didn't have an answer for. He asked "So if I were to invest 100k in a multifamily deal, how much would I make total over a 5 year investment?"

Of course this varies greatly deal to deal. But he was trying to get at the fact that there are a lot of pieces to a syndication: cashflow, tax advantages, value add, loan pay-down, and appreciation over time. What I couldn't quite answer is what do these look like, ballpark, bundled together?

For example:

If he invested 100k for 5 years receiving an 8% preferred return on a value add property at an income of 200k, what would that look like for him? Here's a calculation to give an idea of what I mean:

-40k cash from cashflow
-5.5k tax benefits from depreciation (100k / 27years x 5years x %30 tax bracket)
-100k cash on sale
-10k cash on sale for the 2%(?) appreciation per year
-20k (?) on sale for value add
Total: $185k over 5 years == $37k per year

I know this isn't perfect, maybe its not even a good approximation. Does anyone have a sense of what would be a good estimate from an investors perspective?


Thanks very much,
Shafi

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Most Popular Reply

Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
7y

This is very simple. Just look at the equity multiple.  Most multifamily syndications have a 1.4 to 2.0 multiple over a five year hold.  A 1.4 multiple would mean $100,000 invested gets $140,000 back.  A 2.0 would get $200,000 back and so on.

This calculation doesn’t factor in tax benefits.  And it shouldn’t, tax benefits are a fringe benefit. Just like a job seeker comparing employment options, if everyone is offering two weeks vacation what they are really looking at is the salary.  Most real estate offerings are going to offer similar tax benefits, although some decisions the sponsor makes can influence it to an extent (bonus depreciation and cost segregation).  Besides, any depreciation deduction is recaptured when the asset is sold, albeit at a lower tax rate than the ordinary income that was offset by the depreciation in the first place.


Another important consideration is that an investment yielding a 2.0 multiple isn't necessarily a better investment than one yielding a 1.4 multiple. Higher multiples could be the result of more aggressive financing, which influences risk, or bad underwriting, which just makes them a pipe dream. The experience of the team, the quality of the underwriting, and the ability to withstand adverse economic cycles (meaning conservative debt) are more important than chasing high projected IRR's or multiples.

Finally, the composition of the cash flow is also an important consideration.  If you are looking for current cash flow, the cash-on-cash return might be more important than the multiple.

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  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    7y

    Most syndicators these days are seeking to double their investors' money in 5 years. Some can do it faster, others it takes a few more years. Depends on the investment strategy.

    You're right that there are two components, the cash flow and proceeds at sale. Sponsors should be giving you cash flow projections for their deals which show their expected returns over time, either quarterly or annually. 

    Most deals will have a ramp-up period at the beginning where cash flows are being reinvested and the property is being turned around. Therefore investors may have to wait a quarter or two before cash flow distributions start.

    Proceeds at sale are calculated by capitalizing the projected NOI. There's typically a split of those proceeds, which can be anywhere from 50/50 to 90/10 (as a typical range, agreed to at the outset).

    2Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    7y

    That sounds about right but there are a few key assumptions that can get your wantever number you want to see.

    For example if I use +1.0% on the reversion(exit) cap like how you should you might get 100% ROI in 5 years. But if you use only +0.5% it will show a 130% ROI in 5 years.

    The same is true for annual rent increases per year. Anything over 3% is super wishful thinking.

    2Reply
  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    7y

    This is very simple. Just look at the equity multiple.  Most multifamily syndications have a 1.4 to 2.0 multiple over a five year hold.  A 1.4 multiple would mean $100,000 invested gets $140,000 back.  A 2.0 would get $200,000 back and so on.

    This calculation doesn’t factor in tax benefits.  And it shouldn’t, tax benefits are a fringe benefit. Just like a job seeker comparing employment options, if everyone is offering two weeks vacation what they are really looking at is the salary.  Most real estate offerings are going to offer similar tax benefits, although some decisions the sponsor makes can influence it to an extent (bonus depreciation and cost segregation).  Besides, any depreciation deduction is recaptured when the asset is sold, albeit at a lower tax rate than the ordinary income that was offset by the depreciation in the first place.


    Another important consideration is that an investment yielding a 2.0 multiple isn't necessarily a better investment than one yielding a 1.4 multiple. Higher multiples could be the result of more aggressive financing, which influences risk, or bad underwriting, which just makes them a pipe dream. The experience of the team, the quality of the underwriting, and the ability to withstand adverse economic cycles (meaning conservative debt) are more important than chasing high projected IRR's or multiples.

    Finally, the composition of the cash flow is also an important consideration.  If you are looking for current cash flow, the cash-on-cash return might be more important than the multiple.

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
    16Reply
  • Allan Smith
    Contractor · Nashville, TN · Member since 2014 · 1k+ posts · 1k+ votes
    7y

    There are mf syndication spreadsheets out there that do all that math for you. The one I have is michael blanks. It tells me irr, roi, aar, all with 100s of variables I can enter in. 

    0Reply
  • Alina Trigub
    Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes
    7y

    @Shafi Noss

    While not many people can offer a better answer than @Brian Burke already did, I believe it is important to step back when you're talking to your investor friend and think what are their goals when deciding on the investment? Are they looking for higher returns? Or do they need to shelter funds? Do they want to put money into a longer or shorter term project? What are the tax implications for them? Go over these and many more questions with them to help them decide whether syndications is the right strategy for them. 

    Here's an article that will also help you navigate your investor(s) to make a decision.

    https://www.biggerpockets.com/member-blogs/10850/86626-the-pros-and-cons-of-investing-via-real-estate-syndication

    Should you need a list of questions to discuss with them, feel free to PM me.

    Best!

    4Reply
  • Spencer Gray
    Syndication Expert and Investor · Indianapolis, IN · Member since 2016 · 591 posts · 808 votes
    7y

    Most investors us the "internal rate of return" metric to compare investments held over a multiyear period.

    The IRR is a measure of return over time taking into account all cash flows during the life of an investment. While there are plenty of other good metrics (average cash on cash, equity multiple), IRR is one of the more effective and commonly used metrics to evaluate a deal as a whole over a period over a year. It is very useful to compare multiple investment opportunities or to evaluate a deals total performance. They can also be used as hurdles in a cash flow waterfall structure.

    Calculating IRR is pretty easy if you use Excel or any spreadsheet software like Google Sheets. Enter a series (or calculate) cash flows for each period (year) with + numbers reflecting positive cash flow distributions and outflows and - numbers reflecting cash flowing into the investment (initial investment and capital calls).

    Example: 5 year $100k investment with fixed cash on cash returns of 8% with $30k of gain on top of the return of capital from a sale after a 5 year hold.

    Y1: -$92,000 ( -$100,000 investment + $8,000 distribution)

    Y2: $8,000 (8% cash on cash distribution)

    Y3: $8,000 (8% cash on cash distribution)

    Y4: $8,000 (8% cash on cash distribution)

    Y5: $138,000 ($130,000 sales proceeds + $8,000 cash on cash distribution)

    in Excel type =IRR(Y1:Y5)

    IRR: 17%

    For this example in Google sheets follow the link below. 

    https://docs.google.com/spread...

    3Reply
  • Shafi Noss
    OP
    Lender · Nationwide · Member since 2018 · 571 posts · 310 votes
    7y

    Hi everyone, the point about keeping goals in mind is well taken. This time we really were just curious about the equity multiple + taxes (even as a fringe benefit) and based on @Taylor L., @Lane Kawaoka and @Brian Burke it seems like that aims to be around 2.0 plus extras over 5 years. Very helpful! Thank you.

    0Reply
  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    7y

    @Shafi Noss a 2.0 equity multiple would be a very high-side example and probably carries a fairly high risk profile for a five year investment (or the projections are optimistically underwritten).  It’s about the top of the range—I did not mean to imply that a 2.0 was the expectation.

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
    1Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    7y

    2x multiple on a 5-year hold requires essentially close to doubling of the NOI. Since organic growth is highly unlikely to support this, what we are talking about here are rather extreme value-ads. Which is likely why @Brian Burke mentioned higher risk profile - you are talking big re-positioning projects. In most of America, this means bumping rents by $300+.

    Is it possible? Yes, we are seeing it in Phoenix. Is it low-hanging fruit? No. Do most deals work? No. Would you try this outside of an extremely high growth market? I wouldn't recommend.

    1Reply
  • Diane G.
    CA · Member since 2016 · 1k+ posts · 1k+ votes
    7y

    @Shafi Noss

    I might get shot 10 times in the head but I am still going to say it...

    I would NEVER, like under no circumstances kind of never, invest in a syndication....

    Too many scammers out there, and then a whole host of indicator with good intention but failed anyway.....

    I buy properties and hold them in solely ownership....

    If I don’t have enough money to buy properties, I will simply put them in savings account

    Ok now shoot me

    0Reply
  • Tj Hines
    Specialist · Tampa, FL · Member since 2012 · 933 posts · 492 votes
    7y

    @Shafi Noss typically what you see in 5-7 year syndication models is investors are typically doubling their principle in that time frame if they are dealing with experienced operators who understand strategic ways on how to force the appreciation. Dealing with the right operator is key.

    1Reply
  • Michael Ealy
    Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    7y
    Originally posted by @Shafi Noss:

    Hi everyone,

    I was talking with an investor friend the other day and he asked me a question I didn't have an answer for. He asked "So if I were to invest 100k in a multifamily deal, how much would I make total over a 5 year investment?"

    Of course this varies greatly deal to deal. But he was trying to get at the fact that there are a lot of pieces to a syndication: cashflow, tax advantages, value add, loan pay-down, and appreciation over time. What I couldn't quite answer is what do these look like, ballpark, bundled together?

    For example:

    If he invested 100k for 5 years receiving an 8% preferred return on a value add property at an income of 200k, what would that look like for him? Here's a calculation to give an idea of what I mean:

    -40k cash from cashflow
    -5.5k tax benefits from depreciation (100k / 27years x 5years x %30 tax bracket)
    -100k cash on sale
    -10k cash on sale for the 2%(?) appreciation per year
    -20k (?) on sale for value add
    Total: $185k over 5 years == $37k per year

    I know this isn't perfect, maybe its not even a good approximation. Does anyone have a sense of what would be a good estimate from an investors perspective?


    Thanks very much,
    Shafi

    2x equity multiple is not necessarily a high risk investment. It depends on the market, what kind of deals an experienced syndicator can find AND the level of experience of the syndicator.

    In the markets I invest in, a lot of apartment buildings have rents that are way under market. For example, I closed on a 42-unit building where the rents are $200-$250/month below market ($650-$700 that can be increased to $900 a month) with about a $6500/unit in property improvements.

    1Reply
  • Andrew HoganPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2016 · 560 posts · 463 votes
    7y

    @Diane G. lol, that's one way to phrase it. I hope that retaliation on BP has never gotten that extreme. 

    Totally agree that if you aren't going to self-manage, you had better vet the heck out of who you choose to run your business for you. Sounds like you're fortunate enough to dedicate a good amount of time to your own investments. There is a host of others who want to benefit from real estate, but just don't have the time for a second or third job. They also limit their downside risk when partnering with a proven sponsor who has a solid track record. 

    Great discussion here with great insights. I think that everyone has given a good estimation (not expectation) as far as returns. There will be a day and time when 20-30% IRR to investors is the norm again but definitely not at this late stage in the cycle!

    2Reply
  • Chris Grenzig
    Property Manager · Orlando, FL · Member since 2016 · 479 posts · 277 votes
    7y

    @Shafi Noss tax advantages from syndication aren't usually quoted because it depends a lot on the person investing in the deal on what benefits they received.

    Look at it on a cash flow every year, an annualized return, an IRR and an equitymultiple basis. Some place more empahsis on some of those metrics more than others.

    Cash flow is how much are you receiving in dividends every year.

    Annualized return takes all cash flow and sale proceeds, totals it up, and divides it by the number of years for a return per year basis

    IRR is annualized return but accounts for the time value of money ( a dollar today is worth more than a dollar tomorrow, you would rather a 20% IRR in 3 years vs 4 because you could hypothetically reinvest that money after sale in year 3 and your 20% reinvested would be higher)

    Equity multiple is the same as total gain ((Principal + total income gained)/principal = equity multiple, ($100k invested + $100k gain)/$100k principal = 2.0 equity multiple) 

    2Reply
  • Account Closed
    Real Estate Investor · Waldorf, MD · Member since 2014 · 592 posts · 320 votes
    7y

    @Michael Ealy - See you're buying super distressed homes from grandma and grandpa owners. Additionally, that's a great bump on NOI. Now tell us how many people did you have to evict? It sounds sexy but I know that package came with drama. Spill the beans.

    @Tj Hines I see you on here TJ giving wisdom.  I got you!

    @Brian Burke

    Good to see the president/CEO of Praxis on here parting knowledge from education and experience. I learn something new every time you post.

    1Reply
  • Shafi Noss
    OP
    Lender · Nationwide · Member since 2018 · 571 posts · 310 votes
    7y

    @Brian Burke Understood. A few others were giving a 2.0 multiple, but your experience is that's at the high end. I'll pass on. 

    0Reply
  • Diane G.
    CA · Member since 2016 · 1k+ posts · 1k+ votes
    7y

    @Andrew Hogan

    I don’t believe for a second that 20% is a “normal” return that can be expected in syndication... 5%~ 8%?maybe....

    Is 20% is achievable, everyone on Wall Street will be out of a job....

    0Reply
  • Andrew HoganPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2016 · 560 posts · 463 votes
    7y

    @Diane G. I was referring to the next market correction. Not present time.

    0Reply
  • Diane G.
    CA · Member since 2016 · 1k+ posts · 1k+ votes
    7y

    @Andrew Hogan

    That is possible... I agree ...

    1Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    7y
    Originally posted by @Shafi Noss:

    @Brian Burke Understood. A few others were giving a 2.0 multiple, but your experience is that's at the high end. I'll pass on. 

    Hahaha @Brian Burke - you just talked Shafi out of a 2x deal. LOL 

    And just so we are clear, this is not one of my deals, so I don't have a dog in this race.

    Shafi - what if the underwriting is wrong, off by 50%. Could you still be looking at 1.5x? Would that be enough for you? If so, why would you pass on a deal just like that? Seems kinda silly, doesn't it :)

    0Reply
  • Michael Ealy
    Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    7y

    Not every deal I buy is super distressed. 

    The 42-unit I was talking about is already cashflow producing but the previous owner did not increase the rents as he should have. So it's generating money already and will produce even more income as we increase the rents. The risk with that strategy is very low and $6500/unit is not "heavy repositioning" at all, specially since we acquired the property at 90% occupancy.

    The turn around strategy are:

    1. At take over, we improved the exterior/ curb appeal (below is the Before & After pictures)

    Before Take Over

    After renovating the exterior

    2. And then as the units turnover/leases expire, we put in better interior finishes so that the interior looks a grade above the market - meaning, we convert a unit in a "C" area to look like it's in a "B" area or even an "A" area

    As far as tenant-drama, I don't deal with that. My leasing managers and property managers deal with those ;)

    2Reply
  • Michael Ealy
    Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    7y
    Originally posted by @Diane G.:

    @Andrew Hogan

    I don’t believe for a second that 20% is a “normal” return that can be expected in syndication... 5%~ 8%?maybe....

    Is 20% is achievable, everyone on Wall Street will be out of a job....

     What most people don't know is that WALL STREET is investing in syndication deals (basically through REITs)

    Moreover, life insurance companies invest in syndicated apartment and commercial deals too.

    Life insurance companies are very conservative in their underwriting.

    20% return is not only possible, we've achieved that multiple times. However, the return is broken down into 2 parts:

    - cash on cash return = that's about 8-12% per year (average)
    - capital gains when the property is sold

    Do we achieve 20% return for our investors for all of our deals? No. Our record is NOT perfect just like everybody else. 

    However, unlike most syndicators, we've never lost money for our investors ever since getting private capital in 2006. The only syndicator who has not lost money I know of here on BP is @Brian Burke. There could be more out there but very few have achieved that.

    1Reply
  • Shafi Noss
    OP
    Lender · Nationwide · Member since 2018 · 571 posts · 310 votes
    7y

    Hey @Ben Leybovich, surprised you're not disagreeing with @Brian Burke again! It must be really great information.

    Just a typo there--this was a curiosity question from a friend, I don't actually have a deal in mind. Fixed now :)

    1Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    7y
    Originally posted by @Shafi Noss:

    Hey @Ben Leybovich, surprised you're not disagreeing with @Brian Burke again! It must be really great information.

    Just a typo there--this was a curiosity question from a friend, I don't actually have a deal in mind. Fixed now :)

    Burke is allowed to be right once in a great while...

    2Reply
  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    7y
    Originally posted by @Diane G.:

    @Andrew Hogan

    I don’t believe for a second that 20% is a “normal” return that can be expected in syndication... 5%~ 8%?maybe....

    Is 20% is achievable, everyone on Wall Street will be out of a job....

    5-8% would be an extremely low IRR on a syndication. You should expect 14-18% IRR with a 5-8%+ cash on cash

    3Reply
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