Multi-Family Syndication Northeast Ohio

10 Replies

I am coming up on 3 yrs in my real estate career. I recently came to the realization that I only have 6 units and my goal was 20 units before age 30 and I just turned 29. Syndication has been my goal from the beginning of my real estate venture. I am putting together a deal now and I have 2 individuals who want to invest with me. I am considering 2 value add properties in the Youngstown area. One is a 12 unit with some cosmetic updates but lots of differed maintenance and the other is a 13 unit with under valued rents and needs some updating. I am trying to secure financing in this area does anyone have suggestions for this market.

To the experienced Syndicators: What percentage of preferred return do I offer investors/equity partners in a deal split between 3 partners I have been seeing 6-8% consistently. However being a first time operator what do you experienced operators suggest for my position? Should I be paying more considering that this is my first deal like this?

If this is your first deal to other investors then your pref should reflect that risk. While it depends on what the deal can support I think 8-10% is reasonable. 

That being said if your investors are fine with a 6% , don't let my opinion get in your way! 

@William Washington Like everything else there isn't a one size fits all answer. While a +\- 8% pref is more of the industry standard the number should also be derived from the details of the deal. Coming in with a higher pref to entice investors since you are new may have the opposite effect if you don't have the cash on cash to support it. An investor may at away if you have to raise additional capital up front just to cover the delta between the investor pref and annual CoC return. With that said if the bidding plan supports a higher pref then it definitely could be a good way to get the deal funded.

@William Washington a lot depends on how "knowledgeable" or what they're "accustomed" to already. The better question might be to ask what they're looking for out of the deal. The glory of syndication is that you can structure it however you want. If these investors come from the fix&flip private money space you could structure it by giving them a flat 6-10% return on their money with no remaining upside in the deal. By doing this, you are enabling yourself to buy them out of the deal through a refi and go do another project with those same investors again. 

The traditional, more commonly known structures are:

1. 6-8%pref with 70/30 split thereafter (no GP catchup) and then you can add a waterfall tier structure if you want based off certain IRR hurdles being met.

2. A straight 75/25 - 90/10 split with the larger amount obviously for the LP (passive investor)

*Since the deal is a bit small I would try to go with the first option of paying them a flat rate more like a private money loan with an option to buy them out of the deal via REFI. This will allow you to continue to do more deals with the same investors and will also allow you to own in 2-4 yrs time all the units or at the very least a high % of the deal.

@William Washington

One thing to consider is that your deals are pretty small and the paperwork to do a real syndication is about 15k. Large projects can easily absorb this cost. However if you have two people who want to invest and two deals why not partner with each of them on one building and just take an equity percentage for doing all the work? For simple math let’s say each unit is worth 100k, so one building is 1.2M and one is 1.3M. So you need 20% plus repairs/reserves on each. It ends up being 300k or so on each. Maybe just do a straight 70/30 split on each and put up 10% of the capital on each? That 10% will get you to 40% of the deal equity. No pref. You do bulk of work partner puts in bulk of capital. Just a thought for those small deals. Make sure you understand when you are creating a security (syndication) and when you are not. This is not legal advice so make sure you have an actual lawyer to ask.

Originally posted by @William Washington :

I am coming up on 3 yrs in my real estate career. I recently came to the realization that I only have 6 units and my goal was 20 units before age 30 and I just turned 29. Syndication has been my goal from the beginning of my real estate venture. I am putting together a deal now and I have 2 individuals who want to invest with me. I am considering 2 value add properties in the Youngstown area. One is a 12 unit with some cosmetic updates but lots of differed maintenance and the other is a 13 unit with under valued rents and needs some updating. I am trying to secure financing in this area does anyone have suggestions for this market.

To the experienced Syndicators: What percentage of preferred return do I offer investors/equity partners in a deal split between 3 partners I have been seeing 6-8% consistently. However being a first time operator what do you experienced operators suggest for my position? Should I be paying more considering that this is my first deal like this?

The issue with a Pref. Return will you actually be able to actually pay it? I would make you cut a lot of fees.

 

@William Washington I wouldn't get to down on yourself. You're moving forward and taking action. That's good stuff. Don't discredit the work you've put in thus far. It sounds like for these two scenarios you will need a bridge loan product that will allow you enough time to bring the property up to par, stabilize it, so you can then go out and get attractive financing for it. Not sure if the deal is big enough to offer a pref. return. Unless it kicks off a ton of cash flow. If the deal is not kicking off a ton of cash flow a pref will be hard to accomplish. If you do go with a pref without strong cash flow, you run the risk of not getting paid until the deal sells. Good luck

Definitely consult a loan broker for what potential financing you might be able to get here, may depend on current occupancy and how much rehab work you're needing to do (hard money, bridge, etc). Happy to connect with you and make an intro to contacts in that regard.

I totally agree with @Scott Morongell...really up to what you're investors looking for 

@Lee Ripma makes a great point too about the size and having a couple of partners, sounds like a JV partnership vs syndication but of course, consult an attorney (I'm not one either!)

@William Washington you should call 10-15 local community banks or credit unions for your financing needs. If the debt is greater than $1m you can try some national lenders who might be more competitive.

For your syndication, I would suggest you do a join venture or form a LLC with your two investors. Since this is your first deal you might need to give higher returns to your investors to have them comfortable with the setup since it's your first bigger deal. I'd also suggest you start investing in other syndication deals as a limited partner (LP) so you can see how general partners operate and the work that's involved. By gaining real experience as an LP you will have that for your resume/experience when you put a larger syndication deal together and bring on many investors versus a couple investors.