Rental Property Investor · CT · Member since 2017 · 22 posts · 8 votes
Bigger Pockets LP investors and multifamily syndication professionals, I am curious to the parameters and investment criteria you all require and search for?
I am currently putting together a multifamily value add syndication. To get the conversation rolling, figured it would be best if I explain the basic investor package I am providing friends, family and colleagues. My team is offering 6-7% preferred return (tax benefits discussed with our CPA) distributed bi-annually, an estimated project IRR of 15.5% (in our base case), and hold period of 5 years. Our projected average CaC is 8.4%, after completion of our value add initiative (40 units).
My teams experience is in private equity space, so am curious to what non-institutional LP's look for in deals.
What are the minimum preferred returns?
Projected minimum IRRs?
Hold period, and distribution preferences?
Minimum equity requirements?
Looking forward to getting some different opinions on the matter!
Investor · Apex, NC · Member since 2017 · 135 posts · 97 votes
6y
@Joe Potenza it can be hard to put overall parameters as there are many factors that go into an investment criteria especially when you factor in overall risk
Some basics I hear commonly-->
6-8% preferred return
12-16% IRR
3-5 year hold or refi
$25-50k min equity contribution
These are very high level depending on geography, asset class and asset type they can vary greatly
At the end of the day it will depend on the return profile expectations of your individual investor base that will determine the return profile of each offering
Investor · Apex, NC · Member since 2017 · 135 posts · 97 votes
6y
@Joe Potenza it can be hard to put overall parameters as there are many factors that go into an investment criteria especially when you factor in overall risk
Some basics I hear commonly-->
6-8% preferred return
12-16% IRR
3-5 year hold or refi
$25-50k min equity contribution
These are very high level depending on geography, asset class and asset type they can vary greatly
At the end of the day it will depend on the return profile expectations of your individual investor base that will determine the return profile of each offering
Rental Property Investor · CT · Member since 2017 · 22 posts · 8 votes
6y
@John Blanton Appreciate the feedback! Make sense, I have not had someone commit less then 100k, but was recently approached by a friend asking if I would consider a 20K investment so was to good to hear your opinion on the equity contribution. Thanks again!
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
6y
A lot depends on your marketing strategy for going to the capital market as well. In general if you keep your share price low you will have a broader base of investors to draw from, can keep more control of your project, and can keep your cost of capital down. With higher share prices you're more likely to attract investors who demand more both in terms of control of the project and cost of their equity. If you can write a $250k check you're more likely to be approached with more projects, but this isn't always the case and depends on your target persona.
The market will ultimately tell you what you can attract and your track record as a sponsor will impact this to a very large degree. If you can point to a proven business model that is de-risked to a large degree with a sponsor team with a track record of success operating together on the product type you're presenting this is a lot different risk/value proposition than if either the product type is new to you, the product type is new or a hybrid, or your team is new.
So....the answer really is that it depends, but the advice you received above helps to bound things to a degree. I dislike taking acquisitions fees in general because I think they create misalignment with our investors, but the sponsor should get paid for their time if they're able to negotiate this with their investors. If you have "skin in the game" and take an acquisition fee the net is really no monetary skin in the game and only sweat equity. This may be fine depending on the project type and the sponsor track record.
I dont think you will find any more consensus than @John Blanton provided above, especially without any insight into the property class, location, ect.
You will also find most folks are as fee conscious as institutional investors. If you layer in mgmt fees with acquisition fees and disposition fees, we will throw a fit if the carry is substantial too.
Similarly, GP commitments, frequent communications / transparency (arguably more transparency than institutional managers offer) and a verifiable track record will be necessary to name a few.
Bigger Pockets LP investors and multifamily syndication professionals, I am curious to the parameters and investment criteria you all require and search for?
I am currently putting together a multifamily value add syndication. To get the conversation rolling, figured it would be best if I explain the basic investor package I am providing friends, family and colleagues. My team is offering 6-7% preferred return (tax benefits discussed with our CPA) distributed bi-annually, an estimated project IRR of 15.5% (in our base case), and hold period of 5 years. Our projected average CaC is 8.4%, after completion of our value add initiative (40 units).
My teams experience is in private equity space, so am curious to what non-institutional LP's look for in deals.
What are the minimum preferred returns?
Projected minimum IRRs?
Hold period, and distribution preferences?
Minimum equity requirements?
Looking forward to getting some different opinions on the matter!
This will vary greatly depending on the investors you are targeting. The more sophisticated investors (those who are liquid) are not concerned with details and distributions. They are most concerned with the sponsor and preservation of capital.
Less sophisticated but accredited investors will vary depending on their awareness and exposure to the business.
IRA and 401k investors are happy with straight pref 6-8% right now.
The splits and returns mentioned above are typically what most syndicators are offering but are not the only way to raise the capital. You can offer straight pref, straight equity or both.
Rental Property Investor · CT · Member since 2017 · 22 posts · 8 votes
6y
@Todd Dexheimer Very helpful thank you. For the equity I already have raised, I presented a 1.0% acquisition fee, no AM fee and a 70/30 split (LP/GP) with an IRR hurdle of 15% that bumps to 60/40.
It probably goes without saying, but LPs are going to be vetting you and team as people as much as they vet the deal. More so, even, if they're new to REI. If the LP has other investment options, I think they're more likely to choose your transaction over another based on their relationship, confidence and communications with you and team rather than a difference of 1% pref or projected IRR. At least I would.
Of course you want the deal parameters to fall in place, but not at the expense of making a real connection with your potential investors and a thorough explanation of your team.
Specialist · Earth 2.0 · Member since 2019 · 598 posts · 271 votes
6y
I would look at it if your are the Investor what are my risks. Is the sponsor risky aka new to the business, do they have the reserves necessary and so forth. Next the value add initiative how big of a push do you need to do? Are you trying to push rents $100 dollars or more or what? I rather give Investors on first multiple deals better terms go full cycle and then be able to say now the deal terms change. Now I will say Covid 19 a new market it creates further issues.
Investor · Norman, OK · Member since 2017 · 75 posts · 53 votes
6y
@Joe Potenza - the ranges that @John Blanton mentioned are in line with market averages from what I am seeing. That being said, you can find the high end of that and above.
I prioritize cashflow over the projected sales proceeds. I also like to see a flat cap rate for the projected sale. I like to see a good amount of the value add coming from improved operations vs. all from increased rents.
As for the term, I’m actually getting to the point that I prefer a perpetual fund that can continue to grow indefinitely. Ideally the investor can get their investment back in a reasonable amount of time through cashflow and refi. The problem with a great deal selling is that (assuming you want to reinvest the proceeds) you have to find another great deal ... and pay capital gains tax.