Creating Syndication for Multiple SFR Student Rentals

13 Replies

Hello, I am looking for replies from anyone experienced or educated in the subject of syndicating for multiple single family homes (i.e. raise capital for down payment/CAPEX/reserves, while getting blanket mortgage for remainder). I have great near-campus properties, but not sure what good cash-on-cash should be for investors (10%, 15%, 20%?) or which Reg D exemption I should target (I'm shooting for family/friends, but may have to extend PPM to reach goals). This is state of MA and one commercial bank has given me guidelines for how they could do recourse (25% down) or non-recourse (35% down), but I'm not sure if there are other approaches I should consider. Any legal or accounting thoughts welcome too; my accountant advises one LLC per property, but that means I would have to create 10 right away. Thanks for any thoughts!

@Jim Froehlich   Do you have these properties under contract?  Do you currently own these properties and are trying to monetize the portfolio?  Regardless of the current state of ownership, I would advise seeking legal counsel with a real estate attorney who has a successful track record of putting together syndications and firm understanding of SEC regulations.  While syndications opens up possibility, undertaken incorrectly, they can open up a real can of worms.  In brief, seek good counsel.

The cash on cash will depend on your investors expectations, but if you can reach double digit cash on cash with future upside that would likely be good. Most investors that I speak to want to see 15% IRR or better, but you may be able to get them happy with 12%

As for the Reg D offering, the most common is a 506B, however, you should really talk with a securities attorney to set it up properly. 

For the LLC, I would expect it to be all in 1 LLC for 2 reasons - 1.) The syndication will be expensive if you do a raise for each LLC and 2.) The lender will like it in 1 LLC vs. multiple

@austin freuchting has experience.

I broker SFR portfolios and many are high net worth or funds, but several have syndicated. We typically see 10% - 20% COC returns depending on the quality and market.

Local banks can provide the best terms. Typically 25 yr am and around 5% interest rate. I've seen as low as 3.78% in Chicago area.

Best of luck and I think purchasing/syndicating an SFR portfolio is an excellent approach given the competition in multifamily space.

I went through this exercise with investors who wanted to start a student rental fund. Unless you're getting 15-20% COC returns after all expenses (and appreciation on top of that), I don't think the ROI is enough to get them interested. The fees eat into the profit too much even if you're offering your investors an 8% ROI.

@Peter T. , @Ryan Cox , @Todd Dexheimer , and @Mark Allen ...thank you all for taking the time to read my post and responding.  These were all helpful tips.  To answer @Ryan Cox question, the state of properties is not yet under contract as I'm awaiting rent rolls/expenses to estimate and structure deal.  I do have a good and experienced attorney, but I'm waiting and assessing how much I'll have to pay him depending on direction I take.  An experienced investor told me yesterday to expect as high as $30K if I syndicate, which is not doable for me at this time.  @Peter T., I was wondering what you mean by "fees eat into profits too much"? which fees? Thanks again for your helpful comments...I will see what offer makes 15% COC achievable as appreciation is not a problem. I will post back to this forum if I close the deal or if I don't and explain why.

Originally posted by @Jim Froehlich :

@Peter T., @Ryan Cox , @Todd Dexheimer , and @Mark Allen ...thank you all for taking the time to read my post and responding.  These were all helpful tips.  To answer @Ryan Cox question, the state of properties is not yet under contract as I'm awaiting rent rolls/expenses to estimate and structure deal.  I do have a good and experienced attorney, but I'm waiting and assessing how much I'll have to pay him depending on direction I take.  An experienced investor told me yesterday to expect as high as $30K if I syndicate, which is not doable for me at this time.  @Peter T., I was wondering what you mean by "fees eat into profits too much"? which fees? Thanks again for your helpful comments...I will see what offer makes 15% COC achievable as appreciation is not a problem. I will post back to this forum if I close the deal or if I don't and explain why.

Fees as in: a fee for raising the money, a fee for managing the property mgmt company, fees for paying a PM, so on and so forth. Your investors need to be earning minimum 8% annually (in addition to a nice IRR in the high teens) for anyone to get excited. Through my experience the fees from raising the capital, managing the PM and having an PM (even in-house) just didn't make it worth it to them.

@Peter T. , thanks for the insight and explanation on fees! If you or anyone else has opinions on turning SFR on major campuses into AirBnB units, please let me know if you think that could yield higher returns. If I'm able to move forward, I'm considering taking 1-2 units and bringing them up a level to become Short-term rentals because I've heard that large campuses are good for such rentals via a few podcasts I listened to in past. I'm beginning to think a partnership over syndication might be better avenue. Thanks again!

@Jim Froehlich it doesn't matter what we think the returns should be, all that matters is what you're investors inspect because they're the ones giving you the money. If you can find someone who is willing to take 6% COC and a 12% IRR on sale, then you can afford to buy different properties than if they want a 10% COC and a 20% IRR.

One piece of advice is aim to raise almost double the amount of money you'll need because people that have said they're interested in the past will have many excuses now for not writing a check or significantly less; whether the reasoning is real or made up it doesn't really matter.

Jim - I’m chiming in late, but I think you’re on the right track. If your loan will be greater than $1 million, consider using agency debt ... 20% down, 30 year amortization, low interest rates.

My investor pool likes 10%+ yields, but your pool might have other expectations.

Ask your attorney about a 4A2 syndication if only using friends and family. The cost is much less, ~$10k. I’m happy to refer you to the attorney I use if interested.

@Tyler Kastelberg , thanks for this awesome advice! Please let me know if you've ever done or considered buying the whole thing outright with your group and then re-financing up to 70% after forcing small amount of extra equity. Also if you know agencies that will offer only 20%/30 yr amortization. The best I've found in MA so far requires 25% minimum recourse and 35% down for non-recourse. 10 year (5 fixed,5 ARM),25 yr amor. and some early payoff penalties. That's local commercial for over $2M. thanks!

@Jim Froehlich

Jim - I've done something like that in the past, and I have the name of an agency debt firm. FYI - All agency debt is non-recourse, but you'll need someone who can sign a "big boy" letter.

I'll drop you a DM with more details.

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