How to Create a $400M Apartment Syndication Business from Scratch
Apartment syndication, which is the pooling of money from numerous investors that will be used to buy an apartment building, is a complex real estate investment strategy with one of the highest barriers of entry. In fact, before even searching for your first apartment deal, you’ll likely require years of preparation in order to set yourself up for success.
After leaving a $30,000 a year advertising job and acquiring four single family rental homes, I syndicated my first deal in 2014. Over the next four years, my company built a portfolio of over $400,000,000 in apartment communities. Through this experience, I wrote a book, Best Ever Apartment Syndication Book, distilling all of the lessons I’ve learned along the way so that others my replicate my company’s success.
Here are the 11 steps I followed to create a $400,000,000 apartment syndication business from scratch:
1 – What are the experience and educational requirements needed to syndicate an apartment deal?
The two main requirements needed before becoming an apartment syndicator are education and experience.
First, you must comprehend the fundamental apartment syndication terminology in order to effectively communicate with your team members and passive investors, as well as to understand how to create and execute a business plan (here is a glossary of terms you need to memorize). These are concepts like internal rate of return, effective gross income, economic occupancy, preferred return, profit and loss statements, and many more.
Additionally, you will need a successful track record in business or real estate – ideally in both. Your team members and passive investors need to trust that you are able to execute an apartment syndication business plan. Understanding the apartment terminology is a good start, but having a successful background in business and/or real estate will give them confidence in your ability to replicate those successes as an apartment syndicator.
So, if you haven’t received promotions or awards in the business world or if you haven’t succeeded in a different real estate investment niche, that should be your focus before moving forward in the apartment syndication process.
2 – Why is goal setting important when beginning to syndicate apartment buildings?
Once you have the educational and experience requirements covered, the next step is to set a compelling goal. However, instead of simply setting a goal for how much money you want to make, take it a step further and determine how much money you must raise in order to achieve that goal.
One of the main ways an apartment syndicator makes money is from an acquisition fee, which is paid to the syndicator at closing for putting the deal together (here are the other six common fees). This fee ranges from 1% to 5% of the purchase price. So, if your goal is to make $100,000 and you plan to charge a 2% acquisition fee, you would need to syndicate $5 million worth of apartment communities. Assuming an equity investment of 35% of the purchase price, you would need to raise $1,750,000.
At this point, you know exactly what you need to do (i.e. how much money you need to raise) in order to achieve your specific, quantifiable apartment syndication goal.
3 – Why should you create a thought leadership platform to syndicate a real estate deal?
Even though you comprehend the apartment syndication terminology and have a successful track record in business and/or real estate, since you haven’t completed an apartment deal, you are still going to face a credibility problem. A thought leadership platform, which is an interview-based, online network where you consistently offer valuable content to your loyal following free of charge, is a major part of the solution. Examples of thought leadership platforms are a podcast, a blog, a YouTube channel and a meetup group.
Through your thought leadership platform, you will position yourself as an expert in the apartment syndication field. Additionally, you will build upon your initial apartment syndication education by having conversations with active real estate entrepreneurs, probing them for the best advice they have to offer. Lastly, you will get your name and voice in front of real estate professionals while you sleep, which will help you source apartment deals and private capital, as well as network with potential team members.
Overall, a thought leadership platform will help address your credibility problem, as well as be a tool for finding potential team members, business partners and passive investors. So, while you are working on the experience and education requirements, launch and grow a thought leadership platform (here is my guide for how to create a real estate thought leadership platform).
4 – How do you select a target market for apartment syndication?
The last step before you beginning put together your team is to select a target market, which is the primary geographic location in which you will focus your search for potential investments. There are more than 19,000 cities located in the United States, and it is impossible to evaluate and target every single one.
I recommend selecting seven potential target markets based on where you live, where you have lived (because these are markets with which you are likely already familiar), and the top apartment markets in the country. Then, evaluate those markets across a variety of factors, including population growth, population age, unemployment, job diversification, and supply and demand, in order to select one or two markets to target (here is my guide for evaluating and selecting a target market).
5 – How do you build an all-star apartment syndication team?
You’ve covered the education and experience requirements, launched a thought leadership platform, and selected a market in which to invest. Now, it is time to create your core real estate team. Your core team will consist of a real estate broker who will help you find on-market deals and close on deals, a property management company who will help you during the due diligence process and manage the apartment after closing, a mortgage broker who will help you secure financing, a real estate attorney and securities attorney who will help you create the partnership documents between you and your investors, an accountant and a mentor/consultant.
Again, since you haven’t completed an apartment deal, you are going to have a credibility problem with your passive investors. The thought leadership platform is part of the solution and finding experienced team members is another part. The best approach to building your team is to 1) find a mentor/consultant through referrals, 2) leverage your mentor’s relationships and the relationships you created through your thought leadership platform to find the other members of your core team, and 3) conduct interviews to select the best candidate.
Each member of your team will have their own motivations, so it is your job to prove to them that by becoming a part of your team, they will achieve their goals too. That means leveraging your background, thought leadership platform, and the expertise of your mentor and team members to prove your ability to successfully raise money for, close, and execute a business plan on an apartment deal.
6 – What are the best strategies for finding passive investors?
Surprisingly, the main reason people will invest with you is not based on the returns you offer. Instead, it will be because they trust you with their money. I’ve found that this trust is created in three important ways – through time, displaying your expertise, and creating personal connections.
The best way to find passive investors with which you already have a trusting relationship is through your existing network. Therefore, the approach I recommend is to create a list of every single person you know and categorize them based on how you know them (i.e. work colleagues, family, college friends, neighbors, etc.). Then, your goal is to get one person from each category interested in investing with you and, with their permission, name drop them to the other people in that category. People are more likely to invest with you if they know someone else who is interested in investing too.
If your existing network is small, or to expand your network, other great ways to build personal connections are 1) through your thought leadership platform, 2) participating on BiggerPockets, 3) attending or creating a meetup group, and 4) volunteering (here are a collection of articles with more money raising tips).
Before moving on to the next step, your goal is to obtain verbal commitments from your network of investors that is greater than the amount of money you need to raise in order to achieve your goal, which you set in Step 2.
7 – What’s your ideal apartment syndication business plan?
There are three main apartment syndication business plans. The first is the distressed strategy, which is to purchase an apartment community with an economic occupancy level below 85% (and likely much lower), address the deferred maintenance, bring the property to stabilization, and either sell for a large profit or refinance and hold for cash flow. Another is a turnkey strategy, which is to purchase a completely updated, highly stabilized apartment community with an economic occupancy level of 95% or higher and cash flow starting day one. The third, and the one that my company implements, is the value-add strategy, which is to purchase an apartment community with an economic occupancy level between 85% and 95%, add value (which is to improve the physical property and operations in order to increase the income and decrease the expense), and sell after five to seven years.
Your ideal business plan is based on the goals of you and your investors. If you and your investors are interested in a large, lumpsum return after 12 to 24 months with minimal to no cash flow, as well as the risk of losing most or all of their initial investment, the distressed strategy is ideal. If you and your investors need a place to park capital without the upside potential at sale while receiving a return that beats inflation, the turnkey strategy is ideal. If you and your investors want an ongoing return and a moderate lumpsum return after five to seven years, the value-add strategy is ideal.
Similar to selecting a target market, you cannot pursue every single investment opportunity. There are simply too many. Instead, you must select one of the three investment strategies and only pursue properties with the specific criteria that aligns with that strategy, which includes the current occupancy, condition, asset class, construction date, and resident demographic.
8 – How do you find your first apartment deal?
As I mentioned in the introduction, a large time investment is required before finding your first deal. But, now that you’ve covered the education and experience requirements, set a goal, launched a thought leadership platform, selected a target market, created your core team, obtained verbal commitments from passive investors, and selected a business plan, it’s time to find your first deal.
There are two types of apartment deals: on-market deals listed by a real estate broker and off-market deals without a listing broker. To receive on-market deals, contact your real estate broker, as well as the top brokers in your target market/s and ask to be added to their email list.
Sourcing off-market deals requires more proactive effort on your part, but you will benefit from dealing directly with the owner, avoiding a bidding war, having more financing flexibility, and potentially closing faster. Also, off-market deals are perceived as stronger opportunities in the eyes of passive investors.
There are countless ways to find off-market opportunities, but here are the five most effective strategies. I recommend having at least two lead generation strategies that bring in at least one new off-market lead each week.
9 – How do you evaluate apartment deals?
As you receive on-market leads from real estate brokers and off-market leads from your lead generation strategies, you will need to determine if the lead warrants an offer. This process is called underwriting.
To properly underwrite a deal, you need to obtain a current rent roll and trailing 12-month profit and loss statement, as well as create or purchase a financial model. The underwriting process for apartment communities is quite complex, but here is a brief overview:
- Determine how the apartment is currently operating
- Set assumptions for how the apartment will operate once you’ve taken it over and implemented your business plan
- Create a pro forma, which is the budget with projected income, expenses, and cash flow during the hold period
- Use the pro forma cash flows and the desired returns of you and your passive investors to set a purchase price that will achieve those returns.
After setting an offer price, you’ve arrived at the point where you need to determine if you will submit an offer. If the results of the underwriting process meet or exceed the return goals of you and your passive investors, you will submit a letter of intent, which is a non-binding letter that represents your intent to purchase the property. If your letter of intent is ultimately accepted, you will sign a purchase and sale agreement to officially put the property under contract to purchase.
Once you have the property under contract, you will perform additional due diligence in order to confirm the assumptions you made during the underwriting process and decide if you need to update your offer price and terms or cancel the contract. If you decide to move forward, you will secure financing from a lender. If it is your first deal, you likely won’t meet the liquidity, net worth or experience requirements to qualify for financing. If that is the case, you will need to bring on and compensate a loan guarantor.
10 – What’s the process for securing commitments from passive investors?
Once you have the property under contract and while you are performing due diligence, you will present the new apartment offering to and secure investments from your passive investors.
First, you will use the results of your underwriting and due diligence to create an investment summary document, which outlines the main highlights of the investment and the market, as well as the return projections to your passive investors. Then, using the investment summary as a guide, you will present the new investment offering to your passive investors. Finally, you will officially secure investments from your passive investors, having them sign the required documentation, including an operating agreement, subscription agreement and a private placement memorandum, which are prepared by your attorneys.
11 – How do you execute your business plan on an apartment building?
After the deal has passed the due diligence process and you’ve secured commitments from passive investors, you’ll close on the deal! Upon closing, you will notify your investors of the close and set expectations for ongoing communication and distributions. Then, you will execute your business plan by performing your duties as an asset manager.
Your 10 asset management responsibilities are:
- Implement the business plan by adhering to the income and expense budget
- Conduct weekly performance reviews with your property manager
- Send the correct distributions to your passive investors
- Provide monthly recap emails to your passive investors
- Manage the renovations
- Maintain economic occupancy
- Plan trips to the property
- Frequently analyze the competition
- Frequently analyze the market
- Resolve issues as they arise
The last step in the entire syndication process, and when you and your investors make the BIG money, is to sell the property. The ideal time to sell is based on your business plan and the market. Obtain a broker’s opinion of value from your real estate broker a few times a year and calculate the return projections to your investors based on that sales price. If you can meet or exceed the return goals early, great! If it comes time to sell and the market is such that you cannot meet or exceed the return goals, don’t feel forced to sell. Hang on and wait for the market to turn around before selling.