What do you all think about this deal?

Question

I have been offered to invest as LP in multifamily apartment deal.

Underwriting is supposedly conservative and based on current cap rate (4.5%) and interest rate (7%) so if interest rates go down (which may as Fed has already started cutting rates), returns can be better than the projected ones as can have more buyers for Class A property in few years with lower mortgage rates. It's a brand new lease up multifamily apartment building with 60 units.

Loan estimate 8.1 M, LTV estimate 65%. LP 4.95 M and GP 0.55 M (so GP invest 10%) - total 13.6M.

Each LP invests 70K, distributions start a year after investing as it will take time to lease up, returns 80/20 LP/GP split, 17 - 20% AAR, 1.70 - 1.80x Equity Multiple with 3-4 years hold period. Acquisition fees, refinance fees and Asset management fess are 0%. Loan guarantor fees 2% and disposition fees 2% (paid only after investor return of capital).

Appreciate any thoughts on this?

Brian Burke · Answer

Thanks for the shout-out, @Evan Polaski.

There are other risks here--first is this can't be bought at a 4.5% cap rate, or any cap rate, for that matter, if it is a new-construction lease-up.  Cap rates are income divided by purchase price and the property has little to no income.  This means it is a 4.5% PRO FORMA cap rate, which could turn out to be a 3% cap rate or less if they don't get their projected rents, or expenses turn out to be higher than they thought.  Expenses are guesses without operating history.

Another risk is this is a 60 unit deal. That's "no-man's land" in multifamily.  Too big for mom and pop investors and too small for institutional investors.  They are harder to sell, which presents additional risk.

Finally, there could be refinance risk.  If the deal is in lease-up, the syndicate will likely need a bridge loan.  These have short maturities (typically 3 years) and that means that the timing for a sale or refinance is fixed, and not far enough out to know that you have plenty of time for a market recovery.

Evan covered the rest of it well.

Randall Alan · Answer

@Jack Mi

Hi Jack,

Seeing that this is "Post # 1" for you - I have to ask, how familiar are you with syndications and real estate investing in general?  I'm not the person to answer your primary question on the quality of investment opportunity - but I'm sure other will chime in.  What I do offer is a perspective of syndication versus owning the properties yourself.  I would just point out that when you get involved with syndications as a LP, you are basically handing over your money and crossing your fingers that the guys you are hooking up with are honest, fair, and will take care of you well.  They are going to be making every decision that affects your profitability and if or when you get your money back.  As to the "IF" in that last statement - check out this thread on Norada Capital where they basically said, "Yeah, things are going so poorly that you aren't getting your money back any time soon" (very paraphrased):

https://www.biggerpockets.com/forums/960/topics/1196567-nora...

I'm a "own the property yourself" guy.  You have complete control over everything.  Yes - it is more responsibility & work -  but by having all the control you not only get more experience, but control your own destiny, versus being a rider on the bus as a LP.

Hope it helps!

Randy

David Hamer · Answer

You need to find out more about the business plan for this property and how they are going to achieve the projected returns because this property will be cash flow negative at the time of acquisition based on the numbers you provided.  I agree with Evan that the other deal terms are fair, but how is the operator going to turn the property from cash flow negative to cash flow positive in order to pay the investors the projected return on their investment.  Is vacancy low and they plan to lease it up?  Are rents way below market?  Do units need to be renovated in order to achieve market rent?  If so, how much will it cost to renovate the units?  How long will this process take?  What assumptions are they using for future rent growth?  Are those assumptions in line with market rent growth?

Before investing any money, I would make sure you get the answers to these questions as well as understand what the sponsors prior track record in investing in these types of properties is.

Good luck!

Evan Polaski · Answer

@Jack Mi: my first impression is anyone that is buying a deal at a 4.5% going-in cap rate with 7% interest rate is anything by conservative.

Now, there are so many details missing that it is impossible to give any true thoughts.

The things I like:No up front fees, so less motivation to simply transact10% Co-invest is pretty good80/20 (assuming there is no second hurdle) is fairly good.

Things that give me pause, based on what is actually presented:Going-in cap rate is very slim.  There could be reason behind this, but on surface, this is low.As noted above, severely negative leverageNo stated pref, so I am assuming the 80/20 split happens right awayProjected returns are okay.  About typical for a lot of deals I see today for value-add deals.  For a core deal, I would assume it would be lower, but again, I don't know what they are doing to drive those returns.Relying on markedly lower loan rates is no guaranteeRelying on more core buyers is only likely to happen when pricing (as measured by cap rate) is higher than prevailing interest rates.

Unknowns:What is business plan to generate those returns? What is forecast exit cap rate?What are the loan terms?Does the GP equity sit in same class as LP shares, or is it separate?  If separate, is GP taking the 20% split + their share as 10% LP or does 20% include their 10% equity (effectively equating to a 10% GP bump)Loan guarantor fee and dispo fee is a little higher than I have seen many other deals.  Not a fan of loan guarantor fees in general.Sponsors track record in these types deals across multiple economic cycles (when I see these types of deals, I mean acquiring new construction multifamily in the area)

I am sure if I saw the deck, I would have at least a dozen more questions.  Syndication might be the right investment for you, but given you are new to this, there is a lot to learn in analyzing these deals.  A lot you can gain from these forums, but some you just have to jump in and learn.  I recommend you buy and read Brian Burke's book The Handsoff Investor as a start.

Jack Mi · Answer

I have never invested in real estate either buying a rental home or syndication. I am not familiar with either of the above. I was looking at some online real estate courses and they cost thousands of dollars so thought it might be better to invest in syndication and get 15% or more returns.

What do you all think about this deal?

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