All Forum Posts by: Lennon Lee

Hi Lavada,

It all starts with education and self-awareness, which at the end allows you to understand what your comfort level is.

I recently wrote a short blog on the topic that I hope you find helpful.

https://www.biggerpockets.com/blogs/9859/74589-bre...

Happy investing!

Originally posted by @Manoj Narayanan:

Hello, I came across an opportunity to participate as an LP in an syndication deal. As an LP what due diligence is required other than the deal details. Should I be seeking any attorney reviews? What else?

Thanks Manoj

 Manoj,

You have received some great advice already up there.

I recently wrote a blog post on the subject that tou might find helpful.

https://www.biggerpockets.com/blogs/9859/73520-vetting-multifamily-real-estate-syndicators

Also feel free to shoot me a direct message if you are interested in chatting further.

Good luck!

Devin,

There is no really a right or wrong answer here. At the end of the day is about structuring the deal so that everyone wins and no one ends up feeling that they are being taken advantage off. And yes I know, this may sound obvious but again there is no right or wrong.

If all you are bringing is the capital and it is all from investors (not your own) then maybe 50% is on the higher side. The value that your wife is bringing to the table is actually easier to convert into a percentage of ownership in the deal because you should have a pro-forma and financial projections for the deal and the commissions that she will not charge actually have a dollar amount that is easily calculated based on the numbers you are projecting.

Our business model is based on syndications for large multifamily properties where we bring equity from our investors as limited partners and we participate on the general partnership side of the deal alongside our operating partners (which in your case would be the builder). The general partnership structure may vary from one deal to another but what we regularly see is 30-35% of the GP allocated towards the capital raise (which is what you'd be doing). So definitely not the same scenario but it should give you an idea.

Another important thing to consider is the experience of the builder. Is this a well stablished developer that has been doing this for years or is he starting out and willing to accept less of a percentage just to get some deals going? What about you? 

As you can see, it all ends up circling back to specifics that only you and your potential partner can figure out and negotiate. At the end just remember, everyone should win.

Good luck!

Originally posted by @Tom Lafferty:

I have an offer out on a 60 unit MF property and would like to hear what others are using for their analysis and projections. I'm in DFW, looking at c class properties. If I'm buying at an 8 or 8.5 cap, wouldn't it be smart to increase it for projecting a cap rate when selling in 4-5 years? My thinking is that interest rates almost certainly will be higher at that point, so cap rates will not be able to stay as low as they are now. I'm seeing a lot of projections that use a 7.5 cap in 5 years and I can't imagine that is likely.

Hey Tom,

Regardless of where the market is right now and the type of strategy you'll be pursuing to increase NOI, you should always play it "safe" by at least projecting your "going out" cap rate to be the same as the "going in" cap rate.

That being said, if you are going to have investors involved in the deal you are going to want to be as conservative as possible. At the end of the day your aim should be to under promise and over deliver.

Following a conservative approach, we like to calculate reversion cap rates by adding 10-15 basis points per year of hold to the going in cap rate.

Anyone out there forcing the numbers on a deal by projecting lower cap rates in the future, either has a crystal ball or is in desperate need of attracting "dumb" money. Don't be that guy.

Best of luck and happy investing!

Originally posted by @Paul D.:

Hey BP!

      I have been planning for some time now on how I am going to purchase my first deal and start my real estate business investment. I would like to house hack a duplex or possibly a larger multi-family. I am trying to come up with some creative financing. I am planning on putting money down, but I wanted to also try to syndicate some money as well from people and friends I know.

     If I wanted to raise capital through syndication how exactly does that work with paying them back or presenting them the idea? I want to make sure I create a successful deal and make sure everyone is happy at the end and gain some trust for further investments as well. 

     Im curious of what percentage to pay them back with and also wondering if there is anything else out there that I do not know of that I should know. Any information about this topic would be greatly appreciated! please drop some links here as well on the topic that you think I can read and gain knowledge from. 

Thanks BP

 Hey Paul,

This topic is very extensive and right here in BP you'll be able to find many articles about it that will definitely get your education going.

Here is an article I wrote about the very basics of a real estate syndication. I hope it helps paint a broad picture of the topic and you find it valuable.

https://www.biggerpockets.com/blogs/9859/73551-investing-passively-in-a-commercial-real-estate-syndication

Originally posted by @Daniel Spear:

Hello:

I have been talking to a multi-family property owner who has said that he is considering selling equity in his property to an investor for a guaranteed return. This seems like a great way to leverage your cash flows to get immediate equity out of a building. It is also an interesting way to create valuation for a building. Basically, you take the existing mortgage amount and add however much it would take to keep the investor whole in his or her return.

What are the downsides of this approach? I imagine that the legalities are complicated and if the building fails to cash flow at the expected amount or the owner needs to sell and cannot get the assumed equity out of the building then the investor might be unhappy. What sort of risk premium is typically applied to this sort of practice?

 Hi Daniel,

First and foremost I'd like to say that there is no such thing as "guaranteed returns". If this owner is offering you or anyone else a guaranteed return then I'd run the other way.

You are right about the legalities of such a deal. I do have to say that I've never done a deal like this before but I have experience working with syndications on large apartment deals that are structured following SEC's Reg D guidelines. From what you are describing we are looking looking at a structure where the owner is selling shares of the entity that owns the property in exchange for equity from an investor that will expect a return on his/her investment while being passive. If that is the case then I'm pretty sure that what he is offering are securities and therefore such deals must comply with SEC regulations.

I'm not an attorney so this is definitely not legal advice, your best bet to get clear on this is to talk to a real estate attorney first and also consult with an SEC attorney.

Originally posted by @David Schmidt:

Is there a difference in the tax implications when simply investing in a syndication and collecting income versus owning a multi family unit and getting depreciation write off’s etc.

Would like to hear some thoughts as I am looking at investing in both options and want to weigh out options.

Thanks,

Dave

Hey David,

When investing in a syndication deal you should be able to get your part of the depreciation benefits according to your equity participation. 

For a 1031 exchange though, it might get a little bit more tricky when invested in a syndication vs direct ownership. But it is 100% doable when planned correctly and under the leadership of a well prepared and experience sponsor.

Actually, anything at 2 units or more is a multifamily. It can’t be a single family home if you have 2 to 4 families living in separate apartments on the same building. If the idea is to clarify things for new investors I think we should not confuse things then. That being said, anything at 4 units or less is consider residential and anything at 5 units or more is considered commercial. Residential properties are valued according to comparables and commercial properties valued on NOI and CAP Rates. I agree with you on everything else. I just wanted to leave it clear and not cause confusion to new investors by calling a 4-plex a Single Family Property.

Originally posted by @Isaac Kieffer:

Hey guys! My names Isaac. Been in real estate sales for just about 3 years now. Looking to get into the apartment complex industry ASAP. Income has hit $200k a year and expenses are kept very low to allow myself capital to invest. Where can I start to educate myself? I’m looking at bigger pocket daily but what other podcast/books can I read to educate myself so I can make the correct purchase? Would also be open to paying a mentor for this knowledge with the right credentials (:

Thanks for your responses!

 Hi Isaac,

Bigger Pockets is for sure where you want to be to start learning about real estate investing strategies, including of course, commercial multifamily investing. So being here is a great start already.

Here a few books that I read when starting in multifamily:

- The Perfect Investment by @Paul Moore

- Investing in apartment buildings by Matthew MArtinez.

- The complete guide to buying and selling apartment buildings by Steve Berges

Here are some of the podcasts that I listen to:

- Apartment Building Investment with @Michael Blank

- Best Real Estate Investing Advice ever with @Joe Fairless

- Old Capital Podcast 

- Passive Real Estate Investing

And here are some names of coaches/consultants that you might consider working with;

- Joe Fairless

- Brad Sumrok

- Michael Blank

I hope this helps! And I'm not sure what strategy are you looking to pursue within multifamily investing but feel free to reach out directly to me via DM if you'd like to chat further. I'm always open to talk real estate and help in any way I can.

Originally posted by @Sanjoy V.:

I have been trying to find a decent deal with good cash flow and cap rate in Texas for a year and seems less and less likely; Dallas and Austin. Worry about OK city, although tempted sometimes to commit there. The caps are inflated, too much competition, I have been outbid several times or no one contacts me. Looking at less than 45-70 units in the 3-5mil range.

Like the value add strategy but not sure what time commitment it needs? Even if I can manage to get something impossible in the current scenario.

I am very busy, the question is, is it worth to go solo or is it best to invest with a bigger multifamily group or those online crowdsourcing deals, which claim a minimum return of 8% plus some IRRs at 17% give or take. the risk is still passed on to the investor. You have no true asset.

How does this compare to you actually buying something on your own and give it to Mgmt company? When you do on your own, when you sell, I think you do better? Or no.

Can anyone analyze the risk vs benefits with doing solo vs investing in a multifamily group, what's the standard return and IRR.

Plus you are directly investing cash into these, vs with a loan you just need 20% of the value; although cash on cash should still be the same, I guess.

I am looking for advice, cause looks like I am quite discouraged by the market and it’s hard for a first timer to break into this. I like the balance of cash flow and appreciation. Thoughts on what the BP experts would do in this situation?

Thanks so much!

 Sanjoy,

I believe Omar up there has done a bautiful job at trying to answer your questions, so I'll just go ahead and address one particular thing you mentioned.

You said you guess that cash on cash returns should still be the same whether you get a loan or you invest all cash. That is fundamentally not correct. When you use leverage (get a loan) to purchase a property you are only bringing a portion of the capital to the table, the bank is bringing the rest. So if you are only bringing 20% (which should actually be more like 30% for downpayment plus a cap ex budget, but lets go with 20% for simplicity) of the capital, you should perceive better cash on cash returns than if you were to bring 100% of the capital. Remember that cash on cash returns are the returns based on the cash you invested and not the total capital stack.

Feel free to reach out via DM if you'd like to chat in further detail.