All Forum Posts by: Sam Grooms

Syndications are not measure by income per door. Instead, they are measure by return metrics. No, the 50% rule isn't used very often. Even on the smaller scale, I would only use the 50% rule as a quick tool to see if its worth underwriting further. In a particular submarket, my expenses don't change much if I'm charging $800/mo in rent or $1,200/mo. Use actual dollars when possible. 

Yes, syndications use leverage. The syndication is only being used to pool money together for the required equity. As for the fees to the syndicator, they charge up front fees, fees during the hold period, and fees at the exit. These fees are "keep the lights on" fees. The real pay day for the sponsor/syndicator comes from their share of the gain on the exit (and cash flow, depending on the type of deal it is). Investors usually get 100% of the cash flow and gain on exit, until they receive a set return, say 8%. Then, the cash flows and gain get split between investors and the sponsor, say 70%/30%, respectively (common structure among multifamily value-add). This is just one example, though. There are countless ways to set it up. 

I'm a big believer in finding the city/cities you want to invest in, and then find the good sponsors in that city. 

When I started investing in syndications, I pulled up the quarterly transaction reports from the big brokers (they list all transactions, not just their's), and looked at who the buyers of B and C class multifamily were. I then started researching the top 4-5 buyers, 3 of them were syndicators, two of which were focused on value-add (which I knew I wanted). I spoke with both syndicators and ended up liking one a lot more than the other. 

You could also just speak with the large brokers directly. They know who the top syndicators are in the market. 

No centralized place. Broker websites are the best place for commercial properties. Find out who the top brokerages are in your area. 

You definitely don't need the BRRR method. Let's go with the middle and say the house sells for $700K. Less her $70K mortgage and 6% in fees, she walks away with $588K. To get $24,000 per year on $588,000, you only need a 4.08% after tax return on investment. That's not too difficult to find. BRRR just adds unnecessary risk.

I would target investments with a 10% return, which should give her plenty of cushion for taxes and changes in the market. 

This would still require a securities exemption, and a PPM would be needed. Most syndications are manager managed LLC's.

 No. You can have inflation when cap rates are constant. Rents going up gives you inflation. 

Also, if cap rates go up, my valuation goes down. So in your example, cap rates going from 5% to 5.25%, the value of my property decreases by 4.8%, all else being equal. 

I think you're confusing market cap rates, with a static purchase priced compared to growing NOI. I might increase my purchase cap rate from 5% to 8% by increasing my NOI, but that has nothing to do with market cap rates going up or down.

1.  Not quite. As long as you have any NOI, you'll still have NOI growth equal to the individual growth rates. Expenses could be 99% of GOI, and GOI and OpEx growing at 2%, NOI will grow at 2%.
2. I would not use the house price index. I would try to find actual rental data. Yes, Phoenix is safe to use 3%. Phoenix rent growth is actually still increasing, where most of the country is seeing declines. Just announced last week, Q1'19 over Q1'18 saw a 9.5% increase. That's incredible. But, you can't take that and use it in other markets. 
3. No, prices of buildings in Phoenix are increasing faster than CPI, because they're tied to rents. Rents here are growing 7-9% a year right now. Inflation is at 2%. Now cap rates and economic loss could affect your valuation, even if rents are going up. But those have only continued to go down, even further helping valuations. 

 A few thoughts:

1. Your NOI doesn't grow simply because of the difference between 3% for GOI and 2% of OpEx. Those growth rates can be equal and your NOI will grow at that same growth rate.
2. If you are going to assume there's a difference between your income growth rate and your expense growth rate, you need to be able to justify that difference. Why will your rents grow faster than inflation (your expense growth rate should be tied to inflation)? Go back 30 years and see if your submarket has actually had 3% average rent growth over that period. If not, what's changed that will allow you to underwrite that for the next 10 years? Is your area rapidly growing? 
3. Yes, NOI can grow infinitely over time, since it's tied to inflation (ceteris paribus).

I guess my first question is why? 

For my tenants, I'm providing a product not available in the immediate area. We go in and put new cabinets, granite countertops, stainless appliances, etc. There's no new construction happening where we're doing this, and no one else is renovating apartments like this (in the immediate area). So if you want those type of finishes and want to live in our area, we're you're only option. If new construction did come into the area, their rents would need to be quite a bit higher for it to make sense, and we'd likely actually get a bump in our rents. We also add quite a few community amenities. 

For my investors, their problem is they want good returns while remaining passive. Many people struggle to get 20% returns on active investments. If you can approach that for your investors while they don't have to do anything, why wouldn't they want to invest with you?

I agree with Justin.  The best way to gauge prices is to get multiple bids/estimates for replacement. That price does seem high, though. We have a 98 unit property with a boiler, and were told during due diligence that a new one would be about $25,000 (if it ever needed replacing during our hold). We do this for all of the mechanicals when purchasing a property, and set aside sufficient reserves. I highly recommend it.