All Forum Posts by: Sam Grooms

1. This varies widely, and isn't visible to the main sponsor. 

2. I've never co-sponsored someone else's deal, but we have had co-sponsors on our deals. Like someone mentioned above, it helps us do larger and/or more deals. Yes, you definitely need good rapport with your co-sponsors. You have to feel they're educated enough about all aspects of not only the deal, but also the legalities of raising money. They become an "agent" for your deal, and if they misrepresent something or break securities laws, the entire partnership can be affected. My partner @Ben Leybovich does some consulting on the side for people looking to get in to the sponsor side of syndications. We've had a few co-sponsors come from there (to help them get their feet wet), because we can trust that they have a baseline knowledge. 

Yes, its fairly common to see a group pool money together and invest in another syndication. You can charge fees for managing your group's investment. This is more common among family offices and private equity firms. 

The other way to do it is to co-sponsor a deal. In that sense, you would get a piece of the general partnership and would have other responsibilities besides just pooling money together. The other responsibilities is needed to make this approach legal. This is a lot more common for the size of group/investment you're talking about. 

That's very useful information. If you turn it into a business and put systems in place, I don't think you'll have a problem getting to 5,000 units. Spend time educating yourself on the space. Maybe even ask @Ben Leybovich for some consulting. 

@Charlotte Dunford, You're right that they're both our customers. We focus on delivering value to our tenants, so that they'll pay us more for that value. That in turn brings value to our investors. 

However, our primary customer has to be the investor. At the end of the day, we're a private equity firm. 

Absolutely, I can tell you what they provided. I'm a little weary of posting the actual reporting on a public forum, since the sponsor's performance isn't public information. If you email me, I'll share it with you. 

First, they provided actual performance vs budget. You'd be surprised at how few sponsors provide this, even though its not difficult to prepare. They also did a variance analysis for each line item in the P&L. 

They did the same for quarter-over-quarter and quarter-to-quarter. These ones are a little more common, without the variance analysis. 

They had very detailed CapEx updates. When each unit is expected to be renovated, what stage each renovation was in, how much was spent on it, the rent they were able to get on the completed ones, etc. All of this was provided in detail, as well as in the aggregate.

They also had a narrative describing where we're at in the overall business plan. How much value had been created. Updates on the exit strategy and timing. 

Overall, they were very transparent, which is important. 

How active do you want to be? Value-add Refi is the most common approach in multifamily right now. Think of it as the BRRR method on a large scale. The only issue you'll have is that you'll need equity to get started. The typical value-add refi takes 12-18 months minimum for 100+ units, which is where you'll likely need to be to get 5000 units in 10 years. If we assume you'll acquire them evenly over that period, you'll have to fund the first 1,500 units. That's a considerable amount of cash, which is probably why you brought up creative financing.

Instead, I would start with 150 units in the first year. It will still take some considerable equity, but a lot more manageable. In 12-18 months when you refinance, hopefully you've increased the value enough to also pull out your investment plus some additional equity. This time, buy 200 units (over 1 or 2 properties).  Do the same thing the following year and buy 300 units, and 450 the next. Combining your nearly $500,000 per year of income from the other businesses, the cash flow you're getting from the first couple of property and the additional equity you're pulling out, you should be able to get to 650 in acquisitions by year 5, and you're at 1,750 total. Now, all you have to do is maintain that 650 per year and you'll be able to get to 5000 by year 10. 

It would look something like this:

Having said all that, if you don't want to be active and do value-add, it could become rather difficult. $500,000 in extra business income is significant, but I don't think it gets you to 5,000 units on your own, unless you're buying $25,000 units. 

If you're talking about seller financing, master leases, subject to's, etc when you say creative financing, I don't think that gets you there either. There just isn't enough deal flow with those at this point in the cycle. You'd need a downturn in the market, and probably the economy as a whole. 

The last option would be investing in other people's deals for 9 years and let them double your money every few years. Your $5M investment ($500K per year for 10 years) would turn into $20M (this would take almost perfect execution, and shouldn't be relied upon for even the most experienced sponsors). At 80% LTV, you could buy a $100M property. That still wouldn't get you to 5,000 units, though, unless you're paying $20K per unit.

They matched their projected returns, which was high teens. But like Ian mentioned, they're more geared to newer sponsors. They matched their returns, when the vast majority of experienced sponsors were outperforming. The sponsors in those deals made some rookie mistakes in their underwriting, which didn't allow them to outperform. Overall, I still had a good experience. Their reporting was top notch, which I appreciated (my prior career was financial reporting). Now that I'm on the sponsor side, I've been able to incorporate a lot of their financial reporting into our projects. 

Also, if you're buying 5+ units, its not just about LTV. The limiting factor is usually DSCR. @Scott Passman mentions it when he talks about factoring in your higher mortgage to make sure it still cash flows. Well the bank on 5+ units will do that for you. They'll likely want your cash flow to be 1.25x you debt service (mortgage payment), at a minimum. 

I invested through RealtyShares before they stopped taking new investments. I didn't like not having direct access to the sponsor. 

It sounds like you have the right strategy for today's environment. It's really tough to buy cash flow right now, you'll most likely have to create it by improving the property and increasing rents.