In order to successfully undertake an investment in multi-family (MF) syndication, Paul Moore writes in his book The Perfect Investment to “invest in stabilized value add commercial multifamily properties… through a trustworthy operator/expert asset manager… contracting with a professional property management firm… in a large and growing market.” (p. 61). This article serves as a recap to chapter 6 of that book, and below, I will summarize the seven ingredients for a successful investment in apartment syndication.
1. Commercial multi-family
Needless to say, MF syndication does not include single family homes. Less obvious though, is that both residential multi-family and small apartments (two to four units and five to 70 units, respectively) offer fewer advantages as compared to MF properties, which are commonly classified as those with 70+ units. That being said, you’ll want to target commercial MF properties in order to take advantage of a handful of benefits. Those benefits include the ideas that
- they are large enough to profitably employ an on-site property manager,
- they are typically financed via a non-recourse loan, which means that the bank cannot pursue the owner’s personal assets in the event of default,
- and they are generally valued by income (NOI/CAP) instead of market comparables.
2. A large and growing market
It is said that a market can easily make or break a commercial property deal; a mediocre market will be hard to overcome by other means, and a great market can often cover for a lot of missteps. A few reasons that a large market is preferable are that
- the CAP rates in large markets tend to be steadier
- and there is a presence of a larger seller and buyer pool,
while a growing market offers the greater chance of
- above average population and job growth (increased wages, low unemployment)
- and major employer diversification.
3. A professional property manager (PM)
The PM is the professional group that the owner/asset manager entrusts with running the day-to-day of the property. Responsibilities include overseeing renovations/maintenance, screening tenants and collecting rents, managing amenities, along with hundreds if not thousands of other responsibilities. As you can image, the PM group also has the power to make or break a deal. A few key questions that can be used to vet a PM are as follows:
- How many units do you manage in total?
- How many units do you manage in this market? Submarket?
- Do you own or invest in properties in this market?
4. A trustworthy Sponsor
You will often see the Sponsor alternately referred to as the Operator, the Promoter, or the General Partner. This individual, or group of individuals, is responsible for finding, underwriting, acquiring and managing the asset. You’ll want to find out several things about the Sponsor that you’re considering working with, including, but not limited to:
- What is their experience in real estate?
- What is their understanding of the SEC regulations governing syndication? How about the legal team they have in place to ensure such regulations are met?
- What do past investors say about them both professionally and personally?
- Google search them – can you find anything negative?
5. An expert asset manager
Along the lines of ensuring a trustworthy Sponsor, you’ll also need an expert asset manager. You’ll find that, with most syndicators, the two are one in the same. Common responsibilities for this party include the following, along with others; working with the property management group to identify opportunities to increase NOI, managing accounting and finance on the asset, facilitating a tax segregation study in order to accelerate depreciation, and deciding on an exit strategy. In order to understand the extent of their asset management experience
- review some of their previous deals,
- ask them about their professional history before they became a syndicator (are the two related?),
- and finally, ask your Sponsor as many questions about the asset manager as necessary in order to feel confident in their abilities.
Any reputable Sponsor should be happy to answer any questions that you have and take all the time/effort necessary to ensure your comfort and that an investment with them is the right fit for you.
6. Stabilized properties
In short, a stabilized property is one that is experiencing normal occupancy rates and demanding rents that generally reflect the market and the property condition. Below are several of the top reasons to target stabilized properties:
- It will be easier to secure traditional financing.
- The possibility that leasing up may prove to be more challenging than anticipated.
- Safety. In a nut shell, a stabilized property is one that is making money, but has room for improvements. So, even if the renovations don’t demand the projected rent, the asset will still provide a return at its current performance.
7. Value-add opportunities
Simply put, value-add opportunities are those that increase NOI (through decreased expenses, increased income, or hopefully a combination of the two) and thus increase the value of the asset. There is a plethora of ways to achieve this, and some possibilities are; renovations to increase rents, improved amenities, “other income” such as trash valet or pet fees, implementing a RUBS system, decreasing onsite management costs through economics of scale, etc. Some things to consider when evaluating value-add proposals are:
- Have the proposed improvements been tested on this property or on comparable properties in the market?
- What is the plan for renovations? Will the Sponsor renovate a small enough number of units at a time to maintain a solid occupancy rate?
An important note here is to not confuse deferred maintenance with value-add opportunities. Damaged roofs, AC units in desperate need of repair, neglected parking space, etc. may demand a significant sum of money up front while providing little to no return on investment.
So, if you are considering a passive investment in alternative real estate via MF syndication, be sure to target stabilized commercial MF in a growing market that has plenty of value-add opportunity and is ran by an experienced Sponsor/asset manager with a reliable PM in place. This has been high level overview, rather than a detailed analysis, on the seven ingredients for a successful investment in MF syndication. This is not an exhaustive list of factors that impact the success of a MF syndication deal, but rather a list of the most important factors to know when considering an investment in this niche. If you found this blog interesting and want to learn more about investing in MF syndication, feel free to reach out to me at firstname.lastname@example.org; I’m always happy to discuss and share knowledge with those interested in this space!
What do you think? Have any key ingredients been left out of this recipe for success? Leave your thoughts and comments below so we can discuss!