If you’re thinking of investing in an apartment syndication, there are a few key things you can do to help mitigate risk and protect your investment. Here are five tips:
- Make sure the sponsor team has budgeted adequate capital reserves.
- Ensure the sponsor team performs proper due diligence on the property.
- Ensure the team has a policy on screening tenants.
- Only consider properties in areas with strong rental demand.
- Review the sponsor team as well as their vendor teams.
Capital Reserves
One of the biggest reasons deals can fail is that they do not put away enough money for a rainy day. Our team typically likes to budget an additional 15-20% contingency in our renovation plans to help protect us from unforeseen capital expenses and changes in material prices. If we are using bridge debt with a floating interest rate, we make sure to put away enough in additional reserves to cover any increases in interest rate payments up to our interest rate cap. Interest rate caps are insurance policies to help mitigate risk in a volatile interest rate environment. An operating account with at least 1-1.5 months’ worth of expenses and debt service is also a good idea to have. We want to make precautions possible to prevent a need for a capital call.
Due Diligence
Buying right is incredibly important because if you buy wrong, there is little you can do to fix the situation. For this reason, we typically have specialized contractors go through and scrutinize our properties to ensure we are getting what we think we are getting before we close. This helps prevent surprises and unforeseen expenses.
Tenant Vetting
Our customers are ultimately renters, and we want to be very selective about who we invite to live on our property. Tenant screening is important because non-paying tenants or those that damage the property and can increase our expenses significantly. That’s why we verify their identity, pull credit and rental history, plus verify their income. Our property managers contact their employers and keep a look out for fake check stubs. You would be surprised by the tricks that people play. We generally do not accept people with past evictions because this is a good indicator that they might require eviction on our property.
High Demand Markets
We choose to focus on landlord-friendly markets that show positive population and job growth, and then correlate that to historical rent growth. This maximizes the chances of success in executing a business plan and provides fertile ground for hitting our projections. A good market can sometimes compensate for unforeseen expenses on a property which again, we make measures to prevent the unexpected through due diligence. The right property in the wrong market is not a recipe for success.
Experienced Professionals
In addition to having experienced partners, we are very careful in vetting and choosing vendors that have a proven track record of success. Multifamily investing is a team sport, and we want to work with the best players available. Contractors play a critical role in renovating our properties and we make measures to be certain they have experience, character, and priced appropriately with market demand.
These are 5 ways to help increase the chances of a profitable investment in a multifamily project. If you’re interested in learning how to combat inflation, while mitigating risks, click here.
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By Kelsie Mans-Ray
KMR Multifamily Acquisitions / Syndicator
NOTE: This information is of a general, educational nature and may not be construed as tax, financial, or legal advice pertaining to your specific offering, exemption or situation.
