With the right deal and the right team in place, apartment syndication can be a great way to maximize your return on investment.
So what is an apartment syndication?
Apartment syndication is an investment strategy in which a group of investors pool their money to purchase an apartment complex.
There’s no question that we all want to be productive. We want to get the most out of our time, effort and resources. But how do we achieve this? How can we amplify our output with minimal input? The answer is in efficiency. When we are efficient, we are able to accomplish more with less; thus, optimizing our resources and focusing on the business factors that matters most to investors.
There are two types of investors in multifamily apartment syndications, which are active and passive investors….The active investors are also known as deal sponsors or general partners.
Within a syndication, the general sponsor of the syndicate finds and acquires the property, arranges for financing, and manages the day-to-day operations. There are many benefits to multifamily syndication, including economies of scale because by pooling resources, investors can afford to purchase bigger and better properties than they could on their own.
SOURCING
At our company, we primarily identify investment opportunities through commercial brokers and business partners. We look for markets with strong growth indicators and proven track records that are business- and landlord-friendly. Our focus is on cities and metros with populations of 150,000 or more in South central and eastern states. We typically source B or C Class apartments, with value-add opportunity, that meet or exceed our strict, conservative underwriting (financials evaluation). We believe this provides us with the most opportunity to generate high rate of returns on investments for our investors while minimizing risk. To date, we have successfully completed investments in Dallas, Texas, and always looking to expand our reach.
In order to find the right deal, active investors screen hundreds of properties before discovering a deal worthy of further scrutiny. Then, investors looking to acquire the subject property face stiff competition, on that particular deal, to get their offer accepted by the seller.
Active investors work diligently to find the best investment properties for our investors. On a daily basis, we screen hundreds of properties, conduct underwriting, talk to brokers, tour properties, and do extensive research before we raise a cent from our passive investors. Basically, there is a lot of deal sponsor pre-work PRIOR to purchasing a deal.
Purchasing an investment property is a big commitment. To provide some context, here is an example where a general sponsor spent 365 days per year working to acquire apartment properties. In 2021, the sponsor bought 3 large apartment complexes valued at $80M+. Basically, to acquire the deals, the deal sponsor likely worked 40 business hours weekly for 12 months, which equates to 480+ hours annually. That describes the pre-work only.
Next, beyond the pre-work is the work necessary to complete the purchase (i.e. securing the debt with lenders, capital raising amongst limited partners, transaction paperwork, syndication paperwork, pre-operations / transition work, due diligence, negotiations, etc.)
Plus, there is the operations work (3 to 5 years after the purchase) that a general partner / deal sponsor does to manage the asset daily. This additional effort requires 2,400+ hours over the hold period, for 3 apartment complexes, for example. This of course, includes the experience and efforts of 6 – 10 people managing the properties, to meet and/or exceed investor expectations.
Now, that we have discussed the deal sponsors efforts, including pre-work, let us review passive investors action steps. Limited partners have plenty of pre-work to do too, prior to investing in a deal!
Set Goals
When it comes to investing in multifamily syndications, it’s important to have a clear understanding of your investment goals. This will help you determine what type of strategy to pursue and what criteria to use when making investment decisions. For example, if you’re looking for monthly distributions steady income, then a yield-focused approach may be suitable for you when identifying a deal to invest in. Or if you are looking to make a significant profit when the property is sold, then a value-add approach maybe more aligned with your investing values. Or a combination with a hybrid approach maybe be more suitable for you. Regardless of the approach, your investing needs will determine what kind of investing approach is best for you. When it comes to setting goals, it is important to make sure that they are S.M.A.R.T. – specific, measurable, achievable, relevant, and time-bound. This will help you to stay on track and achieve the results that you are looking for.
Vet Your Sponsors
It’s important to vet out the general partnership team that you’ll be investing with, and to review their experience in this type of investment in real estate. When partnering with sponsors, it’s important to do your due diligence to ensure they are reputable and will be a good fit for your investment goals. Vetting out the general partnership team that they want to invest with and reviewing their investment strategy are important steps for any potential limited partner. But there are a few additional considerations that LP’s should take into account when evaluating a general partner, i.e. their track record investing in multifamily syndications.
Market knowledge
As a first step, you’ll want to gain an understanding of the property location and demographic. This includes things like median household income, major employers in the area, rent growth projections, and more. Once you have this background information, you can start to review the business plan and proforma for the investment.
Evaluate
It’s important to have a business plan that is simple and easy to understand, as well as straightforward to implement. Make sure to review the proforma to ensure that the projected returns are consistent with market expectations and past performance. If you come across a GP who is projecting enormous rates of returns on your investment, make sure to do your due diligence to ensure that this is achievable and align with industry standards. Obtain clarification on factors, like lease-up rate, operating expenses, capital calls, etc. Note, capital calls and if the general partner has previously had to request these in prior investments. A “Capital Call” is when deal sponsors have to go back to their investors and request additional funds to stabilize the property.
Invest
Assuming the deal passes your investment criteria, it is important to move forward expeditiously. Fortunately, for passive investors, a good deal sponsor would have already conducted the appropriate research and due diligence early on so to validate the property, prior to getting it under contract. What this means for you as a passive investor, is that you can leverage their expertise and efforts to get the overview info without having to spend hours mining through data and reinventing a process.
When it comes to conducting due diligence on potential investments, it pays to be thorough. That means making a commitment in time and in effort early on in the process to really get to know the team you’ll be working with, especially when future investment opportunities pass to the next phase (i.e. offer accepted, contract signed, etc). However, it’s important to note that the process of working with a specific team and reviewing their deals gets easier over time. Ultimately, passive investors may only need 3-4 hours total to carry out all the necessary steps to invest in multifamily apartment syndication.
Why work with a deal sponsorship team?
One of the benefits of having a great sponsorship team is that you can rely on them to bring you quality deals that are worth your time and investment. If you’ve already vetted them properly, you can trust that they’ll continue to bring you good opportunities. This saves you time and energy in the long run, and allows you to focus on the things that matter to you most. There’s no need to go it alone when it comes to building wealth. Having a team of real estate experts on your side can make all the difference. You can trust them to help you create a wealth-generating machine that works for you around the clock. With the right team in place, you’ll be well on your way to financial success.
What is the 80/20 split? How do general partners get compensated in syndications?
For the work that general partners put in (i.e. 3,200 hours+), they are compensated with 20% of the total profit. For 3-4 hours of work, passive investors are compensated with 80% of the total profit. General partners are compensated for their expertise, effort, contributions, etc. to source the deal, underwrite and evaluate it, secure financing, capital raise amongst passive investors, handle pre & post property operations, stabilizing the asset, and selling the property.
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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.
