Multifamily syndication is a growing niche in the real estate investing world. It grants investors all of the benefits of real estate investing – relatively safe and stable hard assets, inflation hedging, high quarterly distributions, and significant appreciation – without the hassles commonly associated with being a landlord – dealing with tenants, toilets, and trash.
If you are looking to get involved in multifamily syndication, the very first question you’re probably asking yourself is: how do I find and evaluate investment opportunities? It’s one thing to want to invest; it’s an entirely different affair to decide which investment opportunity to select. This article provides you with a quick guide on analyzing real estate syndication deals.
* For more information about real estate syndication, check out the article posted on the website:The Investment Summary
When you contact a company like mine to find out about one of our investment opportunities, we will send you an Investment Summary. The Investment Summary is a document that provides details about a particular real estate deal, from basic information about the property to specific projected returns for investors.
The Investment Summary is essentially a marketing instrument trying to persuade you to invest in a particular project. It is important to look beyond the sleek graphics and focus on the key data before jumping in.
Even though it is called an Investment “Summary,” it can be a pretty long document! To help you out, here are some common headings that you’re likely to see in an Investment Summary, and some thoughts on which ones deserve particular attention.
Executive Summary
Right upfront, you are likely to see a summary that is usually a one-pager with an overview of the property: where it is located, how many units, how old, and how much it costs. It may also provide quick investment metrics such as projected average Cash on Cash and Average Annual Return.
Photos of the property and area
Photos will be especially important if the property is not in your immediate vicinity. If you live close by, nothing beats driving the property and neighborhood. Whether in person or through pictures, visualizing the property allows you to better assess the General Partners’ (GPs) strategy. For instance, if you see worn-out appliances, that’s not necessarily a bad thing. If the GPs plan and budget for a full replacement of appliances, then these worn-out fridges and ovens represent an opportunity to add value to the property. On the other hand, if you see roofs caving in and there is no mention from the General Partners of roof replacements, then the sky might fall on this investment.
Overview of the market and sub-market
The real estate market consists of a complex set of factors such as location, supply and demand of available real estate inventory, and a host of other economic indicators. Understanding the market within which the property is located forms the bedrock of the General Partners’ strategy. Buying a rundown apartment building in an up-and-coming neighborhood can represent a massive opportunity for improving and upgrading the property so that it reaches its full profitability. Look for information that shows how the GPs have evaluated and understood market conditions.
Details of the business plan
The business plan outlines the GPs’ goals and details how they will achieve them. The business plan should outline, step-by-step, how the property will be upgraded or renovated, how the asset will be managed, and how specific problems (e.g., high levels of vacancies or below-market rents) are going to be addressed. Each business plan will be different because each deal is different, but all should seek to unlock as much value as possible from the property.
Projected returns and exit strategies
The projected returns highlight how much money the GPs expect to distribute to investors during the hold and at sale. In a real estate syndication, you are likely to make money in two ways. First, the Cash on Cash. This is the equivalent of dividends in the stock market. Usually distributed quarterly, Cash on Cash represents the profits generated by the operation of the property over the hold time. Second, the proceeds from appreciation and sale. Once the investment period ends, the property is usually sold. If it is sold for more than it was purchased, investors share in these profits. There should be a clear projected holding period along with a few plausible exit strategies based on market conditions at the time of sale.
Detailed numbers and analysis
This part of the Investment Summary contains the numbers and the math. Every passive investor should know the five real estate investment return metrics before investing a single penny in a deal to minimize risk and maximize profit. Key investments metrics: Cash-on-Cash Return (CoC), Internal Rate of Return (IRR), Average Annual Return (AAR), Capitalization Rates (Cap Rates), and Equity Multiple.
*For more information on investment return metrics, check out the article that describes this in detail:A key part of the analysis is underwriting. Multifamily underwriting is the system of gathering data about a deal, making assumptions about how the deal is likely to perform in the future, creating projected cash flows of the investment, and assigning a valuation to the deal based on that information.
Ensure the GPs do not overestimate market rental rates and rental growth, not underestimate operating and renovation expenses.
Team bios
In a multifamily syndication, you are not just investing in a property; you are also investing in the ability of the GPs and the property management team to execute. Please consider their experience and don’t hesitate to ask for information about previous projects that they have completed. As a passive investor, you will not be involved in the day-to-day management of the property, so you need to trust the General Partners.
Feel free to ask about Homesphere Investments’ current investment opportunities so that you can review an Investment Summary for yourself!
