When it comes to real estate investing, multifamily properties are in high demand. It may be tempting to rush and acquire the first property you see; however, you should slow down and take a few prudent steps first. This will ensure that you have a good relationship with your brokers, contractors, lenders, and other members of your team later on. Real estate syndication is one of the best ways to acquire multifamily properties.
In this article, we will explain how to get started with real estate investing and syndicate a real estate deal in 10 easy steps.
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Step 1: Set goals for your real estate syndication and prepare a draft business plan
Before starting the acquisition process, answer the following questions for yourself to prepare a draft business plan for your real estate syndication. We already spoke about SMART goal setting in our article on building your real estate syndication team. However, here you need to be more specific.
How much equity do you need?
Once you come up with your decided purchase price, you can move on to the next question. The amount of equity you need to raise will define the number of investors, guarantors, and even the type of financing for your real estate syndication deal.
How will you get the money?
For example, 30% can be your equity, and 70% can be your debt.
How many passive investors do you need to raise money for your deal?
When you have an idea of the amount you need and how to get it, you can outline how many passive investors/ limited partners you need in your database. Once you start raising capital, you can add them to your real estate investor portal.
Do you need guarantors?
If yes, how many? When syndicating real estate deals, the rule of thumb for debt is that the net worth of the guarantors needs to be equal to or greater than the loan amount you will secure for your property acquisition. For example, for a $10M deal, you and your guarantors need to have a net worth of about $7M.
What property characteristics are you looking for?
Including property size, location, class, year, price, etc.
What is your real estate syndication’s business model?
The business model defines your real estate investing goals and strategy. Many real estate syndications have a five-year cash flow analysis, and most will sell at the end of year five. However, some syndicators never held a real estate deal for longer than seven years and never sold a deal in less than 2.5 years. So the typical holding time for most real estate syndication deals is from 2.5 to 7 years.
What type of financing are you looking for?
There are several types of financing, including bank loans, recourse, and non-recourse loans, and then even within the non-recourse loans, there are Fannie Mae and Freddie Mac loans and some other sources of financing.
What is your property management strategy?
Some syndicators hire a third-party property management team. However, some choose not to hire a third party and decide to self-manage. The reasons for this decision can be that it is a small property or because you want to have more control and visibility over your assets. In this case, you might want to build your own management company.
You need to think through this as you buy your first syndication deal and move forward to buy your second, third, fourth deal, etc. Do you want to build your management company, or would you like to outsource property management to a third party?
Step 2: Have your real estate syndication team complete
It’s vital to build your real estate syndication team before starting with the acquisition process. Once you start analyzing the deal and prepare to make an offer, it is not the time to be looking for an attorney, for example. Read our article on how to build your syndication team.
Step 3: Get pre-qualified
The pre-qualification process is designed to estimate income, assets, etc. It is different from the pre-approval (more relevant to single-family), where we need to get actual documents instead of estimates.
One of the benefits of apartment acquisition is that you don’t need to get pre-approved by a lender. If you are syndicating a real estate investment deal, you are using more assets and resources than you would have on your own (such as buying a single-family home). So even if you purchase your deal with your own money, as many people do, you still don’t need to get pre-approval.
To get pre-qualified, you need to put your personal financial statement together, define your SMART goals, and your property size and go through the business plan questions.
Step 4: Define your criteria
When looking at multifamily real estate investment deals, there are multiple criteria you need to consider.
Real estate syndication deal price
While the importance of the price might seem obvious, it’s still an essential question to ask yourself. For example, if you buy a deal with your own money, the price will be your primary criterion because you have limited funds.
Therefore, your personal liquidity and your net worth in terms of the down payment plus what you can secure as a loan limit the price range you could go for. However, if you are syndicating a deal, you have more flexibility with the price than on your own.
Number of units
If you are new to real estate syndication, we recommend that you look for deals in the range of 50 to 150 units. Avoid going for $20M – $30M deals even if you have an experienced co-sponsor. Because it will be hard for you to get these deals awarded as you will compete against buyer groups with much more experience than you.
Syndicate your first deal or two, and then go after the bigger deals once you feel comfortable. Remember, it is not essential to go after more extensive properties (200+ units). Bigger isn’t always better. Find your sweet spot and stick to it. You can make the same returns on a 100-unit deal as on a 200-unit deal.
Property location
When it comes to commercial real estate syndication, choose your investment property location by selecting a landlord-friendly and business-friendly environment with an above-average cap rate and healthy economic drivers (e.g., job growth & population growth). The affordability gap is also an essential factor.
In fact, you don’t have to invest close to your location (especially if you are a passive investor). For example, our Founder Perry Zheng lives in Seattle, but he syndicated properties in Texas. Listen to this podcast to learn more about his experience. As long as your property management team is doing a good job, you will rarely have to visit your properties. So pick three-four major markets and focus on them.
Property class
Most multifamily syndicators purchase B&C class properties.
Business model
Most syndicators analyze deals using 5-year cashflow projections and simulating a sale at the end of the five years. This is a standard business model for commercial real estate syndication.
Property financing
Consider whether you can get a non-recourse loan which is what most people want. However, in some cases, recourse loans can be more advantageous depending on your holding period and the type of deal you buy.
The rehab
If you are a beginner, we suggest getting a deal with low to moderate renovation requirements. In dollar amount, it means that if you take the number of units and multiply it by $5000 per unit, this per-unit amount will be distributed over the entire property, including the exterior. For example, if you buy a 100-unit property and the rehab costs more than $500K, we suggest you think twice before getting into this project. Managing this renovation will become a significant part of your business plan.
Once you become more experienced as an asset manager, you can take on properties with more renovation requirements. The exception will be if one of your co-sponsors has a lot of experience as a contractor.
Physical assets
Physical assets are things like individual A/C units vs. a chiller system, a master electric meter vs. individual electric meters in each unit, individual water heaters vs. central water heating, etc. You will have your personal preferences once you get more experience. There are no specific rules as all these physical assets have their pros and cons and impact your profitability differently.
Step 5: Locate the property
People in your real estate syndication team could be your source to locate the property. In the real estate space, it is really about who you know, not what you know. Your attorney, your broker, your contractor…. These are the people you should ask first before starting your search outside your network.
Keep in mind that locating real estate investment deals takes a lot of time, energy, effort, and, most importantly, relationship building. The better you are at building relationships, the more deals you will attract. If you doubt your capabilities in relationship-building, then you better get a co-sponsor who is a pro at it.
Some places to find potential real estate syndication deals:
Loopnet.com
It’s a great resource to look for deals and identify brokers in your target markets. For example, you pick Austin, TX, and you can search for properties on Loopnet. All the deals that are for sale in that market will come up in your search results. What’s more, you can see the brokers in this market that are selling these deals. We suggest casting your net wider and putting in search criteria for properties smaller and larger than those you want to consider. This way, you will see more brokers in this market and can grow your broker database.
Listing brokers
This is probably one of the most critical resources. 80%-90% of your deals will come from your relationships with listing brokers.
Property owners & Investor groups
There are plenty of meetups and seminars where you can meet owners and passive investor groups. You must attend those networking events and build relationships with both.
Step 6: High-level financial analysis
Before driving to a property one hour or more away, run some numbers and get some industry data. There are plenty of online resources to analyze the market, household income, and overall demographical, and socioeconomic situation in the area of your target property. Among them are:
https://www.marketwatch.com
https://www.bls.gov/
https://alndata.com/
https://www.costar.com/
https://www.loopnet.com/
What you should look for are the following stats:
- Rent comps
- Sales comps
- Demographics
- Population growth
- Rent growth
- Occupancy rates
- Cap rates
Once you get the deal from a broker, you can do a quick high-level analysis using the following metrics:
Unit mix, market rents, and proforma rents
The unit mix is a breakdown of units by the number of studios, one bedrooms, two bedrooms, three bedrooms, etc., together with their size in sq. feet. Then you need to analyze what are the current rent prices for these units. A lot of times, if it is an on-market deal, you will have the proforma rent too. Once you have all this information, you can estimate what the proforma rent will be in the future by using the following formula:
The number of units x the proforma rent x 12 = annual gross potential proforma rent. This is your annual estimated income.
Then multiply this number by 93% to calculate the total income. Why 93%? Because we are deducting 10% economic vacancy from 100%, and then we are adding some other non-rental income. So if you don’t include non-rental income, take the gross potential proforma rent and multiply it by 90% instead of 93%.
- Subtract the expenses. Your operating expenses depend on several factors. The first one is the size of the property. Then it’s location, insurance premiums, taxes, etc. It’s essential to understand the range of these expenses. In general, it’s almost impossible to own and run an apartment building even under 60 units for less than $4000-$5000/unit/year or $5 ft2 – $7 ft2/ unit/year.
- Calculate net operating profit (NOI) using the following formula:
Estimated NOI = (Gross potential proforma rent – your expenses) / Market CAP rate.
- Compare your estimated NOI to the property price and consider renovation. After calculating the property value by estimating your NOI, add another $1000/unit/year of expenses and deferred maintenance and consider the renovation expenses discussed above. Then decide if you want to spend more time on this property before moving to the next step.
Step 7: High-level property inspection
Before you spend a lot of time doing property analysis and digging deeper into details, do a high-level property inspection. Don’t tour the property before having an outside look because you will ruin your relationships with listing brokers if you tour it without the broker being there.
You want to avoid wasting your time and the agent’s time. Setting up a tour is like test-driving a car. Test drive is one of the salesperson’s techniques to persuade you to buy that car. Therefore, if you end up doing multiple tours and don’t make any offers, the brokers will likely assume that you are wasting their time.
In other words, before going inside to talk to the staff or contact the leasing agent, drive by the property to understand the following:
- Does it match the criteria outlined above?
- Does it look good? Does it have a curb appeal?
- What about the location?
- Who is living at this property? For example, if you drive by the property in the middle of the day and the parking lot is full, it is a good sign. At night, are there any signs of loitering or vandalism? Do you feel comfortable being around that property at night?
- Is there trash lying around the property? Is there graffiti on the walls? Does it look like it needs maintenance on the outside? If the problem seems really big, it might not be something you want to deal with.
- What kind of improvements can you make to this property? What are you going to do with the exterior and amenities?
- Do YOU like it? Do you see yourself owning, nurturing, and adding value to this property for the next five years?
- Is it really a B-class property?
Now, let’s look at an example:
Let’s say you got a 120-unit deal, and the asking price is $12M. If there is no asking price and it says TBD by market, you can call the broker and ask what the seller’s expectations are. The property is stabilized with the occupancy in the 90% range and was recently rehabbed (so there is not a lot of deferred maintenance) with some value ad opportunity. The question we are asking is: Is this a deal worth pursuing? Here is how you determine that:
- 120 units. Proforma rent is $1000/month.
- Annual gross proforma rent = $1,440K
- $1,440K x 93% = $1,339,200 total income (not just rental income. If you want to calculate only the rental income, multiply GPR by 90%).
- Expenses: $4K/unit x 120 units = $480K
- NOI = $859,200
- Estimated value (or the price you should pay for this property)= $859,200/ 7% (market CAP rate) = $12,274,285
- Subtract the required capital improvements (99% of deals need some of them). For a moderate value add, you can estimate them at $3K-$5K per unit. So if we pick a midpoint for our fictional property, the amount will be $4K X 120 units = $480K.
- Subtract the CAPEX amount from the estimated property value: $12,274,285 – $480,000 = $11,794,285. Compare this amount to the asking price of $12M
- Ask yourself: are you within the 15% striking range? 15% of the asking price is $1,800,000. So, our example property is within this range. If you are more than 20% off the asking price, it’s doubtful that you will get the deal.
This kind of property is the perfect candidate for the high-level financial analysis that we described above. However, suppose you get a property where there is a large fixer-upper, with tons of value adds or a lot of renovation or deferred maintenance. In this case, it’s going to be more complex to model using this high-level analysis.
However, you must do this kind of analysis before going and having your first look at the deal. It’s important to note that this high-level analysis is rapid and quite estimated. Therefore, if you have an offering package, a rent roll, and a T12, you must do a more thorough analysis using property analysis tools, 5-year cash flow, T12, and proforma buyer expenses.
Step 8: Property tour
As we mentioned above, avoid doing the property tour until you’ve done your high-level financial analysis, driven by the property, and vetted it against your criteria to ensure this property is what you are looking for. Additionally, we also suggest doing a 5-year cash flow analysis before the property tour.
While on the property tour, you should have the offering package with you if there is one, and your notes from the property analysis, the questions you would like to ask the broker, and the things you want to confirm with the site manager. Some questions you should seek answers to during your property tour are:
- Are there problems? If yes, what kind of problems?
- What are the opportunities?
- What is the typical condition of an interior unit?
- What upgrades have been done in the office?
- How professional is the staff? How do they dress? What is the number of staff at the property?
- What are the amenities? Do they have a club house? Fitness center? Swimming pool? Dog park? Laundry facilities? Covered parking? Reserve parking? etc. Some of these amenities that are not yet on the property could be a value add opportunity.
- How are the utilities handled? Is there an opportunity to save on utilities? Or to bill back for utilities?
- Are there opportunities for other income? What can potentially be built?
To cover these questions, you need to follow a few simple steps during your property tour:
- Interior. Check a few interior vacant units, upgraded and non-upgraded (if applicable), and check the office and the common area. Ask the property manager if they had, for example, $300K how would they spend it? This question will help you uncover much more details than asking directly about problems that the property has.
- Exterior. Walk the exterior of the building. Do this after the tour to see the amenities: parking lot, pool, landscaping, laundry, etc. Check deferred maintenance, foundation, etc. Take your contractor with you to have a professional opinion. Check the cars in the parking lot and try to determine the clientele.
You need to confirm all this information with your property management company and discover what value-add opportunities they see. Therefore, the ultimate question is: what value can you really add to this deal?
A property tour is also an excellent opportunity to build relationships with the broker or the seller.
Allocate some time after the property tour to drive around the market and look at some rental and sales comps, the closest shopping area, the closest gas station, the closest grocery store, etc., to start planning your market survey.
Step 9: Submit your multifamily LOI.
To submit your multifamily LOI, use a 1-2 page letter of intent and outline:
- The price (leave yourself some room to increase it).
- The amount of earnest money. Usually, it is between 1% and 2% of the purchase price. Depending on the market, some of this money is “hard” and non-refundable. In multifamily, that’s the meaning of “hard” money. If you are uncomfortable with the non-refundable earnest money, you might want to look for a deal in another less competitive market. However, if you decide to take the risk with non-refundable earnest money, ensure that this money is subject to seller default, clean title, and clean environment.
- The feasibility period.
- Your real estate resume. If you are buying a deal with your money, you should have proof of funds. If you have a co-sponsor, you should have your co-sponsor’s resumé and track record. Especially if you are new to real estate syndication, it’s crucial to have a co-sponsor with experience in that market.
Step 10: Negotiate the contract
We will discuss contract negotiations in more detail in our future articles. However, be ready for several “best and final” offers, being called for a buyer interview, and some more additional steps before you start negotiating the contract.
