For a real estate syndication to be successful a clear and well-defined set of steps should be followed. This process establishes a business plan for the managing partners to follow and provides passive investors with the knowledge they need to make an informed decision – thus ensuring the syndication is acting together towards the same goal. While not every syndication follows the same path, all successful processes follow a linear path with a distinct beginning, middle, and end.
For a value-add multifamily real estate syndication there are five common phases to a syndication. These are:
The first stage of the syndication process is the property acquisition. This step is taken care of by the managing partners, also known as the sponsors or syndicators. Identifying, underwriting, and getting a property under contract is a lengthy and complicated process. REEP properties must meet a strict set of criteria before we will even consider touring it. We dig deep on its crime, location, surrounding job market and more. If it passes this initial exploration, then we take the property through a lengthy underwriting process. If we are happy with all the data that is revealed, then we look at making an offer on the property.
Once a contract is signed, we work to develop the business plan detailing how we will improve the property over the life of the investment. Together with our in-house property management team, REEP Management, we create this business plan. Once we’re all confident in the property analysis and the plan, we then take the proposal to potential investors, such as you, to see how much interest there is. After everyone filled out the investor documents and deposited funds, we then finalize the purchase.
Initiate Business Plan
The word “value-add” implies exactly what it sounds like; we’re enhancing the property’s value. From the moment we close, our REEP Management team is on-site and begins making immediate improvements.
Working from the business plan, our property management staff starts improvements on any unoccupied units, implements new branding, and begins to address any common area issues. As leases expire, additional units are remodeled. Rents are raised on all upgraded units and over time the value of the property is increased through these property wide upgrades and improvements. We also look for additional amenities we can add to the property that are in demand by today’s renters. Examples include – dog parks, package lockers, and outdoor kitchens. This process is also sometimes referred to as creating Forced Appreciation.
Renovations and property improvements increase the value of the property itself.
For example, the average rent increase for a renovated unit is $100 per month. This rent increase generates an additional $120,000 in rental income for the year, which, at a conservative 10% cap rate, equates to $1,200,000 in additional equity for the property.
Through this process, the managing partners can leverage this additional equity to potentially refinance or sell the property depending on market conditions at that time. If the property is refinanced, a portion of the initial investment is returned to the investors. The original share of ownership in the investment would stay the same – allowing all the investors to continue to benefit from the properties continued appreciation and equity growth, as if the entire amount were still invested.
For example, if you invested $100,000 in a value-add multifamily syndication and the sponsors refinanced the property after 18 months, returning 40% of your initial money, you would receive $40,000 back from your initial investment. This distribution would not affect your shares in the investment, and you would continue to benefit from distributions based off your initial $100,000 investment.
While retaining the asset, the asset continues to appreciate both through an organic increase in property value and through forced appreciation, which is achieved through property improvements. The property management team also works to improve the operations and occupancy rates of the property. Through these methods improved cash flow is generated. The cash left after expenses is distributed to investors as a return on their investment. This cash flow is also referred to as a cash-on-cash return.
During the hold period, as new tenants move in, or leases are renewed rents are increased. If the unit receives a rehab during this period, the rent increase can be significant. This process results in increased revenue and property value. The hold period is typically five years but could be longer depending on the property.
Selling the Property
By the end of the hold period the business plan should be completed. At this point the forced appreciation process is complete. The property has had all the planned upgrades and the property manager has had time to improve the property operationally. Given this, it is time to sell the property and benefit from the property’s increased sales value.
Once the property is sold, the investors will receive their final payment from the sale proceeds.
Each transaction is unique, and not all syndications proceed through all five phases. However, this an example of the common path syndications take.
As a passive investor, there is a minimum amount of work required to participate in the syndication process. However, you still want to remain aware of the normal syndication phases to keep yourself informed of any developments.