Calling all rehabbers- a case for passive investing

[Joe Archbold]

Recently, a solid, all brick ranch home came on the market in one of the neighborhoods where I manage my investments. It is a 3 bedroom, 1.5 baths, home in a very nice area and seemed below market. I drove by, stopped, and chatted with him. He let me tour the house. As we talked, he mentioned that he had outlived his parents, siblings, and spouse (not an easy situation). I was, of course, complimentary of the home. It was obvious that he has been smoking in it for at least a decade. Everything was original from the 50s and in terrible shape, a serious gutting.

Trying to assess the basics of the project. I was concerned whether it be a bidding war for a total rehab? And what could I sell it for as it is the worst home in the neighborhood? And it needs everything. But I am not deterred. To get my bearings straight, I contact my realtor/mentor with more experience than anyone I know.

I told him that I thought this could be a good candidate for a flip. It’s in a good area. Blah, blah, blah. He sent me the listing, comps, and the bad news. He gave me the current status of our market for flips. The listing says, “calling all rehabbers… best offer by such date”. He said that since I would be competing against rehabbers that it’s gotten more complicated. Rehabbers in our area are looking to build the project into a job for themselves. Meaning project is their job, cover their costs and the payroll that’s it.

That was not my plan. I thought to outsource a bunch of work and make 50% at the sale. So spitballing, I invest approximately $100K and walk away with $150K. That not only sounds unlikely, but it also will be an extensive amount of my time.

Conversely, If I invest as a Limited Partner in a syndication, I can take that same 100K, and here is the possible scenario.

1. 1.) Contact a broker-dealer that I know, like, and trust. And let them know that I want to engage in evaluating syndications. They will ask some questions and ask to fill out an investor questionnaire for suitability.
2. 2.) Based on the information provided, they will start sending project details. Common projects are large multifamily apartment complexes focused on a value-add strategy to reduce risk, taking Class B products and improving them to Class B+ or A equivalent. The details for these projects outline the team managing the project and their strategy. It includes the market demographics and the business plan. This data will have been analyzed by the broker team and reviewed before inviting investors to participate.
3. The data will also include the investment structure. Many are structured as 7% preferred return + share of profits with 70/30 LP/GP profit split to 2x multiple. Basically, the investor should receive a target 7% annual income paid monthly. At the end of the project or sale, the LP will get 70% of profits to achieve 2X investment. Hold Period: 3 to 5 years.
4. 3.) The next step review/ sign the PPM (private placement memorandum) and fund the project.
5. 4.) Within several months, the investment is cash-flowing, unlike a house flip that could be hemorrhaging cash.

So in a 3-5 year period, an LP investor may be able to take 100K and achieve a 2X multiple.

Joe Archbold