Real estate syndication

[Louis Hemmler]

Hi everyone,

I currently own a few rental properties, but I’m looking to transition into real estate syndications. I've been introduced to GDL Asset Management/Green Water Asset Management, which primarily focuses on multifamily properties in Arizona. Has anyone had any experience with this company or can share insights into their reputation?

Thanks!

[Evan Polaski]

@Louis Hemmler, no direct experience.  

As Chris and Justin note, the old adage of "vet the jockey (sponsor), not the horse" does not work anymore.

While the sponsor can definitely screw up a deal, investing with the "best" sponsor is bad deals is a more surefire way to lose money.  

So, a few things to highlight or add to Justin's list:

1.  I don't like that their website only talks about "project level returns".  As an LP, I only care about net returns on full cycle deals, because project level can, and often are, bring down project level returns significantly once you take into account GP fees and carried interest

2. Floating rate debt, even with a cap, is still floating rate debt.  Buying an interest rate cap is both temporary and is really only a prepayment of the interest rate for the term of the cap.  Many, many multifamily deals that are going sideways today are due to floating rate loans with caps. Going-in cap rate should be higher than interest rate. Historically, the standard fundamental was that your going-in cap rate should be higher than LONG TERM, FIXED rate interest.  But with the ability for sponsors to buydown floating rate caps for the next 3 yrs, it is up to you if you believe their marketing.  Personally, if prevailing rates are 6% and you are buying at a 5% going in cap-rate, even if you buy your 6% down to 4.5% for the next three years, you are still in negative leverage.

3. What is the actual basis of the property.  Most deals will tout "buying this deal at only $XX,000 per door".  But, in reality, when you add in the acquisition fee, the interest rate cap price, the renovation costs, etc, their real basis per door is significantly higher, and therefore need to sell at that price just to truly break even.

4. Understand where distributions are coming from. Many groups show proformas down to NOI, talk at high levels of loan terms, and then show projected distribution rates. But when you back into their math, NOI less debt service does not equal distributions. They are engineering those returns by over raising equity. While there is nothing illegal about this, and there is certainly value in over capitalizing a deal to have reserves, this is a balance. Many investors only look at projected returns and invest based on that, and therefore don't realize that the property is barely generating cash flow, because they are getting a 7% return day one.