Want to get into multifamily passively

[David D'Ambrosio]

I currently own SFHs but want to try to get into the multifamily space in the next few years.  I have done a fair amount of research and realize I don't have the drive nor time to be in on my own. I work full time and I am an accredited investor, so it seems being an investor in a syndication makes sense for me.  Does anyone have any advice on people or firms to look at?  Im specifically looking to invest for long term cashflow, so Id like to partner with someone who in interested in doing a value add play but whose intention is to hold long term.  It seems to me that a lot of syndications are looking to go in, add value, and sell out after a hold time.  I want to be a long term owner getting cashflow longterm, similar to my philosophies with single family holds.  Thanks

[Brian Burke]

I appreciate the mention, @Joel Owens!

@David D'Ambrosio, I don't blame you at all for wanting to avoid the middleman.  My observation of the crowdfunding platforms was that there were a lot of inexperienced sponsors listing deals because they had no investor base from which to draw, so they turn to the internet.  The concept has come a long way, though, so maybe that's changed as of late.

But my opinion is still that investors invest with groups they trust.  Those that they develop a relationship with.  It's not a "deal" decision, it's a relationship decision, and the crowdfunding avenue takes the relationship out and just makes it transactional.  I think that's why they struggle on the equity side and have better success on the debt side.

Not to mention that most established investment sponsors have a fairly robust base of investors, and if they are doing their job well, a steady stream of new investors coming in from word of mouth and referrals.  That's the primary reason that I don't use the online platforms for investor recruitment.  I just don't need to.

As you seek a group or groups to invest with, be sure to look for ones that have been around long enough to have seen a few cycles.  Don't let them get their initial experience with your dollars.

Ask about actual performance versus projected performance.  Anyone can tell a story with projections and mold that story to their advantage.  But doing so ensures a short life in the passive investment business as those projections are ultimately not achieved.  But I see it all the time.

As to hold times, there are a couple of reasons why investment sponsors tend to favor shorter hold times.  On the self-serving side, they participate in the upside so they don't get paid (much) until the property is sold. 

But most of the other reasons are external. First, the question most passive investors ask is "when will I get my money back." There are far fewer investors favoring undefined or long hold times than short. Then there is the equation of return on equity. Sure, your cash on cash return is high in year 8, but the return on equity is typically very low by then. A sale, followed by recycling the capital into a new offering, increases your return by layering in the gain from the previous sale along with your original capital. And with a value-add strategy, there is typically a large lift at the beginning of an investment cycle as the property is rehabbed and income is increased. After that the increases slow dramatically, so capturing the exit sooner results in a higher IRR. And then there is the issue of deterioration. For very long hold periods the property is going to need a second rehab somewhere along the line, and that could result in a capital call where the investors have to put money in, and investors really don't like to do that!

That said, I tend to underwrite all of my acquisitions to a ten year hold.  Not because the investors are looking for long term cash flow (but some are), but because at some point in the not too distant future there is likely to be an adverse market cycle.  The investment's business plan must be prepared to hold long-term in order to ride the cycle to the other side, to sell at the next market cycle peak.  Now if the market cooperates and the property can be sold for a huge return in three years, that's great, but there has to be an alternative plan, and a longer hold cycle along with stress tests and conservative underwriting are the best line of defense.

Good luck in your search!