Go Solo OR with a big Multifamily investor

[Sanjoy V.]

I have been trying to find a decent deal with good cash flow and cap rate in Texas for a year and seems less and less likely; Dallas and Austin. Worry about OK city, although tempted sometimes to commit there. The caps are inflated, too much competition, I have been outbid several times or no one contacts me. Looking at less than 45-70 units in the 3-5mil range. Like the value add strategy but not sure what time commitment it needs? Even if I can manage to get something impossible in the current scenario. I am very busy, the question is, is it worth to go solo or is it best to invest with a bigger multifamily group or those online crowdsourcing deals, which claim a minimum return of 8% plus some IRRs at 17% give or take. the risk is still passed on to the investor. You have no true asset. How does this compare to you actually buying something on your own and give it to Mgmt company? When you do on your own, when you sell, I think you do better? Or no. Can anyone analyze the risk vs benefits with doing solo vs investing in a multifamily group, what’s the standard return and IRR. Plus you are directly investing cash into these, vs with a loan you just need 20% of the value; although cash on cash should still be the same, I guess. I am looking for advice, cause looks like I am quite discouraged by the market and it’s hard for a first timer to break into this. I like the balance of cash flow and appreciation. Thoughts on what the BP experts would do in this situation? Thanks so much!

[Omar Khan]

@Sanjoy V. Regardless of what avenue you choose, there are NO minimum guaranteed returns. The 8% preferred you refer to is for guidance purposes. Ideally, you should be getting that but if the deal goes south, in all likelihood, most Sponsors will not step in to invest their personal capital (regardless of how "trust worthy" they sound/look). 

Assuming you are a high W2 earner in a demanding, full-time job. Hence, even if you buy a property outright, you should be prepared for headaches in dealing with property managers. Experienced developers/syndicators face the exact problems. Either you will get nickle-and-dimed (expense will be inflated, tenants will be turned over quicker) or other service related headaches will occur i.e. managing your manager can become another full-time job. This isn't to dissuade you but to provide perspective as there is a big learning curve. 

If you work with a syndication group (full disclosure: I am a syndicator), you will not have to deal with the operational headaches. The sales pitch is: mailbox money/passive income. But we all know there is no such thing as mailbox money/passive income as you have to pick the right Sponsor, the right market and the right project. But it is less work than outright management. In most cases (read the PPM and legal docs before sending any money), the Sponsor has managerial control but you, along with other investors, are an equity owner in a building through your investment into the LLC that owns the property.

From a valuation perspective, I would urge you not asses properties simply off cap rates, IRR or cash-on-cash only. Each metric, like all metrics, is open to abuse and can be manipulated. In particular, the cap rate should be considered as a measure of risk and NOT solely as a measure of return (when acquiring).

E.g. Class A type properties have lower cap rates than Class C type properties. Why? Because the market views Class A type properties as less risky and hence is willing to pay a premium for them.

Specific investment strategies like value-add add another layer of complexity. For example, if your plan is dependent on renovating 50% of the units by the end of 2 years, so that you can re-finance, what happens when the renovations go behind schedule? Do you have enough cash in the bank to withstand a few months/years of performance below forecasts? You have to look at these and other issues in granular detail before deciding what strategy to pursue.