Whats the Average investor returns for Multifamily investing

[Sanjoy V.]

I have looked at Multifamily Investment over the last few years. I’m trying to understand what’s the average return, IRR, cash on cash and also average five year return if you invested $100,000. Is there a industry norm for syndication, returns etc, fee for management, initiation fee etc. Understandably,everybody has different strategies. Also trying to understand what’s the average percentage taken by multi family management syndicator for management, 1 to 2%? Averages for these; 1. Deal initiation fee at closing 2. Syndicator management fee monthly 3. Percent split on profits 70/30 or 80/20, waterfall? 4. COC return, average IRR. 5. If investor puts in 100k what do you expect to make at 5 years including the invested amount. Thanks in advance!

[Brian Burke]

@Sanjoy V. this varies widely, of course, as each deal is different. And not all syndications are created alike. Just because a sponsor projects a higher IRR than another sponsor doesn't mean that deal will perform better. It could simply be that one syndication sponsor is more aggressive in their assumptions than the other. The only thing certain about any projection in a syndication investment is that they will be wrong.

For class B&C multifamily assets acquired today, you should expect to see CoC returns in the low to mid single digits in the early years, growing to low double digits by year 5 or so. If the project is a particularly heavy value-add, in other words requires a lot of renovation and even a resident profile change, you could see zero CoC return for the first year, maybe even a bit longer.

Factoring in proceeds from sale, you should see IRRs in the mid-teens.  13% to 17% depending on the length of the hold and the risk profile of the investment.  Assuming everything goes according to plan...massive economic events could easily disrupt those returns.

As to your questions on fees:  Sponsor's typically charge acquisition fees ranging from 2% to 3% of the purchase price.  Asset management fees tend to be 1%, but the big question is 1% of WHAT?  Some charge 1% of gross collected income, some charge 1% of the capital raised (annually), some charge 1% of the purchase price (annually), some charge 1% of the "estimated market value" of the property (annually) and some charge 1% of the debt plus invested equity (annually).  So watch out for just "1%", be sure you understand how it's calculated because the dollars would vary massively.

Waterfall splits can range all the way from 80/20 to 50/50.  And there could be steps in between.  For example, a lot of my offerings have been 100% to an 8% return, 70% to a 12% return, 60% to a 15% return, and 50% above a 15% return.  Structures can vary from sponsor to sponsor and even deal to deal from the same sponsor.

Your question 5 refers to the equity multiple.  A multiple of 1.5 would mean that you put in $100,000 and get $150,000 back (total--that includes the return of your principal, so a $50,000 profit).  Typical multiples range from 1.2 all the way to 2.5.  It depends on how long the intended hold period is.  Shorter holds can yield higher IRRs but lower multiples, and vice-versa.  For a 3-5 year hold, in most cases you could expect to see 1.4 to 1.7 multiples, whereas a 10-year play might be a 2.3 to 2.7.  This is one of the reasons a lot of investors favor shorter holds.  If you can do two 5-year holds and get a 1.5 multiple on each, that would be 3.0 over 10 years.  It's tough to get a 3.0 from a single ten-year hold because a lot of the wind pushing the multiple is the value-add, and you only do that once on a 10-year hold, versus getting the benefit of two value-add pushes if you do two sequential 5-year holds.