Total Return for Multifamily Syndication Investment?

[Shafi Noss]

Hi everyone,

I was talking with an investor friend the other day and he asked me a question I didn't have an answer for. He asked "So if I were to invest 100k in a multifamily deal, how much would I make total over a 5 year investment?"

Of course this varies greatly deal to deal. But he was trying to get at the fact that there are a lot of pieces to a syndication: cashflow, tax advantages, value add, loan pay-down, and appreciation over time. What I couldn't quite answer is what do these look like, ballpark, bundled together?

For example:

If he invested 100k for 5 years receiving an 8% preferred return on a value add property at an income of 200k, what would that look like for him? Here's a calculation to give an idea of what I mean:

-40k cash from cashflow
-5.5k tax benefits from depreciation (100k / 27years x 5years x %30 tax bracket)
-100k cash on sale
-10k cash on sale for the 2%(?) appreciation per year
-20k (?) on sale for value add
Total: $185k over 5 years == $37k per year

I know this isn't perfect, maybe its not even a good approximation. Does anyone have a sense of what would be a good estimate from an investors perspective?


Thanks very much,
Shafi

[Brian Burke]

This is very simple. Just look at the equity multiple.  Most multifamily syndications have a 1.4 to 2.0 multiple over a five year hold.  A 1.4 multiple would mean $100,000 invested gets $140,000 back.  A 2.0 would get $200,000 back and so on.

This calculation doesn’t factor in tax benefits.  And it shouldn’t, tax benefits are a fringe benefit. Just like a job seeker comparing employment options, if everyone is offering two weeks vacation what they are really looking at is the salary.  Most real estate offerings are going to offer similar tax benefits, although some decisions the sponsor makes can influence it to an extent (bonus depreciation and cost segregation).  Besides, any depreciation deduction is recaptured when the asset is sold, albeit at a lower tax rate than the ordinary income that was offset by the depreciation in the first place.

Another important consideration is that an investment yielding a 2.0 multiple isn't necessarily a better investment than one yielding a 1.4 multiple. Higher multiples could be the result of more aggressive financing, which influences risk, or bad underwriting, which just makes them a pipe dream. The experience of the team, the quality of the underwriting, and the ability to withstand adverse economic cycles (meaning conservative debt) are more important than chasing high projected IRR's or multiples.

Finally, the composition of the cash flow is also an important consideration.  If you are looking for current cash flow, the cash-on-cash return might be more important than the multiple.