MF Investment Durations

[Ed Matthews]

My wife and I are in our first year of MF investing; learning a lot by reading books, watching videos and podcasts, and attending Meetups and seminars around DFW. We've invested in our first deal. 

The deals we've seen have so far had an underwriting time range of 3-5 years. Why is that range so typical?

One big reason to get into real estate is to hedge against inflation and as a means to get long-term cash flow. That's the mantra I hear from people who buy, hold, and rent out SFRs, but I don't hear that in the MF world; the message I hear is getting in and out of a deal in a few years. Is there a reason syndication wouldn't work for a 20 year or longer period? Or is the legal and financial system structured to offer substantially better returns to these shorter deals?

Thanks!

[Spencer Gray]

I believe 5 years is the average hold period for syndicated real estate, although there are still plenty of groups out there with 5-10 year investment horizons.

I think you're right that to take full advantage of the inflation hedge benefit of real estate you need to take a long term approach. It's really the difference between trading and investing - hunting and farming.

The truth is that sponsors are motivated to get into their promote and have to return investors capital to do that.

The best of both worlds is to refinance in 3-5 years, return most if not all of capital, while retaining ownership and (reduced) cashflow.Then by reinvesting your tax free proceeds you start to compound your return, assuming the market provides good opportunities to invest.

I buy like I'm going to hold forever. I underwrite for 7-10 year holds and like to use fixed, rate long term (10-35 year terms) non recourse debt. This greatly mitigates interest rate risk and market cycle risk. If an incredible opportunity presents itself in 3-5 years that meets or exceeds your targeted return, you have to explore the option. If there are other opportunities on the market to reinvest your capital, it might make sense to sell.