Multi Family Syndication Questions (Advice Needed)

[Sean Richway]

Looking at getting started in multi family acquisitions and I wanted to pick the brain of the members on the site for some questions/topics that are not discussed as much.  These are a bit more detailed on the GP side but wanted to get some perspective from others regarding these items:

1.  When syndicating apartment buildings I am assuming the GP is raising the acquisition fee and Cap X requirements as part of the LP equity amount?

2. Besides the rent roll and T12 what would you suggest reviewing or requesting?

3. Is the asset management fee charged by the GP factored into the CAP rate? I am assuming it is not since it can change from sponsor to sponsor but wanted to make sure.

4.  Any tips when interviewing a potential property manager?

5.  Any specific metrics or stats  you look at when evaluating a suitable market?

6. Any specific processes or procedures followed when it comes looking at a deal, issuing a LOI, underwriting the deal, signing the purchase contract, raising the capital, securing debt, etc. More looking for timing and at what point each step would be done.

Those are the main points I had right now I was curious about.  Appreciate everyone's help and feedback!

[Brian Geiger]

@Sean Richway

When I underwrite deals from the beginning, I will do the following:

1. Review the rent roll

2. Review the T-12 (Profit & Loss Statement)

3. Input the data into a financial model (For Expenses, you want to see expenses take about 50% of the Effective Gross Income. If the expenses significant lower than 50%, then income may be grossly overstated or the property is poorly managed because very little money is going into it. If the expenses are much higher than 50 % of the EGI, then we may have some value add play here that will require to cut expenses.) The 50% Rule comes in handy here. 

4. Research the rental comps in the area and add it to the model.

5. From the comps, I would see where there may be some value add potential in regards to rents.

6. I would then come up with assumptions on how I would manage the property based on how the property was managed before (The reason why I love due diligence so much is because I can verify my assumptions by doing the due diligence).

7. Adjust the purchase price until I get the IRR and CoC metric I am looking for.

From there I would submit my LOI to purchase. When I do that, the ball is in the seller's court to review it. I would add a deadline to the LOI. The purpose of the deadline is to expedite the process. During the phase between the LOI and the Purchase Price, we are negotiating terms (the deadline to have the due diligence completed by) and price. The broker may come back with a counter-offer. The back and forth happens until we agree on a purchase price. Once we agree on the price, I would have my attorney draft a Purchase and Sale Agreement that outlines the price, the time frame for due diligence and a refundable earnest money deposit of usually 1% of the price going hard after 30 days of due diligence.

As far as a financial model template, I recommend using the following for when you are just starting out:

1. Michael Blank Deal Analyzer

2. Jake and Gino Deal Analyzer

3. Think Multifamily Deal Analyzer

You will have to purchase these financial models but the goal here is to use one of them to familiarize yourself with underwriting apartments. Overtime you should create a model that you will use for your company. As far as the LOI template is concern, I can show you an example. Just PM me but remember each deal is different so do not follow my template verbatim. Instead I highly recommend having an attorney draft it for you.

When doing a rental comparable analysis, you want to go on sites like Apartments.com, Hotpads.com and Zillow Rentals to get an idea of the rents in your area. You can also speak with brokers and Property Management companies in your area to get an idea of the rents in the market. Be sure that you are comparing Apples to Apples and not Apples to Oranges. (i.e you want to compare the same number of rooms and baths with other apartments in your area). To further explain this, your subject property will have a 2 BD X 1 BA at a 780 Sq ft. you want to compare this with what other apartments (usually within a 1 mile radius depending on the market) are charging for the same characteristics. 

For job growth: I use the U.S. Census.gov, CityData.com and the Department of Numbers.gov (Updates Monthly).

For Unemployment Rate: Data.io.USA, U.S. Census and City Data

Rental Demand: U.S. Census, CoStar (Paid Service).

I recommend that you read through market reports to find out about rental demand, job growth, population growth and unemployment data. You also want job diversity. You would not want ONE company employing more than 30% of the market. I listed some market reports for you so you can get some understanding on the markets you are looking at:

Marcus & Millichap’s Annual U.S. Multifamily Investment Forecast

CBRE Biannual Cap Rate Survey

Integra Realty Resources (IRR) Annual Viewpoint Commercial Real Estate Trends Report

Zillow Annual Consumer House Trends Report

RCLCO Quarterly State of the Real Estate Market

PwC Annual Emerging Trends in Real Estate

I hope this helps and please reach out if you need me to clarify something.