SO HOW MUCH WILL I MAKE INVESTING IN AN APARTMENT SYNDICATON?

[Rick Martin]

This post has to start with a disclaimer. No one can guarantee returns, and there's a risk associated with any investment. Having said this, it will give those who are curious a rough ballpark of the kinds of returns you might expect.

1) We start with the hold time. Apartment syndication is a non-liquid investment. It can range from 3 to 10 years, but you will find the most common hold time to be 5 or 6 years.

2) The first source of income is the cash-on-cash return or COC%. The cash flow is what's left after you factor in vacancy costs, mortgage, and expenses, and it's the pot of money that gets distributed to investors, usually quarterly. The most common COC percentage I see most deals shoot for is 8%. That is, if you were to invest $100,000, the projected cash-on-cash returns for each of the five years would be about $8,000. Thus, Cash flow comes out to approximately $40,000 throughout a five-year hold.

3) Projected Profit Upon Sale: 40-60%. In a value-add scenario, the units get updated, the tenant base improves, and rents get raised to market rates. Operational efficiencies can also result in lower expenses, so with higher rents and lower costs, we increase the NOI. Higher NOI ÷ the prevailing cap rates result in increased profit at the sale. How much? It is very tough to predict, but you will often see a 60% increase over a 5-yr hold. Divide that 60% by five years, and you have another annual 12% from the profit at the sale to add your 8% COC%

The math comes out to a 20% average-annual-return multiplied by five years for a 100% total return. The ballpark result is doubling your money every five years. Not an exact science, but it does give you an idea.

[Tushar P.]

I have invested in ~20 syndications in the last ~1.5 years (spread over multifamily, office, mixed use, industrial, student housing, senior housing, etc), and the projected returns are 1.5-3.5 equity multiples over 3-10 yr hold periods, which equates to 12-18% IRR. None have exited yet.

I don’t have the time or desire to be actively involved, so syndication works well for me for diversifying my investments (from stocks into real estate).

Need to be careful of the syndicators’ tricks - they may show substantial skin in the game by making a significant equity contribution but they may be collecting more in fees at closing, they may offer some coc returns during the hold period but the payment would not come from cash flow from operations but from a cash reserve created using LP contributions itself, they may claim during equity raise that lending is firm for a ground up development but say after closing that ‘construction financing’ needs to be finalized, etc.

I haven’t had any bad experiences yet. I don’t invest with mom and pop syndicators but that doesn’t mean sponsors who have been in the business for 20+ years and have more than $1B in assets would not try to scam the investors either. Need to do the due diligence and always ask the sponsor to clarify any doubts. I rarely reject any deal because of the business plan, but sometimes the proforma assumptions itself can be dubious.

I think a good syndicator will put a balanced deal forward, because they would value the investor’s time as much they value their own.