First investment in multifam via syndicator

[Melody T.]

Things have been slow trying to build my real estate portfolio through single family and small multi fam. I'm looking at a lot of opportunities, but after I run the numbers, I'm not really finding decent CoC returns and cap rates, especially looking in the Cleveland area right now. My offers are getting beat by folks who have some magically optimistic pro form apparently and it's not worth jumping in for sub par returns and tenant headaches (or PM headaches). As such, I'm thinking about trying to scale via syndication.

I know a principal at a syndication with over $2B in assets. They're very well established so I feel pretty comfortable with the sponsor and their track record. The property I'm considering investing in is a multifamily facility, ~600 units with 95% occupancy, and the play is to increase value by renovating the units and holding for 4-5 years. They've made $3M of equity available. The investor Cash on Cash yield is projected to be 5.9% in Yr 1, 7.1% Yr 2, 8.06% Yr 3, and 9.89% Yr 4. This includes distributions and in year 4, distributions + sale proceeds. Annual average yield 7.67%. IRR 10.78% and equity multiple 1.46x

I would like to learn more about what due diligence I should be doing, what questions to ask, and anything I would need in place to transact (attorney, costs associated etc.) Thanks in advance.

[Andrew Weiner]

I have not read the book but just being involved with syndication deals over the years I have seen a few different things.  Not all syndicators are similar, there are some that take on huge risks and they might not even realize it because for almost 10 years you could buy poorly and the rapid appreciation bailed you out, going forward they might not be able to repeat what worked before.  

I would encourage you to read the full offering document, there should be details on how the profit is split, are you able to liquiditate early if you need (can you sell your shares even at a discount?), what kind of capital reserves are being kept, what are the contingency plans if the market is down in 4-5 years?  Is there any preferred return?