8 Important Things to Know Before Investing Passively

[Bronson Hill]

Interested in investing in real estate, but not quite sure how to get started? Maybe you're curious about the process of investing and want to know what it actually looks like?

Potential investors have lots of questions about how multifamily deals are structured and we are happy to answer them.

If you are trusting a deal sponsor with your hard earned money, it’s only fair you understand the process accurately so you can gauge a timeline around getting your money back along with some nice profit.

So, in this blogpost, we're going to talk about multifamily syndication and how to get involved through passive investing in your first deal.

Understanding the Investing Process

Before you start investing passively in a multifamily property, you need to know the different steps, the process it goes through.

For your understanding, I have broken down the whole process into eight important steps

The Operator or Syndicator

The first thing that you should understand is that we have someone called an operator or a syndicator. This is typically a team of people who go out and find properties.

Operators are people who identify the property, look closely at the property, renovate certain things and add value to it.

Now these operators typically work in certain regions.

They work with different classes and different property sizes and this is what makes them unique. You don't want operators who are working with everything, everywhere because then they are not specialized in their fields/property types.

Let’s say you want to invest in brand new construction, then you should really look for an operator that focuses in that special area.

You also need to make sure your goals align with the strategy of the operator you are partnering with.

If you are interested in brand new construction, you need to find an operator who has the same focus as yours. Conversely, if you’re focused more on distressed real estate, doing full renovations and adding value, you want to find an operator who is aligned with that strategy.

Getting the Deal Under Contract

Once you have the right operator, the deal hunt starts.

The operators have to be really on top of their game in order to get a property under contract. Since they are working in a local market, they tend to have strong relationships with the real estate brokers. These brokers can provide them with opportunities to get the best properties on the market.

Once they find the right property, they have to quickly and accurately determine if the deal is worth pursuing.

This requires necessary due diligence. Operators will look at the property one last time, update their assumptions and adjust their business plans accordingly. If everything goes well, they will get the deal under contract.

Presenting The Deal to Investors

After the deal is under contract and the operators are sure that it’s a solid investment, they will now present the investment property to the potential investors.

This is typically done through a webinar or some sort of deal package saying, Hey, we've got this deal! We want to present it to you.

These investors can either be individuals who are willing to invest $50,000 or $100,000 or they can be individuals or large groups/organizations with hundreds of thousands (or millions) to invest.

Investors Choose to Invest

The fourth step in the process is where investors get to make a decision.

The investors will make a choice, say, Hey, do I want to invest in this deal? Or do I not? Do I like the operator? Do I like the deal? Does the business plan make sense?

For investors: Go above and beyond in your research. Ask as many questions as you want from the operator, list your concerns and review all the data and information out there in as much detail as possible. (We also have some videos coming out later discussing this particular topic in detail so stay tuned!)

Deal Closes

Now if you are satisfied with your research and are ready to invest in a deal like this, the next step is to fill out a short form telling us: “Hey, I'm interested in investing in this property.” This short form is called a “soft commit”.

After that we will send you some paperwork to sign. You will then wire the funds to us and enter into a multifamily syndication deal.

Also, the deal is not official until you fulfill all the requirements of ‘closing the deal”.

To help you understand, this whole closing process is very similar to that of a single family home transaction. For example, when you buy a house, there is a specific day when you actually close the deal on the house. You bring in certain documents, wire the funds and make sure all the requirements of a ‘closing’ are met accordingly. Same happens when you close an investment deal with us.

Operator Starts to Add Value to the Projects

The next step in a value-add multifamily real estate syndication is the part where the value is actually added.

Often the business plans call for increasing rents by lets say $100 or $200.

To do this, the operators will increase the rental value of the property by spending $10,000 or $15,000 per unit in renovations and then raise rents for these nicer units.

These renovations may sound time consuming but they end up increasing the property value significantly. Simply put, it is the ultimate strategy to add value to any type of multifamily syndication.

Based on the property and the business plan, renovations can include interior (such as updating appliances, high-speed internet), exterior and/or common area renovations, such as improving curb appeals, updating light fixtures, adding a clubhouse and more.

Investors Receive Passive Income

Once the planned renovations complete, these value-add multifamily properties start to generate a nice passive income for the investors. Please note that you won’t be getting income from day one because it takes time let's say 90 days or 180 days depending on the renovation to finish and see cash flow increase for the property.

After the multifamily apartments are updated, investors start to earn passive income through rents collected from the units in that updated property.

So there are two ways you get paid through doing a multifamily deal. The first is called cash on cash. And that's what I mentioned above i.e. the value add method.

So let's say a deal calls for 8% cash on cash. That means on average, if somebody invested $100,000, we would expect around $8,000 per year to be paid through the life of the deal.

The other way you get paid through investing in multifamily syndication is by getting a lump sum when the property is sold.

The IRR or the average rate of return in this case is the cash on cash plus any backend appreciation when the property is sold.

Total return on deal = Cash on cash + Property Value Appreciation

These are typically double digit returns depending on the type of deal.

Deal is Sold

The final step in a value-add multifamily real estate syndication is selling the asset. Most of our deals are usually 3 to 7 year long depending on the investment timeline and the deal’s performance.

But in the end, rather than holding the property forever, we prefer selling it. The investor’s capital is returned so that it can be invested into another project.

So there you have it. These are the important steps of a multifamily syndication deal.

As a passive investor, you don't have to worry about doing a single thing in any of these steps. However it is important for you to understand how the investment process works and what to expect from a value-add multifamily syndication.