28 Jan The Phases of Value-Add Multifamily Syndications
The Basic Phases of Value-Add Multifamily Syndications
There is a process to value-add projects when you are improving multifamily properties.
Each commercial real estate syndication goes through a series of stages that help to ensure that these investment properties have a clear progression based on a well-thought-out business plan. This helps to make sure that the general partners act as a cohesive unit in successfully increasing the value of the property.
Phase #1 – Acquire the Property
The first step begins with a deal sponsor getting the multifamily deal under contract. Finding great real estate deals can be difficult and demands very conservative underwriting strategies with solid projections.
Once the multifamily property is under contract, the deal sponsors work efficiently to determine what the property needs, budget for the expenses and create a clear business plan accordingly. Once we and the deal sponsors are confident that we have an outstanding opportunity for our passive investors, then we release the details of the project to our potential investors to gauge interest. Once the group of investors – the limited partners and the general partners – send in their funds, then we close on the apartment building as a group investment.
Phase #2 – Add Value to the Property
The progression of stages includes adding value to the property, which is why new construction rehab projects typically start once we have successfully closed on the multifamily asset.
In keeping with the stringent business plan, the property manager and the property management team along with the construction crew begin the renovations on any vacant units as a clear beginning to the efforts of increasing the multifamily value. This renovation phase can typically be 12 to 24 months or longer. The process with this type of investment is dependent on when the tenants’ leases are expiring to make these improvements.
So although 12 to 24 months is not much time to dramatically increase the value of the asset, it is still a systematic process that has to be done in stages.
Also, the exteriors of the apartment building and the common areas can be renovated as well during this stage. Such improvements can include adding a playground or a dog park, covered parking, putting in storage units, improving landscaping, and improving efficiencies of the asset to decrease expenses and improve the annual income, which will, in turn, increase the value.
Phase #3 – Refinance the Property
Since one of the main objectives of real estate investments is to generate passive income for the real estate investors, then the property must be profitable. Commercial properties are valued by the income that they generate, so the central idea behind the renovation phase is to increase efficiencies, improve the property, enhance the tenant’s experience, and increase revenue which will ultimately increase the equity and the value.
The good news is that with the additional equity in the property and depending on the cap rates, a deal sponsor may be able to exercise a couple of options earlier than the business plan anticipated such as refinancing the property or selling the property early which would allow the individual investors to capitalize on these investment opportunities earlier than expected.
Through a refinance or a supplemental loan, these options would enable you to receive a portion of your initial investment returned, while the property would still cash flow as though all of the original capital were still invested. This enables you to reinvest that capital into something else all while you’re continuing to earn returns on your original investment.
So, let’s take a look at what that would mean for you. Say you invested $100,000 into a value-add apartment complex through a syndication model, and after 18 months, the sponsors refinanced the property and returned 40 percent of your original capital. So you would receive $40,000 of your original $100,000 PLUS you would be getting your continuous cash flow distributions of 8% – 10% (depending on your preferred return) off of your full $100,000 original investment. Not bad.
Just know, however, that a refinance or a supplemental loan can never be guaranteed.
Phase #4 – The Hold Term
As a passive real estate investor in a multifamily syndication it can offer you incredible benefits and can help you to increase your net worth while providing you with excellent tax advantages. Real estate investing passively can ultimately help you achieve the financial freedom you may be seeking. Multifamily is one of the best asset classes that new investors and seasoned investors alike can be investing in to achieve their financial goals.
You should be aware that during the hold period your capital could be invested for 5 to 7 years, sometimes less. It is during this phase that nominal and incremental rent increases typically occur. The increases in rent will depend on the real estate market at the time and what the rent growth and market rents are for that market.
The biggest risk phase (the value-add stage of the process) is behind us during this phase and the sponsor team concentrates on attracting solid tenants and generating strong cash-on-cash returns (cash flow) for the investors, which can contribute to appreciation and equity increases.
It should be noted that the hold term may be less than 5 years depending on the particular property itself, the sponsor team, and their business plan projections.
Phase #5 – Sell the Property
By this phase the apartment building has been rehabbed and renovated, efficiencies streamlined, revenues and equity have increased, and a strong tenant base has been put in place and the overall experience for the tenant community has been improved.
The best way for investors to make the greatest use of their capital is for the sponsor team to sell the asset so that the investors are able to deploy those profits into another investment opportunity if they so desire.
During the disposition phase, the sponsor team will get the asset prepared for sale. Sometimes if all of the investors are in agreement ahead of time, the property can be sold and a 1031 exchange can be implemented. Investors can then roll their proceeds and their initial capital into another investment opportunity. This doesn’t happen too often, but it’s good to be aware of this option.
Once the property has been sold you receive your initial investment back as well as a percentage of the profits. Break out the champagne!
To Sum It Up
In conclusion, every multifamily real estate deal is unique and not all syndications go through the various stages that we have outlined here.
But, here’s the great news: As a passive investor in a real estate syndication, you don’t have to do any of the work besides some upfront due diligence to see if the executive summary of the sponsor team and the project itself is what you are looking for. Other than that you get to receive regular passive income, great tax benefits, and a portion of the profits at sale all while you’re living life on your own terms.
I hope this has brought you a step closer to learning how to Earn Passively & Live Abundantly!
Until next time….
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