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Effective Underwriting for Multifamily Syndication Properties

Dear existing multifamily investors and would-be investors,


Interest in investing in multifamily real estate private equity (REPE) syndications continues to grow and more would-be investors become aware of the attractive investment returns which can be achieved. However, as always, we believe it’s important for all investors to have a good, in-depth understanding about what’s involved before investing in multifamily syndications as well as learn about some of the key terms, requirements and regulations involved.


Suite Life Multifamily has, therefore, recently started a series of informative articles about the lucrative world of passive, syndicated real estate investment. These aim to help both existing investors keep up to date with events in the multifamily world, but also help new investors gain enough understanding and confidence to invest in this fast growing asset class.


If you are already one of our registered subscribers and regularly follow news about our investment, thank you, and enjoy this read. If not, do keep a look-out for our new articles to gain more knowledge about passive investment into multifamily properties. This will also  keep you up to date with all you need to know about syndicated private equity real estate investment!


SuiteLifeMF's vision is to help you create your own financial freedom through alternative sources of income and was founded to empower and educate those that want to build generational wealth through passive real estate investment opportunities. SuitetLifeMF has already successfully invested in a number of projects across the US.


One of the most important aspects of assessing the potential of a multifamily property for syndication is the financial projections which need to be prepared at the outset. This is an essential part of due diligence and is usually called “underwriting”. It is also known as a “feasibility study” as the feasibility of the investment being profitable is being examined.


So, before we have a closer look at some of the key components of underwriting, let’s first recap what multifamily syndications are all about.


What are multifamily real estate syndications?

Multifamily syndication is a real estate investment strategy that pools funds from multiple investors to purchase and manage a multifamily property, such as an apartment complex. Syndication offers investors the opportunity to invest in such larger properties, enjoy the benefits of economies of scale, as well as diversify their investment portfolios.


What does effective underwriting involve?

Effective underwriting is critical to the success of a multifamily syndication. It involves analysing various financial and operational aspects of the intended property to determine its current value and potential future value.


There are a number of primary levers to consider in underwriting multifamily syndications and some important “sensitivities”. When doing financial modelling for underwriting there are always a number of variable factors such as occupancy of the rental units, forecast rental growth rate, interest rates and so on. In the more sophisticated models these variables can be adjusted one at a time (or several at once) to see what the impact of changing such figures has on the overall investment return. This process is often called a "sensitivity analysis" and the variables are usually called “sensitivities”  


Effective underwriting enables the syndicator to evaluate the property's income-generating potential, identify any potential risks or challenges and make informed decisions about the property's purchase, management, and refinancing and/or subsequent disposition.


Ineffective underwriting, on the other hand, can result in poor investment decisions, leading to lower returns or even losses for investors. It is, therefore, essential to conduct thorough underwriting and analysis to ensure that the property meets the investment criteria and goals of the multifamily  syndication.


Some primary levers to consider in underwriting multifamily syndications:


Underwriting a multifamily syndication involves carefully analysing several primary levers that determine the property's profitability and potential returns for investors and these include the following:


The so-called T-12


A T-12 (also known as the trailing 12 months) refers to the past 12 months' financial performance of the property. T-12 provides valuable data on an existing property's income, expenses and net operating income (NOI). The T-12 statement is an important part of the underwriting process as it allows the syndicator to evaluate the property's current performance and identify any trends or anomalies that may impact future performance.


Determining proforma rents


Proforma rents refer to the projected rents that the property can generate after it has been acquired and the operation optimised by the syndication. When determining proforma rents, the syndicator must consider several factors, including current market rents, comparable rents in the area, and the multifamily property's amenities and features.


Rental growth projections


Rental growth projections refer to the expected rate of rental growth for the property. In deriving rental growth projections, the syndicator will analyse several factors, including market trends, supply and demand and the property's location, condition and amenities and features.


Calculating operating expenses


Operating expenses refer to the costs associated with managing and maintaining the property and includes expenses such as property taxes, insurance, repairs and maintenance, utilities and property management fees. To calculate operating expenses, the syndicator must consider several factors, including the property's age, condition, location and amenities and endeavour to identify areas where costs can be contained or reduced going forward.


Calculating net operating income


NOI refers to the income generated by the property after deducting operating expenses and is a crucial metric in underwriting as it determines the property's cash flow and potential returns for investors. To compute NOI, the syndicator will subtract the property's operating expenses from its gross income.


Some of the main sensitivities or variables in multifamily syndication underwriting

As mentioned above, when underwriting a multifamily syndication, it is important to consider various sensitivities that can have a significant impact on the investment's performance if they materially change.


Here are some of the main sensitivities to be considered:


  • Rental increases or decreases: rental income is the primary source of revenue in a multifamily investment, and changes in rental rates can have a significant impact on the investment's cash flow. The potential for rental increases or possible decreases based on current market conditions (or known increases in competitive supply, for example) and the property's location, age, and facilities and amenities needs to be considered.


  • Occupancy: is the percentage of the property's units that are rented out. Higher occupancy rates generally lead to higher revenue whilst, clearly, lower occupancy rates can result in lower revenue and higher vacancy costs. It's important to consider the current occupancy rates and trends in the local market, as well as the potential for future changes in occupancy.


  • Statutory limits on possible rent increases: in some cases, there may be restrictions on the syndicates ability to raise rents, due to rent control laws. Obviously, it's important to take any such restrictions into account and factor in the potential impact on cashflow from the project and on investment returns.


  • Interest rates: can have a significant impact on the cost of financing and the overall returns of a multifamily syndicated investment. It's important, therefore, to consider the potential impact of changes in interest rates and to factor in the cost of financing under several different scenarios.


  • Cap rate and possible changes: the cap rate is a measure of a property's value based on its NOI. Changes in the cap rate can have a significant impact on the property's value and overall returns. When underwriting, it's important to consider the current cap rate and potential changes over the planned holding period.


Some terms commonly used when discussing underwriting multifamily syndications


Some of the terms commonly used in multifamily syndications are as follows:


  • Full cycle: refers to the entire planned investment timeline, from the acquisition of the property to its eventual disposition (or refinancing). This includes the holding period, the period of any renovations or improvements made to the property and the eventual sale.


  • IRR: the internal rate of return (IRR) is, simplistically, a measure of a multifamily investment's profitability. It takes into account the time value of money and factors in the timing and amount of cash flows over the holding period. A higher IRR indicates a more profitable investment.


  • Equity multiplier: is a measure of the amount of leverage used in an investment. It is calculated by dividing the total asset value by the amount of equity invested. As you'd expect, a higher equity multiplier indicates a higher level or ratio of leverage and potential risk.


  • Total returns: refer to the total profit generated by a multifamily investment over its full cycle. This includes both cash flow and any appreciation in the property's value.


  • Cash on cash: is a measure of the cash return generated by an investment in a given year. It is calculated by dividing the cash flow generated by the amount of equity invested. A higher cash on cash return indicates a more profitable investment.


  • Equity: refers to the portion of an investment that is owned outright by the investors in the multifamily syndication, as opposed to any debt or other forms of financing.


  • Occupancy: As mentioned earlier, occupancy refers to the percentage of a property's units that are rented out at a given time. This can be both physical and economic occupancy, best explained as follows:


Physical occupancy is both a measurement of the physical space occupied by tenants compared to the total available lettable space or number of units in a building, as well as a measurement of the total monthly or annual rental which the property produces;

Economic occupancy considers what income a rental property is producing compared with what it could be producing. In other words, economic occupancy is a calculation of the physical occupancy measured against the total possible income on the assumption that a property is 100% occupied and all tenants are paying the full market rental value.


  • Depreciation: refers to the perceived decrease in value of a property over time due to wear and tear, ageing and other factors. In multifamily syndicated real estate investing, depreciation can be used as a tax deduction to offset rental income.


  • Holding period: is the amount of time that an investment is held before it is sold. It is an important factor to consider when underwriting, as it impacts the overall returns of an investment. In multifamily syndications, the holding period typically ranges from three to seven years. During this time, investors receive regular cash flow from rental income and benefit from any appreciation in the property value. When the holding period ends, the property is typically sold, and the investors receive their share of the profits.


The actual length of the holding period depends on several factors, including market conditions, the investment strategy and the goals of the investors. A longer holding period may provide higher returns, but it also carries more risk. Conversely, a shorter holding period may be less risky, but may also result in lower returns. Therefore, it is essential to carefully assess the holding period when underwriting a multifamily syndication, taking into account the potential risks and rewards associated with different investment horizons.


We trust that the foregoing is helpful in allowing you to learn more about multifamily syndicated investments and, if you have any questions or require further explanation, do not hesitate to reach out and ask!


If you’d like to know more about investing in a syndicated multifamily property, you can also contact us for a no obligation chat or subscribe  to our upcoming newsletters.


Yours sincerely,


Anna and Peter Tan


SuiteLifeMF has been acquiring, operating and investing in real estate for over 10+ years, acquiring  over 1500 doors and with over US$ 100M under management (900+ doors). They also operate a property management company that handles a portfolio of single family homes.


SuiteLifeMF maintains a disciplined approach to investing, which focuses on capital preservation and strong returns with a deep understanding of submarkets, economic and political situations.



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