Dear existing multifamily investors and would-be investors,
Judging by the huge number of enquiries we get, it’s clear that many people are very interested in multifamily real estate (private equity) (REPE) syndications. However, we believe it’s important to have a good, in-depth understanding about what’s involved before you invest in multifamily syndications. Plus, learn about some of the 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 investments!
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. SuiteLifeMF has already successfully invested in a number of projects in the US.
This time, we’ll review some of the preparatory and ongoing work involved for any investors in multifamily real estate and look at some of the relevant aspects of multifamily analysis and what factors to consider when evaluating a deal.
Analyzing a possible multifamily investment
Multifamily real estate investing has become a popular alternative investment for investors who are seeking asset diversification, passive income and long-term wealth creation.
Analysing a possible multifamily deal is an essential part of the process to understand the potential return on investment, risks involved, and future prospects for the property in question.
Market Analysis
The first step in analysing a multifamily deal is to assess national, regional and local multifamily rental market trends. This involves evaluating the current real estate market at a macro level before examining the sub-market where the property is located, and the rent growth and occupancy projections therein. Understanding the market will provide a better idea of the demand for rental properties, the competition and the future prospects for the property.
Other key factors to consider are population and job growth. A growing population is a good indicator of demand for rental properties, and a growing job market is a positive sign for the local economy. In addition, it's important to evaluate the median household income in the area to determine the affordability of the rental units, along with potential rental income in that market.
Property Characteristics
Once you have a good understanding of the market, the next step is to evaluate the property itself. Some of the key factors to consider include the age of the property, the quality of construction, the overall condition of the units and the amenities offered (ie common gardens, swimming pool, gym, on-site laundry etc). A newer property with high-quality construction and well-maintained units is generally a more attractive investment than an older property that requires significant repairs and renovations. Additionally, the type of property, such as a garden-style apartment complex, high-rise building, or town home community, will impact the investment's appeal and its potential return.
Operational income performance; “adding value”
Clearly, one of the most important aspects of evaluating a multifamily deal is the expected operational performance of the property. The first metric to consider is organic rent growth, which measures the increase in rental income without adjusting for occupancy or unit mix changes. This metric provides insight into the underlying demand for rental units in the area and the property's ability to attract and retain tenants.
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Another important metric is the property's ongoing operating expenses, including property management fees, utilities and maintenance costs. These expenses should be closely evaluated to determine if they are reasonable and in line with similar properties in the area.
In multifamily underwriting, it's essential to analyse the property's occupancy rate and rental income. The rent roll provides information on the current occupancy and rental income, which is a crucial aspect of the underwriting process. The T12 financials give a comprehensive picture of the property's financial performance over the past year, including its income and expenses.
There are two primary ways to enhance the net operating income (NOI) of a syndicated multifamily property and this can be undertaken by:
Improving income without raising rentals
Whilst rent increases can be a quick way to boost income, it is not always feasible or desirable. There are other ways to increase the income of a multifamily property without raising the rent, including:
improving occupancy: a higher occupancy rate means more rental income. Improving the property's marketing and management can help increase occupancy and rental income;
increasing ancillary income: ancillary income includes sources of income outside of rent, such as parking fees, storage fees, and laundry facilities. Adding these amenities and charging for them can increase the property's income;
reducing operating expenses: costs of property management fees, utilities, and maintenance costs, can be reduced and increase the property's net operating income and boost its bottom line
Improving income by making changes to the property
Another option to improve net income is by making changes to the property and these can be done by:
renovations: undertaking renovations to the units and common areas can improve the property's appeal and attract higher-paying tenants; in turn this can increase the rental income (sometimes called “adding value”;
add value-added amenities: may include a fitness centre or community or meeting room from where tenants can work, can make the property more attractive to renters and increase its income potential
Underwriting a multifamily property investment
Once all market data has been assembled and a strategy for the multifamily property determined the underwriting (sometimes called a “feasibility study”) can commence. This examines the financial feasibility of making the investment into the multifamily property and assesses the expected investment returns.
What is the right strategy and age of property to invest in?It depends. A newer property typically has less mechanical issues, but it will be offset by the higher replacement cost and lower risk from a maintenance perspective. Older properties typically have more maintenance costs. Because of the additional work generally needed for maintenance, older properties are purchased at a lower replacement cost and can be at a great basis. End of the day, it depends on the purchase price, the potential of the property, and the management team to have project success!
The underwriting process is important and endeavours to ensure that a multifamily investment is a viable one. By carefully evaluating the property's financial metrics and considering the location and physical condition, investors can make informed investment decisions and minimise the risk of investing in a property that is not likely to generate returns, plus increase their chances of success in the multifamily real estate market.
Typical lifecycle of a multifamily project
The lifecycle of a multifamily project includes several stages, including:
market research and analysis;
due diligence;
acquisition;
ownership
exit.
The General Partners (GP) will carefully manage each stage and consider the key factors that impact the property's financial performance.
In the acquisition stage, after the macro market research is complete, the general partner starts by identifying potential properties that meet their criteria, including location, property type, and financial metrics. The GP will have initial market research completed, which will provide information on the local real estate market, including the median household income, population growth, job growth, and property characteristics.
Once a suitable property is found, the purchasing party will be able to complete an initial financial analysis (underwriting) including a review of the property’s rent roll, T12 financials, and an assessment of the property's current. The team will look at market comparables, shop the neighbourhood to develop proforma rents and draft an initial business plan. If the expected financial performance meets the team’s requirements, the GP will place a bid on the property. Especially in a competitive market, this stage requires a significant amount of time and effort to find the right property that meets the investment criteria and to negotiate the terms of the deal.
The GP will negotiate the terms of the deal with the seller and request to put the property under contract. Once both parties agree to the major terms of the deal and the team is awarded the contract, team is in the due diligence phase. The purchasing party performs a comprehensive analysis of the property, including refining micro-market and sub-market research, a deeper dive into financial analysis, and operational performance analysis. The team will be able to walk through all units and investigate the property to determine if there are repairs, deferred maintenance, and additional income opportunities. There will be in-depth inspections including plumbing, electrical, foundation and roof.
The operational performance analysis evaluates and helps develop the business plan, focusing on the property's management, maintenance, and lease-up strategies to ensure that they are in line with industry standards and that they will contribute to the property's long-term success.
Over ~2-3 months, the team will put together the remaining pieces of the project needed to close (and successfully acquire) the project. This would include finding debt and equity for the deal. Debt typically is a loan from a financial institution, and equity can come from private individuals (investors) through syndication. Other items to finalise on would include settling loan requirements like obtaining the proper insurance coverage for the property. Once everything is settled, the property will be considered close, and property is transferred to the new owners!
Ownership is when the hard work begins and involves understanding operations, stabilizing the property,renovations and implementing business plan on day 1.
The construction stage involves any necessary renovations or upgrades to the property, including updating the building's systems and amenities. The objective of this stage is to improve the property's value and attract higher paying tenants, and requires careful planning and execution to ensure that the project stays on schedule and within budget.
Glossary of multifamily related terms for Passive investors
The stabilisation stage is when the property reaches its full operating occupancy (typically less than 100%) and the rental income is stabilised. This stage is an important milestone in the lifecycle of a multifamily project, as it marks the point when the property begins to generate a consistent rental income, and requires careful management and effective leasing strategies to maintain high occupancy levels and to attract high-paying tenants. This stage does not occur immediately as it involves tenants to move out in order for units to be renovated.
Finally, the exit stage is when the GP sells the property and is able to fulfill the return on investment to the investors. This stage requires careful planning and execution, as the syndicator must consider market conditions, the property's financial performance, and the terms of the sale or refinance to maximise the return on investment.
Some of the key parties involved in multifamily syndications
Apart from the investors (limited partners or LP) joining the syndication, there are a number of key parties involved. The general partner (GP or sponsor) is clearly one of the most important. The GP should be familiar with the relevant laws and regulations governing syndications, including securities laws and tax laws but, in any event, it's important to have a clear understanding of the responsibilities and obligations of each party involved in the syndication to minimise the risk of disputes or misunderstandings.
Additionally, the GP should be responsible for creating and maintaining a positive and transparent relationship with the LPs, by answering their questions and addressing any concerns in a timely manner. This requires excellent communication skills, transparency, and a deep understanding of the syndication investment structure.
In terms of ongoing reporting, the GP should provide regular financial reports, which include information on the property's revenue and expenses, occupancy levels, and any other relevant financial metrics. These reports help to keep the LPs informed on the property's performance and provide them with a clear understanding of their investment's progress.
Syndication can offer several benefits over traditional real estate investment methods. Firstly, it provides individual investors with access to larger and potentially more lucrative investments that would otherwise be beyond their reach. By pooling resources, investors can also spread the risk of investment across a larger portfolio of properties, which can help to mitigate the impact of any potential losses.
However, as with any real estate investment, syndications also come with some risks. Some of which may be the risk of poor management by the GP or an adverse change in market conditions. Investors, therefore, need to thoroughly research the GP and their track record before investing in a syndication. Additionally, it's important to have a clear understanding of the terms of the investment, including the fees, investment horizon, and distribution schedule.
Exit planning
The GP should also have a clear exit strategy in place, which outlines the plan for selling the property or refinancing it. This should take into account the goals of the syndication, market conditions and the expected return on investment. The GP should also be prepared to implement the exit strategy, once needed, which requires careful planning and execution.
Selling is relatively straightforward but the timing is key.
Refinancing a multifamily property is the process of securing a new loan to replace an existing one. This can be done to lower the interest rate, extend the loan term, or access additional cash for property improvements or other investments.
Before considering refinancing, it is important to evaluate current market conditions, the financial performance of the property, and the terms of the existing loan. The syndicator should consider factors such as the interest rate, loan-to-value ratio and the length of the loan term.
Once refinancing is chosen as the best option, the next step is to find a lender. This can be done by working with a mortgage broker, contacting banks, or working with a lending platform. The terms and interest rates offered by each lender need to be compared and the one that offers the best terms for the investment chosen.
Once the lender has been selected, the GP will provide financial information and documentation to the lender to support the loan application. This may include tax returns, rent rolls, and a pro forma operating statement. The lender will also perform a property appraisal to determine the value of the property.
The closing process involves executing a new loan agreement, which outlines the terms of the new loan, and also requires the payment of various fees, such as closing costs, title insurance, and appraisal fees.
Refinancing a multifamily deal can be a complex process, but it can offer many benefits to the syndication if they are not yet ready to sell.
In summary, investing in syndicated multifamily real estate can be a great way to generate passive income and potentially build wealth over time. Most of the complex problems involved can be dealt with by a capable GP leaving you to maximise your chances of success in this exciting and dynamic sector of the real estate investment market.
Of course, the decision to invest in real estate or invest in stocks or bonds or indeed other asset classes, which offer different risks and opportunities, is a choice which depends on an investors risk tolerance, objectives, financial status and investment style.
If you’d like to know more about syndicated multifamily investment, please feel free to contact us for a no obligation chat or subscribe to our upcoming newsletters.
Yours sincerely,
Anna and Peter Tan
SuiteLifeMF has acquired, operated and invested in real estate for over 10+ years, investing in over 1500 doors and with over US$ 100 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.