Syndication is the pooling of investor money where the investor is typically a limited partner and the general partner, or active partner, puts the deal together and manages the business plan to provide a return for the benefit of all investors.
Our goal is to invest in properties that return 7-9% annually and an average internal rate of return in the 15-18% range for the hold period. In a value-add project, a large part of the investor returns come in the year of sale. This is often modeled as year 5-7.
We target a 5-7 year hold on our deals. This provides time to execute our value-add plan and then cash flow for a few years while looking for an opportunistic sale. Some investor principal could be returned as early as year 2 from a refinancing event or we may want to continue to cash flow till year 7 if market conditions are not favorable.
Our minimum investment starts at $50,000 or $75,000 with increments of $5,000.
We typically pay distributions on a monthly or quarterly basis.
We communicate regularly:
- Monthly Updates: Current operations and capital improvements.
- Quarterly Financials: Detailed financial results and distribution information.
- Quarterly Distributions: Distributions sent 15 days after the close of each quarter.
- Tax Documents: A K1 is sent on or before March 31st.
Apartment syndications are very tax efficient. As a partner in our limited partnership, you will benefit from your portion of the investment’s deductions for property taxes, loan interest and depreciation. We like to use a cost segregation strategy as well to accelerate depreciation. It’s not unusual on a $100K investment to return actual cash in your pocket of $8K while experiencing a paper loss on your annual K-1. That loss can then be used to offset other passive income. At time of sale the partnership gains are treated as long-term capital gains.
Risks are outlined in the Private Placement Memorandum. That said, here are a few data points. In 2009, at the bottom of the financial crisis, delinquency rates on single family homes was 5% vs 1% on MF apartments. Additionally, vacancies in Class C and B (older properties where value-add syndicators play) remained steady at 8%. We further mitigate risk by targeting proven assets where current owner is generating good cash flow (our due diligence includes auditing the trailing 12-month financials, bank records and tax returns). Additionally, lenders will not loan millions of dollars unless we are experienced, have a good business plan, conservative underwriting (banks will underwrite the deal as well), have adequate insurance, and have an inspection completed by outside experts.
During an economic downturn the goal would be to continue to cash flow and hold until the market is healthier to achieve a better price at sale. Class B/C value-add properties tend to hold up much better in downturns because folks need a place to stay and rents are more in line with the market / service economy demographic that is typically still employed in downturns versus the higher paid class A renters whose jobs are more at risk.
We’ll let you know we have an investment available when we get a property under contract. We start the equity raise process with investors immediately and it runs concurrent to due diligence and the bank’s underwriting which takes about 5 weeks. Typically investors reserve their spot in the 1st week. In the 5th week, investors review and sign the PPM and transfer funds to the escrow account. Then we close on the property 2-3 weeks later.
Yes, you can invest in real estate with certain retirement accounts. We can to discuss how to boosted your IRA investing returns with real estate investing.
We model different scenarios to show our break-even point for profitability given a decline in occupancy or if rents drop below projections. Most of our scenarios allow occupancy to go drop between 75-80% to break even. Third party data shows that in our target markets the worst vacancy levels were around 85% during the 2009 financial crisis.
There is nothing in our prospectus for a workout or formula for such a scenario. The investment should be considered an illiquid investment. That said, the general partner will review your situation and see if there is something that can be done to help.
The returns forecasted to you are after fees. The most common fee is an acquisition fee based on purchase price and is paid closing. This covers the general partner’s costs to find the deal and get it under contract. The second most common fee is the asset management fee which is compensation for holding the property manager accountable, to ensure execution of the business plan, bookkeeping, and distribution of checks and K1s. The asset management fee is aligned with the investor’s interest as it is based on the property’s revenues. Industry averages are 1-3 % for both fees.
The Private Placement Memorandum is required by the SEC and describes the offering, risks, includes the partnership agreement, investment summary and subscription agreement. It is a lengthy legal document (approx. 100 pages) prepared by a syndication attorney. The subscription agreement section includes basic information as to amounts being purchased and percent ownership. The risk section highlights just about every possible risk that could happen.
We currently market our investments under SEC regulation 506(b) which allows us to include investors who are either sophisticated or accredited, and with whom we have a relationship. A sophisticated investor is one who has sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.
To be accredited you must have:
Earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
Net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
Accreditation is simply determination by self-disclosure of the investor via a checkbox in the subscription agreement.