Know and vet those you invest with..
Often as an investor it feels like the people that knock on the door, call, mail, email you just want your money. It’s very important to VET your deal sponsors and general partners
prior to signing the paperwork.
When evaluating a new syndication deal for multifamily ask questions:
Deal Sponsors
- Investigate the sponsorship team’s background and ask questions (Bankruptcy, fraud, lawsuits, etc.)
- What’s your track record on these type of deals?
- Where do they live and invest?
- What type of deals and size have they done in the past?
- What were the investor returns?
- Does sponsor invest in the deal? (They can be the same.)
- Build trust with the team and get to know them. Do you share the same values?
- Look for partners to have functional skillsets in Customer Service, Finance, Construction, Asset Management.
- Word gets around, so ask other LPs and GPs for references.
- If they are doing their first deal, are the co-sponsoring with an experienced lead? How committed are they?
Property Details
- Location of the property. LOCATION, LOCATION, LOCATION!
- What is the age of the property?
- What is the size of the property?
- What are Actual Rents vs Area Comps?
- Floor plans, unit mix, and amenities. 1BR, 2BR, 3BR (How many)
- Building HVACs/Chillers, Water Heaters, Pitched Roof/Flat Roofs, Etc…
- Are there any environmental consideration issues?
Demographics
- 1, 3, 5 miles median household income (prefer rent <= 25% income).
- What types of Industries within 5 to 10 miles?
- Is there Job growth? Is it one major new company, or many?
- Is there Population growth in the area? What percentage?
- What is the Tenants mix, family size and jobs? Are they primarily from surrounding industries?
Underwriting Debts
- What kind of debts does the deal use?
- What is the holding period? (Think Exit Plan)
- Does the sponsor get the loan based on holding period?
- Does it match the business plan?
- If it is a bridge loan, does the sponsor buy a rate cap and for how long?
- What is the DSCR (debt service coverage ratio)? (Prefer >= 1.25, bank requirement). Lower DSCR increases the risk.
- What are the cap rates when exiting the deal? Is it higher or lower than the cap rate when buying the property? What is the projected return with the underwriting and exit cap rate?The higher the exit cap rate, the more conservative the deal is. (Sometimes it can sound to good)Example: If you are planning to hold 3 to 5 years, no need to get a fixed rate loan for 10 years with prepayment penalty. The penalty can be a huge liability and the only way to deal with it is to sell and have the buyer assume the loan. Or the other way is to sell when the price has appreciated so much, and it is ok to just pay the penalty.
Cash Flow and Occupancy
- To what extent does the property cash flow from day one?
- What is the break-even occupancy rate?
- How conservative are the underwriting assumptions?
- What justifies higher rent after you take over? You can charge higher rent because of renovations or the comps? What about vacancies?
We prefer to buy stable assets with a small value add and cash flows from day one. The lower the break-even occupancy rate, the better.
If you are doing a lot of renovations in a typical value-add, it is unrealistic to expect that occupancy rates are above 90% at the end of first year. Check for professionalism and trust your instincts, and look for a team that has delivered. A sponsor that has taken the deal through complete cycle, and delivered to their plan. Be sure that the sponsor has skin in the game with investing equal or greater than LPs. Make sure the sponsors have clearly defined roles and their contact information is readily available should you need to contact them. Remember it’s important to be critical for their efforts, but praise them when they do well.
Finally be absolutely sure they execute the plan, and have a clear exit strategy. Make sure they have a contingency plan should they need it, and always have enough capital to put into the deal should there be a crisis.
