Cash Flow Champs Real Estate Podcast

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What is Multifamily Syndication?

Real Estate is an asset class where you hold the asset. It is a tangible asset, and it is always advisable to invest in a tangible asset than paper assets like stocks. Stock duration can become zero very easily but a Multifamily or Real Estate asset always remains there.

In a single-family environment, an Investor will go buy a single family. They will manage the single families, they will take care of the toilet, tenants and trash. They will get the rent, they will pay the mortgage and some maintenance and then in the end they will get some appreciation but the Investor has to work on the property for the duration of the project.

In the syndication environment, we pool the money from Multiple Investors. We buy a bigger asset and that asset is managed by professional people or by professional property management companies. Lenders are watching that asset and the Investor get part of the rent. As if he would have gotten from his single-family home, he would get part of the rent from this bigger multifamily project and then they end up getting part of the appreciation also.

In other words, Investors end up getting part of the rent during the life cycle of the project and they end up getting part of the appreciation also. They end up making more money because the overall asset is managed by Professional people.

Professional Property Management companies and professional capital expenditures through a professional construction management company.

Professional accounting takes place. Banks are looking at the project. SEC is watching that no wrong stuff is going on. It is important to understand that for Investors it is a Passive Investment. The Investor doesn’t do anything. The Investor has the life back to him. They have not signed up for a job. All the Busy Professionals who are out there, if they Invest Passively in Syndication, end up making a lot more money than they would make otherwise by buying these properties themselves.

What is Multifamily and its various advantages?

There are many advantages of Multifamily. Multifamily is an asset class, whereas it’s a commercial asset class, you buy 200 unit apartment complex, and even if your occupancy is 90%, you are still getting the cash flow but if you have a single-family home your tenant leaves, you do not get any cash flow from that property. Even with 90% – 95% occupancy in a 200-unit apartment complex, you are making enough money which is distributed to the Investors. The risk of getting no cash flow is not there in Multifamily, because you have predictable cash flow coming out of your property. You have a predictable income, you have predictable expenses. You have a predictable net operating income and anything after paying the mortgage is distributed back to the Investors.

The second point is basically in a value add environment when you have some problem with the property, the operator goes in and tries to put some money in the property.

For Example, the operator puts $5,000 per unit in that 200-unit property, and they end up putting in a million dollars but by putting that million dollars. Let’s say the rent goes up by $100. To keep it simple, $100 per unit, meaning $1200 per year goes up. If the cap rate is five, the valuation of the property goes up by $1200 divided by 0.5, which is $24,000. Just by putting $5,000 in a unit, the valuation of the property goes up by $24,000. If you are putting that money $5,000 in 200 units, 5000 multiplied by 200 is 10000, 100000 or 1 million. By putting that much money, $24,000 multiplied by $200, it’s $2.4 million. The valuation of the asset goes up by $4.8 million. By putting $1 million in the property, by increasing the rent by $100, the valuation of the asset goes up by 4.8 million. That is how Multifamily or Commercial Real Estate is evaluated. $100 means in a five-cap market, about a $24,000 valuation increase. In the 200-unit apartment complex, the valuation of the property goes up by $4.8 million. It is so easy to improve the valuation which is delivered back to the investors in a multifamily environment.

It is hands-free for limited partners. There’s one bigger thing in the Tax Code. The tax code in Commercial Real Estate is written in a way that a lot of tax benefits are given back to the Investors. That could mean that our tax liabilities can go down considerably in commercial Real Estate.