The 5 Phases of Value-Add Multifamily Real Estate Syndications

Post 20

by Joe Firmin                              3-Minute Read

My son Rafael just learned essay writing last year. Do you remember the 5-paragraph essay structure from elementary school? Having guidelines to introduce a central idea, provide 3 supportive paragraphs, and then close with a strong conclusion? This structure provides freedom and… well… structure all at once.

Similarly, each real estate syndication goes through a progression of stages with a clear beginning, middle, and end, which ensures individual apartment investors operate as one, following a clear business plan.

Phase #1 – Acquire

The first stage begins with the sponsors (True Freedom Capital – Joe & Chris) getting a property under contract. Not only can finding a great opportunity be difficult, but this phase also requires thorough underwriting skills and solid projection calculations.

Once under contract, we work diligently to discover the property’s needs, record estimated expenses, and update the business plan accordingly. After the we are confident with the research, the deal, and the projections, we share the deal with investors (like you!), to gauge interest. Once all investors send in their funds, we then close on the property.

Phase #2 – Add Value

The term “value-add” means exactly what it sounds like; we’re adding value to the property, which is why changes typically kick off upon closing.

All in accordance with the business plan, transitions begin with the property management team and renovations on any vacant units. This phase can last 12 to 18 months or longer, depending on the time it takes for all residents’ leases to expire and for all old units to be renovated.

Exterior and common area renovations may also be made, such as updating or adding light fixtures, a dog walk, fire pit area, covered parking, or landscaping.

While renovations can get rents up, we look at expenses and seek to minimize them, getting costs down.

Phase #3 – Refinance

Since commercial properties are valued according to the income they generate, the whole point of the renovation phase is to get rent premiums, thus increasing the revenue. The whole point of the expense reset is to get costs down; so with rents up and costs down = income UP.

Most residents will happily pay an additional $100 per month for the opportunity to move into an updated unit, and if the apartment complex has 100 units, that’s an additional $120,000 per year in rental income, which, at a very conservative 10% cap rate, equates to $1,200,000 in additional equity.

With that additional equity, a sponsor may attempt to refinance or, if the market is right, sell the property early. Although fantastic, neither of these is guaranteed. Through a refinance or supplemental loan, you would receive a portion of your initial investment back, while still cash flowing as if the entire amount were still invested.

Let’s pretend you invested $100,000 into a value-add multifamily syndication, and after 18 months, the sponsors refinanced the property and returned 40 percent of your original capital. Oh yeah, celebrate! This means you got back $40,000, plus the normal cash flow distributions on your full $100,000 original investment. That’s just sweet…

Phase #4 – Hold

The next phase constitutes holding the asset while collecting cash-on-cash returns (aka, cash flow). Since the value-add phases are complete and the riskiest phases have passed, the focus shifts toward attracting great residents and generating strong revenue.

Throughout the hold period, rent increases at a nominally low percentage each year, thus increasing revenue and contributing toward a steady appreciation of the property. The length of this phase, preferably 5 years or less, is based on the individual property, sponsor, and business plan.

Phase #5 – Sell

At this point, the property exhibits completed updates, increased revenues, and appreciation. So, the best use of investor capital is to sell the property so that they can seek their next investment project. During this phase, sponsors prepare the asset for sale.

Sometimes the asset can be sold off-market, creating minimal disruption for residents and keeping more cash with investors (no broker fees). Otherwise, sponsors go through the whole listing and sale process. Occasionally, if ALL investors agree, a 1031 exchange may be initiated. This allows investors to roll their capital and proceeds into another deal with the same sponsor.

Either way, once the sale is complete, you get your original capital back, plus a percentage of the profits. Time to pop those corks!

That’s it!

Just like Rafael’s five-paragraph essay, you have structure and focus within each step. Remember, every deal is different and not all syndications go through all five phases.

As a passive investor, you get to avoid the legwork, but you still want to thoroughly understand the typical phases of the value-add multifamily syndication process, so you’re informed every step of the way.

If you’d like to discuss how to invest in real estate via a syndication, I’d be happy to jump on a call with you. Schedule a call HERE.

If you’re ready to start exploring passive real estate investing, please sign up for our True Freedom Investor Network. It’s free to join with no commitment. It’s also the only way we can send you investment opportunities. Join now!

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