How Does This Thing Work, and How Much Am I Going to Make?
Suppose you have $250,000 that you have been wanting to invest, and you decide you are going to place it into apartment syndications, and earn passive income. When I invest in syndications, I aim to double my money within five to six years. You will see the term equity multiple on the offering. For example, the equity multiple might project 1.9x after five years. Your equity multiple maybe 2x after just five years, meaning your $250,000 is now worth $500,000. This sounds great, but other things are going on under the hood that will improve your position.
As we know, apartment syndication is a pooling of investor's money to buy significant assets ( in this case, an apartment). But how does it work, and what are you going to get in return? What am I going to get in return? It is a fair question to ask. It is a question you should be asking - and quantifying. If I ask my stockbroker," what am I going to get in return when I invest in UBER's IPO?" His correct answer should be: “I have no clue, good luck.” When I place a bet on Krypto currency, his answer might be: “Best of luck, but there is a good chance you are going to lose it all.” Even when you invest in a mutual fund, the firm hands you some historical data on how the fund has performed over the last 5 to 10 years. They then go on to quote, "Past Performance Is No Guarantee of Future Results.”
Conversely, when you invest in apartment syndications, you are given a detailed prospectus quoting projected returns based on market economics and a sound business plan. This plan has not only been vetted by the lending institution that will provide the loan, but also a professional property management company. The Property Management will oversee the asset and be involved in the execution of the business plan, and they, along with the lender, have a vested interest for the asset to succeed.
How is this going to work? When a Syndicator finds an opportunity, they will send you a prospectus, referred to as an Investment Summary. This summarizes the details of the returns, the business plan, and the timeline for achieving those returns and business plan. This lays out the story in great detail.
How much am I going to get in return? Suppose you have $250,000 that you have been wanting to invest, and you decide you are going to place it into apartment syndications, and earn passive income. When I invest in syndications, I aim to double my money within five to six years. You will see the term equity multiple on the offering. For example, the equity multiple might project 1.9x after five years. Your equity multiple could well be 2x after just five years, meaning your $250,000 is now worth $500,000. This sounds great, but other things are going on under the hood that will improve your position. Once the business plan has been executed, the operator will seek a refinance or supplemental loan. With the rents and overall revenue raised, the operator goes back to the bank and shows the improvement in net operating income (NOI). They are then given a new loan based on the increase in value. The operator then returns all or a significant portion of the investor’s original investment. Investors still continue earning cash flow on the property and will share in the profits, once the property is sold (Carefully read the PPM, the operating agreement, and subscription agreement to make sure the deal is structured this way. If it is not, walk away). The investor now can redeploy that returned capital (from the refinance) into another syndication, exponentially increasing the number of syndications they now are invested in. Thus, if the original $250,000 was divided into five syndications, by the end of year two or three, that investor might now have the option of investing in 5 more apartments. This would bring his or her total number of syndications he or she is in, to 10 (only after three years!). This is how the real wealth begins to build, and why it may be shortsighted to think your capital will be locked up for the next five to 10 years.
Obviously, we cannot assume that every business plan in every syndication will be executed perfectly, so what is the downside risk? Maybe there is a slowdown in the market, and the building needs to be held a little longer. The return of investor capital could be delayed for a few years while we ride out the storm. Rent growth can flatten in a down market, so along with it, your COC (Cash on Cash return) may get reduced from 8–10% to 2 -4% for a few years. While that return does not sound attractive, remember that you are not losing your investment, you are merely waiting out the storm. To draw a comparison to the stock market and to quote a few people: “everyone’s 401k’s became 201k’s with the last recession.” Also, do not confuse Multifamily with a Single-family investment. A record number of people lost their homes in that same 2008 crash. Many of those people moved into multifamily communities, I might add. People will always need a roof over their heads, and that is why Multifamily is considered recession-resistant. It is actually an attractive alternative in times of duress. Not to go off on a tangent about risk diversification, but remember when your single-family residence is vacant, you are 100% empty. If five tenants leave your apartment, you are still 95% occupied in a 100 unit building. To be entirely fair, investing in the stock market is much more liquid, but when that market caves, an interesting phenomenon occurs. Investors say to themselves, 'It will come back tomorrow," and then it drops another 1000 points. Even though you can sell it immediately, most of us do not hit the SELL button. I know that feeling; it makes me sick to my stomach.
Enough scary talk – let's get back to the cup being half full. When you consider "what will I get in return?" Doubling your money in five to six years sounds pretty great, but remember the multiply effect: The redeploying of your capital when it is returned. The number of apartments/syndications that you are invested in may jump from five to 20 in a shorter period then you may think. That original $250,000 could become $1,000,000 in equity after 8 years. Even if you decided to live off 10% of that as passive income (a passive income salary of 100k), you could still be redeploying the other half. You would never allow the nest egg to run out. Make sense? Confused? Have questions? Please ask!