Crush your Top 3 Fears as a First-Time Multifamily Investor

Unlock the Confidence to Succeed

Multifamily syndications offer incredible opportunities to build wealth and create passive income.  

We have surely found this to be true, and many others have as well. But, as with any investment, it’s natural to have questions and concerns.

Do you have questions, concerns, or something else blocking you from making this investment?

Mike and I regularly talk with new investors who worry about risk, the credibility of the sponsorship team, and the potential returns. These concerns are valid and deserve thoughtful consideration.

In this article, I’ll address these three primary concerns through stories of investors like you, actionable insights, and wisdom from industry leaders.

#1 RISK AND FINANCIAL SECURITY

Every investor’s first question is often, “How safe is my money?” The most wealthy among us are careful to protect their invested capital. They don’t take uneducated or excessive risks.

As Buffet says, “The most important return is the return of your capital.” We agree.

Multifamily syndications involve risk, but strategies and safeguards can help mitigate it. A good sponsor will have contingency plans to handle unexpected challenges.

In 2020, just three months after purchasing our 128-unit apartment complex in Tallahassee, our work faced the unexpected challenges of the COVID-19 pandemic. Tenants began struggling to pay rent, leading to a temporary dip in occupancy. We communicated with our investment partners, secured additional capital, and adjusted our operations.

Our actions allowed the property to cover expenses and avoid significant disruptions. We implemented tenant support programs, such as flexible payment plans, maintained occupancy, and stabilized cash flow, actually increasing the property’s value.

It is essential to plan for the unexpected and prioritize financial security.

“In investing, what is comfortable is rarely profitable,” says Robert Arnott. Risk is a natural part of investing, but thorough preparation and intelligent risk management make all the difference.

Here are three Risk Mitigation Strategies to look for as you talk with the Sponsor of your syndication:

–        Reserves: Setting aside sufficient capital for unexpected expenses.

–        Market Analysis: Investing in markets with strong job growth, population increases, and rental demand.

–        Stress Testing: Evaluating worst-case scenarios to ensure the investment remains viable and to have considered contingencies.

As a passive investor, one of the Limited Partners in a multifamily property, you want to protect your capital. The best way to do this is to thoroughly evaluate the General Partners, their track record, and experience. They will be the ones controlling the outcomes of your investment.

#2 SPONSORSHIP TEAM AND TRACK RECORD

Do you know who you are trusting with your money?

The success of a syndication depends heavily on the Sponsor’s expertise, transparency, and ability to handle challenges.

Mike and I seek out the best multifamily syndicators in the country. We talk with many and focus on a few. After asking questions and conducting our due diligence on their track record and team, we are confident they can deliver.

A first-time syndication investor, Emily partnered with a sponsor to invest in a 160-unit property undergoing significant renovations. These ‘value-added’ opportunities, which involve improving a property to increase its value and potential returns, are one way to boost the ultimate investment returns, but they require additional skill and experience.

Halfway through the project, unexpected structural issues threatened the budget. These issues, which were not apparent during the initial inspection, required additional funds and time to resolve.

The Sponsor’s experience and extensive network of contractors allowed them to address the issue quickly and cost-effectively.

Throughout the process, Emily received regular updates, detailed explanations, and reassurance from the Sponsor. Despite the setback, the renovations were completed on time, and the property generated cash flow earlier than projected.

Emily’s story illustrates why choosing an experienced, communicative sponsor is critical to your investment’s success.

I remember something Sheryl Sandberg said about leadership. “Leadership is about making others better due to your presence and ensuring that impact lasts in your absence.” This is the kind of leadership you expect from an excellent multifamily operator.

A strong sponsor guides the investment and builds trust through clear communication and effective leadership.

Here are three things (among many) to Look for in a Sponsor:

–        Experience: Look for sponsors with a proven track record in multifamily properties.

–        Transparency: Sponsors should provide clear updates and be available to answer questions.

–        Alignment of Interests: Sponsors who invest their capital in the deal demonstrate confidence and alignment with investors. They need to have skin in the game.

Mike and I have prepared a list of 21 Questions to Ask potential deal sponsors. These questions focus on the Sponsor and their team more than on the particular property they are asking you to invest in. We have seen excellent properties with poor operators do very poorly. Great operators are the key to a property’s success as an investment.

If you want a copy of this PDF with the 21 Questions to Ask, CLICK HERE

#3 RETURN ON INVESTMENT AND EXIT STRATEGY

For many first-time investors, the third concern has been, “When will I see returns, and how much can I expect?”

Although every deal has its numbers, many can produce annual returns in the mid-teens over the life of the investment. 

Some first-time investors wonder if this is possible. We can show you example after example through the years where these and even better returns are the norm. “Really?” you might ask.

Yes, the potential for excellent returns in multifamily syndication investments is not just a possibility but a reality that can make your investment journey exciting and rewarding.

Multifamily investments do well because of the high demand for safe, clean, affordable housing. Profits are increased through  managing property efficiently from month to month and making use of the multiple ways to generate returns, such as net income after expenses, market appreciation, and property valuation. Another critical factor is the ability to use commercial loans to finance the property, which can significantly increase the potential returns through leverage.

While every deal is unique, a strong sponsor will provide realistic projections and a clear plan for distributing cash flow and exiting the investment.

Mike and I do our underwriting beyond what the syndicator has done to confirm their realistic projections. The lenders and appraisers also underwrite separately as an even more objective confirmation of the operator’s assumptions. These rigorous underwriting processes will give you confidence in the sponsor’s assumptions.

In 2018, a multifamily property in suburban Atlanta was purchased as a syndication. The sponsors implemented a value-add strategy, renovating units and improving property management to increase rents.

The original projection was a 15% annualized return over five years, with quarterly cash flow distributions of 7-8%. However, by year three, the property had appreciated significantly due to increased demand in the area. The sponsors received an unsolicited offer to sell the property at a price far above projections. After consulting with investors, they sold the property, delivering a 20% annualized return—exceeding expectations by five percentage points.

This outcome highlights how a well-thought-out exit strategy can maximize returns.

Was it Peter Drucker who said, “The best way to predict the future is to create it.”? Excellent multifamily operators employ a variety of approaches to generate the returns they expect from a property. It may take three to five years or more, but the strategies can be effective.

Strong sponsors actively create value through strategic planning and execution.

Here are three Components of a Solid Exit Strategy:

–        Clear Timeframes: A defined investment period, typically 5-7 years.

–        Multiple Options: Selling, refinancing, or holding based on market conditions.

–        Realistic Projections: Conservative assumptions to ensure achievable returns.

FINAL THOUGHTS

As a new multi-family partnership investor, your concerns about risk, the sponsorship team, and returns are valid. You are smart enough to identify your fears, anxieties, and problems. By addressing them, you are laying the foundation of intelligent investing. 

Addressing these concerns begins with partnering with a sponsor who prioritizes risk management, communicates transparently, and delivers realistic returns.

Here is a summary of three ways to address your concerns.

1. Risk Mitigation: Look for committed sponsors who plan for the unexpected, like reserves and stress testing, as demonstrated in the Houston syndication story.

2. Trustworthy Sponsors: Choose sponsors with a strong track record, skin in the game, and a commitment to transparency, as shown in Emily’s renovation project.

3. Achievable Returns: Partner with sponsors who provide clear and realistic plans for cash flow and exits, like the Atlanta value-add example.

Robert Collier reminds you and me, “Success is the sum of small efforts, repeated day in and day out.”

With the right Sponsor and due diligence, multifamily syndication can be a decisive step toward building wealth and achieving financial freedom.

Please reach out if you’re considering investing in a syndication and have more questions. We’re here to guide you and ensure your investment journey is informed, confident, and rewarding.

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