Value-add Multifamily Real Estate Syndications: The 6 Step Process

December 9, 2021
December 9, 2021 disrupt

Value-add Multifamily Real Estate Syndications: The 6 Step Process9 min read

There are multiple ways to invest in multifamily real estate. Some investors prefer long-term strategies like buying a property and holding on to it for a very long time, enjoying (hopefully) solid cash flow and capital appreciation during the process. Others like to buy a property, put renovations into it, and flip it as fast as possible to avoid potential market downturns. If you have ever watched a property flipping show on TV, they do this type of investment. It’s action-packed and can net a sizable return if done right. There’s yet another way, through value-add multifamily real estate properties. This approach is a hybrid between the two extremes above, and it can yield some of the best investment results. Sound interesting? Let’s dive into what value add multifamily real estate properties are and how you can participate in this type of investment.

Value-Add Multifamily: What Is This Investment Strategy?

A real estate syndication needs to have a story. Now, they don’t need to write a best-selling novel, but there needs to be a clear introduction, some action in the middle, and a clear ending. Many deals that run into trouble do so because there’s no well-defined exit strategy.

For some real estate investments, that’s ok. If you buy a multifamily property in Dallas that you’re planning on holding onto forever for passive income, it’s perfectly acceptable to have no exit strategy. But if you’re part of a syndication with multiple investors, having a clean break for when you get your money back and have the ability to find a new investment makes the most sense.

Similarly, you might buy that multifamily property in Dallas and leave it as-is to keep the rent checks flowing. However, just purchasing a multifamily property and leaving it is likely not as profitable as sprucing it up and charging higher rents. This would be “adding value” to an asset.

Example of a Value Add Real Estate Strategy in Multifamily

Let’s take a look at an example. Minor improvements such as a fresh coat of paint could increase rents by $50 a month per unit. Now, at first glance, this may not sound like it would have a big impact on your investment, however for multifamily properties, if you multiply that rent pop by 500 apartment units and you’ve dramatically increased investor returns by $25k PER MONTH. Not to mention, you’ll also see capital appreciation from your value add improvements.

This simple example shows you the power behind a value-add real estate investment strategy!

Now let’s get into the 6 steps of how the value add real estate strategy in multifamily works.  

 

The 6 Step Process of a Value-Add Multifamily Strategy

Having a structured plan is the key to a syndication’s success. For a value-add multifamily syndication, six distinct steps need to happen, and they will flow as follows.

Step 1: Identify a Value Add Multifamily Real Estate Property

The first step is to find a multifamily property that has value add potential. When researching for a value-add multifamily complex, here are just a few questions to ask when finding and identifying a great value-add real estate opportunity!

Is there a value add opportunity? 8 questions to ask when looking for value add opportunities:

1. Is the property achieving rents below comparable properties? Why? Is there an opportunity for a sponsor to bring units up to par with comparable properties?

2. Are there current unit upgrades being done at the property? What is the rent they are achieving on upgraded units vs. nonupgraded ones? 

3. How is the onsite multifamily property management company operating the property? Is there room to improve operational efficiencies?

4. Are vendor expenses too high expenses compared to the surrounding market? Is payroll too high? Look for areas to trim expenses. 

5. Is there eviction that needs to execute? Does the property need security implemented (patrol, security gates, cameras) to improve the safety and peace of mind of your residents? 

6. How is the online reputation of the property? Can rebranding can increase the value of the property and bring in new tenants? 

7. Take a look at the interiors/exteriors; how can you bring the asset in line with high-performing comps in your market? A new fresh coat of paint? New furniture? Improved landscaping? Could you add in fenced-in patios for first-floor tenants?

8. How are the amenities? Can you modernize and revamp your current amenity set? Is there open space in the interior/exteriors of the property that could add value to your residents? Think of a dog park, gym, amazon lockers, or improved office space.

Once you have identified a way to add value to a property and you can move to step 2- acquiring the real estate property!

 

Step 2: Acquire The Value Add Real Estate Property

Once a syndicator(s) locates a quality multifamily property, they will move towards getting it under contract as quickly as possible. Once under contract, the syndicator(s) will perform due diligence, ensuring that the property is in the right condition met for their value add investment strategy and will meet the goals of their investors.

After the syndicators are sure about the financial state of the deal, they open it up to investors. Investors will see an offering memorandum, maybe a webinar or something along those lines, and decide if this value add real estate property is right for their investment. Once the sponsors raise enough capital to acquire the property, they will work to close the deal.

 

Step 3: Adding Value to the Multifamily Property

This step is where the magic happens. Here is where the sponsors add value to the property itself.

Naturally, what adding value looks like is different for every deal. However, for multifamily real estate, this typically includes renovations, exterior landscaping enhancements, adding a dog park, updating the pool, remodeling interior units, improving the security of the property, and building out other amenities that tenants love and can bring in more capital!

If interior renovations are necessary, those typically start with vacant or down units first. As leases come due, the property management team can move the tenants to the upgraded units, which frees those old ones up for renovation.

The timeline for adding value to the property can vary but for a rule of thumb, you can expect about a year to a year-and-a-half. Some projects may take even longer, though, especially if all interior units need renovations and you have to wait for multiple (or multi-year) leases to come due!

 

Step 3: Refinance the Property

Wait, refinance? Why?

You may be sitting there wondering why you would refinance the deal? With all these repairs done, why not just cash out! Or, enjoy the higher rents and hold it for a little while.

The answer all has to do with valuation.

How are multifamily properties valued?

The valuation of a multifamily property happens differently than a single-family home. Comparable sales determine single-family home appraisals, but a multifamily dwelling’s worth comes from how much money it generates.

A multifamily real estate complex generating $1 million a year in rent is worth more than one generating $50,000 – assuming both are in the same submarket.

The refinancing often comes in the form of a supplemental loan which goes on top of the original loan. Any monetary proceeds from that additional loan go directly to the investors as a form of an early disbursement.

Here’s the magic of value-add multifamily real estate: let’s say you invest $50,000 into a project. The sponsors buy the building and add value after 12 months. Now the building is worth 50% more (it can happen!). They then acquire an additional loan for that 50% and can return the capital to the investors.

That means, after one year, you’ve got 50% of your original investment back ($25k)! You can invest that in another deal if you want! Additionally, all investment returns (let’s say $5k per year) remain the same. Instead of making $5k with $50k invested, you’ll be earning $5k with only $25k invested! And you’ll still get your initial investment back plus any further appreciation when they sell down the road.

Note that not all value-add deals will do this. Sometimes all you can do is hold. Other times, the market is so strong that the sponsor can find a great buyer and get out of the project early. It all depends.

 

Step 4: The Holding Period

Once all the additions and improvements are in and the sponsor refinances the property (if applicable), the sponsor will continue to hold onto the property until they seem a prime time to exit. During the hold time, investors will still be receiving a cash-on-cash return and an economic appreciation of the property. 

The amount of time the deal’s sponsors will hold the multifamily complexes will vary on the state of the market and the business plan of the asset. Most real estate syndications will be between 3-7 years, and that’s the standard. However, no law or rule is saying that it must be five years. Some deals will be longer while others will be shorter.

For example, many deals at Disrupt Equity have closed in as little as 18 months- and still achieved our investor’s incredible returns!

 

Step 5: Time to Sell the Multifamily Property!

Last but not least is selling the building. You may be asking; I am earning high passive income from this real estate syndication-why would I want to sell?

Although while holding the multifamily property would continue to generate passive income for investors, once the value has been added and rents have been pushed, that’s often not the best use of investor capital. At this point, the best thing to do is to dispose of the property, return the money to investors so they can deploy their capital into another value add real estate property, and repeat steps 1-5 of this article!

 

A Value-Add Multifamily Real Estate Syndication Could Be the Best

While no investment has any guarantees, a value-add multifamily syndication often has a path to the success of your investment. Simply put, it has a well-defined entry (acquiring the property), a two-pronged approach to adding value (holding onto the asset and renovations), and has a short-enough timeframe that (hopefully) the market doesn’t move too much in the other direction. In other words, it’s a strategic, thoughtful approach to investing your hard-earned capital!

Although passive investors in a real estate syndication would not be integrated into each of these phases of a value add strategy, it’s important to partner with a reputable real estate syndication company that offers these types of value add opportunities for your investment! 

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