A Limited Partner is a passive investor in Multifamily Real Estate syndication. By definition, the limited partner is basically responsible for bringing capital to the deal.
My conversation with Lane Kawaoka, host of the podcast Simple Passive Cash Flow , takes an honest look at multifamily real estate investing from the limited partner view.
Lane started in single family real estate and quickly realized that in order to grow enough cash flow to replace his W2 job he needed to scale. He recognized that Multifamily real estate was the answer, but did not know how.
In Multifamily, you can go it alone, partner, joint venture, or syndication. Syndication is a group of investors that pool their money to purchase a larger property that is likely out of reach if they tried to purchase alone.
A syndication has two level of partners,: General Partner and Limited Partner.
The General Partner (GP) is the quarterback. They are responsible for qualifying the market, connecting with local brokers, finding the property, coordinating the prospectus, attracting investors, operating the property. For this work, the General Partner is compensated for operation and performance of the deal.
The LImited Partner (LP) supplies the capital needed for the down payment and capital expenses. They have no duties regarding the acquisition nor operation of the property other than providing the capital. This is truly a passive investment for the LP.
When you are an LP, it’s your job to find an opportunity and a GP, operator, that you feel will do a good job and provide solid returns on your investment. So, what are you looking for in a General Partner?
A qualified General Partner, individually or his team, will posses a proven track record. “Past performance does not necessarily predict future results”, however, it does give you a chance to judge if the GP and team are qualified.
Things to look for in a General Partner:
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Prior CREPN episode:
Multifamily Syndication is a team sport. You will multiply your success when you create a winning team.
Vinney Chopra has successfully purchased over 26 multifamily properties through syndication. In this interview he describes the members you need on your multifamily syndication team for success.
Relations at all levels are key to your success in all real estate investing. For newer syndicators, you can overcome a lot when you have experienced professionals on your team.
Once you have selected an emerging market to invest in, you need to find the following members for your team.
Partner: this is the person you identify with that shares your vision and can share in doing the work that needs to get done. Someone with a different skill set that compliments you tends to work best. There are numerous jobs that need to be taken care of and together you can divide the work and conquer. One thing to consider is a partner with strong financials. Chose your partner wisely because you will likely be working together for multiple years.
Commercial Real Estate Brokers are essential to success. Due to the nature of commercial real estate, having relationships with multiple brokers can pay dividends. Brokers have the relations with the local property owners, know the market, the properties, owners and who is a potential seller. You will do best if you present your specific buying criteria so they know exactly what you are looking for.
Loan Broker is your source of funding. The amount you will qualify is dictated by the networth of your general partners. An experienced loan broker will know the various programs available and be able to find you the best funding.
Attorneys are critical to the legal structure needed for your success. The attorneys will form the LLC entity for the property and your operating company. You also need a securities attorney to prepare the private placement memorandum, operating agreement and subscription agreement. Each of these are critical your ability to raise money and stay out of trouble.
Property Manager has the critical needed experience managing multifamily properties. The property manager will also help recognize issues during your inspection that need to be addressed with the seller. An experienced property manager has will convey confidence to lenders and your investors. A good property manager has relations with contractors, knows the laws and has systems to deal with most situations. Their experience is key to the profitable operation of your property.
Investors: Start talking to everyone as soon as you decide you will be investing using syndication model. You must have a prior relationship with your investors who invest in your syndication. Without investors, you will never buy a property.
CPA: Your CPA will prepare the annual financials you need to communicate the property’s performance to your investors. Your investors will expect your numbers to be presented in a standard accounting format.
Contractors of all types. The good news is that with multiple units, you have the chance to achieve economies of scale. When you find a quality contractor that provides the best service and price, add them to your “preferred vendors” list. These are your go to solutions when a problem arises. Let the contractors know that there will be additional work in the future and see if they can recognize this future work in their pricing.
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Prior episodes with Vinney Chopra
Multifamily due diligence can be a black hole for real estate investors.
Nathan Tabor has learned expensive lessons from flipping multifamily properties. He shares some lessons and what you can do during due diligence to avoid learning the hard way.
Remember, the object is to learn all you can before you close so that you have no surprises. Here is a short list that every real estate investor can use.
Before you spend any money on physical inspections, contact the local authorities. When possible, go to the building permit authority in person and confirm that the property is zoned for the current usage, and future usage if you have construction plans.
Find the local Housing Authority. It may be the city or county, but usually there is an advocate for tenants to complain to. Look for complaints against the property. Google the property to see what comes up. If the property is not well taken care of, tenants will likely complain. Find out if any complaints have been filed before you close. They will be your responsibility after the property is yours.
Look for the eviction court record. How many evictions have been filed against the tenants at the property. If there are a lot of evictions, you have a very unstable property.
Crime records; how many times have the police been called to the property and for what. You can renovate a property, but it is really hard to renovate a neighborhood.
If the above issues check out, it’s time to move to the physical property due diligence.
Older properties can be an endless opportunity for unplanned cost. Some things Nathan has learned to check for.
Know the entire Electrical system. Check every plug to make certain there is power. Ask questions about the wiring. Is there any aluminum wiring? Are there fuses or circuit breakers. If circuit breakers, what brand of electrical box? All of these can significantly affect the insurance you will be able to get for the property and the cost.
Trip and fall hazards. Inspect the parking lot, walkways and stairs for cracks and uneven surfaces. If there are issues, you need to identify them now and the cost to fix. If you don’t and the insurance company inspection is unfavorable, you could lose your insurance.
The plumbing system. Sit on every toilet to see if the sub flooring is solid. Scope all of the waste lines for any blockage or failures. Turn on the water in multiple fixtures at the same time and see what happens. Is there a fire hydrant on the property, if so is it yours or the city’s? Find out the answers and get estimates for needed repairs.
If you pay to much, you can lose you can mess up your future opportunities to invest in real estate. Your offer price cannot be more than the property can support. A good way to avoid paying too much is to back into your offer price. How much you want to make? What are the estimated repair cost, carrying cost, etc? Add all of these together and you will know the maximum amount you can offer. Leave no stone unturned.
When you get your loan offer, be sure to read the requirements for insurance. If the loan allows for a maximum deductible of $5,000 and your insurance quote has a $25,000 deductible, it will cost you to buy the lower deductible.
Verify the Sellers numbers. Verify the Rent Roll with the bank statements to see if the rent deposits match the rent roll. You can also ask for tax returns. The seller may inflate the rent roll, but will likely not inflate rent collected on his taxes.
For more go to: nathantabor.com
The Rent Roll Triangle is a simple underwriting calculation to determine if the property has potential for a value add strategy.
John Wilhoit is an experienced asset manager. He takes us through how you can utilize the rent roll triangle so you can determine how the current income of a property compares to its potential.
The rent roll triangle compares the collected rent to the gross potential rent to determine how the property is currently performing against its potential. Once calculated, you will know if there is an opportunity to increase the rents. If you are looking in a particular market, you can look at multiple properties to determine which property to submit a letter of intent on.
Numbers needed to calculate the Rent Roll Triangle:
How to calculate the Rent Roll Triangle:
Divide: Annual Collected Rent / Annual Gross Potential Rent
Annual Collected Rent: $80,000
Annual Gross Potential Rent: $100,000
$80,000/$100,000 = 80%
The property is rented to 80% of its gross potential, or
there is a chance to increase rents by 20%.
From here, you will need to determine how significant of a value add is needed to raise the rent. Is it a simple matter of increasing the rents, paint, or do you need significant capital improvements? How long will it take to earn back the cost of the upgrades?
There is an endless number of calculations real estate investors can use when evaluating an investment property. I have found that experienced investors focus on a couple of measurements when investing.
Use the Rent Triangle to quickly determine the income potential of your next value add real estate purchase. Regardless if you are buying a duplex, apartment building or office building, this easy to use calculation will show you a property’s potential upside.
So, if you are looking for an easy calculation to determine if there is more underwriting needed, consider using the Rent Triangle.
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