Skip to content 
Acquisition Phase
This phase involves identifying, evaluating, and securing a multifamily property which requires market research, property analysis, negotiating terms, and finalizing the purchase.
Market research is important for longevity and affordability. A lot goes into ensuring you are in the right market which is a separate article in and of itself. However, there are at least three factors that must check the boxes 1) jobs, 2) population, and 3) affordability. There is a lot to unpack for each of these, for example jobs must be diverse and affordability can also come with heightened crime risks.
Property analysis means making sure we are not acquiring someone’s problem. Things to consider here are the age of the property, deferred maintenance, and taxes and insurance. Older properties may have aluminum wiring or cast-iron piping which can affect the insurance and capital expenditures. Deferred maintenance is usually more of an opportunity when negotiating price, but only if it is uncovered during the due diligence phase. Taxes and insurance can constantly change. Your operations team should always call the local tax assessor’s office to get an accurate grasp on expected cost and also work with insurance brokers to secure the best coverage at favorable rates.
Terms that are negotiated can include: interest rates, loan-to-value (LTV), purchase price, and many others. Of course, negotiating power is dictated by the market and due diligence. Negotiating in a seller’s market is much different than a buyer’s market. Knowledge about the asset and instrument you are attempting to negotiate is critical for gaining favorable terms.
Once due diligence is complete and terms are agreed on, it is time to close on the property. Closing means raising the remaining capital necessary to not only cover the purchase price, but also line the reserves for operating expenses and capital expenditures. During this latter phase, our legal documents are also completed which set up the holding company for the property and get us in compliance with federal and state SEC rules.
Operational Phase
The operating phase is often overlooked by passive investors. This is likely because passive investors, as they should, expect the investment to run smoothly after the acquisition. Unlike the acquisition and disposition phase, syndicators are not advertising the operational phase in a slide deck through hard numbers, which is what we all like to see. Instead, the operational phase can be evaluated by looking at the lead sponsors on the syndicate and their track record. How many deals have they done, how many have been full cycle, and are they meeting their estimated returns? These are important questions to ask and if your sponsor cannot answer or will not let you speak with the lead sponsor then maybe the team not worth your money and time.
Capital improvements should get started as soon as possible. The earlier the team can start and complete the capital improvements the better return for the investors because this shortens the hold period and increases internal rate of return.
Expect cash flow to decrease temporarily during capital improvements. If the team is making interior renovations, the units they are renovating will likely need to be vacant. The schedule will need to align with the lease renewal schedule and the vacancies should be included in the underwriting.
Stabilizing the property in many ways falls to the property manager. The asset managers will vet all property managers in the market to ensure they have the right company for that asset class and local market. Nonetheless, a syndication team still needs to conduct regular meetings with property management to discuss shifting priorities and expected vacancies.
Acquisition Phase
The capital phase can include a sale or refinance. Almost all syndicators today prefer to refinance and hold the property long term. Why? Because the previous two steps are simply difficult, requiring high levels of stress and work. Refinancing and holding the asset benefits the parties that prefer to enjoy cash flow from multiple properties for lifetime security.
Refinancing is not always preferred by the investors for multiple reasons. 1) taxes: several investors join as limited partners on multifamily deals to enjoy the front-loaded depreciation of the asset, which allows them to save taxes on other forms of passive income. 2) Higher rate of returns: Keeping your capital tied up in an asset that is no longer yielding the high returns that brought you in is less attractive for investors. Many investors prefer to get their initial contribution back with expected returns and re-invest with another or the same syndicate in a different deal. This keeps the returns high and does not require significantly more effort on the investor’s part. 3) GP and LP split can change after refinance. Throughout the initial acquisition and operation phase, the investors are getting almost all cash flow. After the capital phase, the split could change to something more even in addition to decreased cash flow which can make staying in the property less attractive for investors.
Refinancing and staying in the deal is an increasingly common investment strategy that syndicators are adopting. Syndicators should by forth coming about this during the offering and if they are not simply ask them. There is nothing wrong with this strategy and it does not hurt investor returns. Passive investors even have the option of staying with the syndicators for the long-term.
As a passive investor, you should never be in the dark on the progression of the business plan. Sponsors should send out regular updates, good news and bad. When you have questions never hesitate to contact the sponsor that brought you in on the deal. You may play an active role in asset management, but your capital helped close the property and you are owed a reliable line of communication with the management team.
