Before investing in multifamily syndication there is a lot to consider.
In this video, we will talk about what real estate investors look for before investing in a multifamily syndication.
Transcripts:
Chris Bounds 00:00
Brian, when talking with investors, so passive investors, folks, they’re going to be providing the equity for these deals. What are you talking about how the story is important? The location is important. But what are some of the other key concerns or maybe not even concerns, but just key pieces of information that you’re seeing that investors want in order to feel comfortable with further dialogue. It may not mean that they actually commit to investing in that particular deal, but to entertain and go down that path of interest and hopefully investing?
Brian Alfaro 00:37
Yeah, I think, it’s important to go back to that conversation about your investor avatar, because different investors ask very different questions. If you’re talking to an investor who’s very yield driven, they want that cash flow, they’re very likely chasing those C-Class assets. Their questions might be revolved around the cashflow and how you guys are going to execute your value added plan to in order to achieve those returns and different questions like that, we lean a little bit more on like we’ve talked about the core, Core Plus assets.
You’re going to have a little bit lesser yields, we’re not going to have the same returns as a huge value add play. But it’s also a little bit it’s better, because it’s risk adjusted, right. Those investors, they’re typically looking for more appreciation, equity upside and they’re looking for tax benefits, because they have jobs already, or have other income streams through other investment vehicles where they’re not living or looking for cash flow. Do they want cash flow? Yes. But it’s not the primary driving factor behind their investment decision.
Chris Bounds 01:35
Somebody’s wealth preservation.
Brian Alfaro 01:37
Wealth preservation, right. Somebody who’s yield driven, they won’t touch anything that’s less than, say, 8%. Just to use an example. Versus you know, somebody who’s looking for wealth preservation and you pitch them this awesome opportunity, a place for them to park their money that’s more secure and more stabilized in their mind in a volatile stock market or cryptocurrencies. They might take a five or 6% cash on cash, but still have a 1.92x, multiple on a five to seven year hold. Right. I would say for us, some of the questions we get are definitely about, people ask about the depreciation and tax benefits, they want to talk about cost segregation, and that how that can benefit them.
I know on our deal, we closed on December, that was a big conversation to bonus depreciation, especially at the end of the year, a lot of people are looking for like, okay, it’s that last quarter, I need to put some money to work to get those tax benefits, especially, we talked about how somebody in the family is usually a realtor, right? You have that real estate professional status, which then sort of blanket and benefit the whole family? Yeah, so that’s a big conversation as well. And then really, they I would say, to kind of just keep it simple. They want to know, how are you going to protect their capital? You know, what’s the business plan? How are you going to put my money to work? What’s sort of the worst case scenario, which goes back to, we were talking about sensitivity analysis. You guys have this floating rate debt or this fixed rate debt? What happens if this happens?
And then what happens if that happens? And I think it goes back to Cody’s point about when he was raising capital, the first time being able to confidently answer those questions. Nobody has a crystal ball, right? We can say we have this, we have that, we have this abundance amount of reserves and we have this rate cap in place and we’re planning on refinancing into fixed rate debt. You can say all the right things, but which is important because you want to have a response to everything, but we don’t have a crystal ball. And all you can really do is let them know, like, look, we have different exit options and different strategies in place, depending on what happens with the market. I think that really gives investors confidence. Because if you go to somebody and say, Hey, this deals amazing, but it’s only amazing. If this particular scenario plays out, rates have to stay low rents have to keep going up.
Amazon has to build a new facility next door like they’re talking about, if those are the only things that make it a good deal, that makes it a little risky for the investor and not as comfortable versus saying, Okay, here’s our sensitivity analysis. Here’s what happens if we don’t hit our performing rents. Here’s what happens if rates do go up. And maybe we get closer to that rate cap, here’s what happens if we don’t continue to see cap rate compression and cap rates actually go up a little bit. Here are the different scenarios based on that.
And I think showing them that you’ve educated yourself and that you have those options available gives them confidence that you’ve done your homework, which is you know, that’s really important to them, because people don’t want to park their money with somebody who like Cody was saying, No, you’re not educated enough. That’s really important. I would say those are the big things that we really get talking to this accredited investors that we really target as our investor avatar. Cody, anything you want to add to that?
Cody Laughlin 04:21
Yeah, no, I think he hit the nail on the head. I think it goes back to the importance of identifying what your thesis is and going to, specifically get be intentful about the type of investors that you’re attracting that align with your thesis. To Brian’s point, I mean, when it comes to the equity side, those your cost of equity is ultimately what’s going to allow you to be competitive.
When you talk about raising capital. Right. And, you know, there is a significant difference overall, versus the accredited and non accredited investor. We don’t, we’re not going to go into detail about that. But you got to basically find the investors that fit your investing thesis and align with your strategy. If you have a lower cost of equity, that can it can give you a lot better competitive advantage you just got to figure out what that means to you and what what your strategy is but I think Brian do a good job there.