SS282: What Passive Investors Look for in Apartment Deals

SS282: What Passive Investors Look for in Apartment Deals

Passive investors in apartment syndications typically prioritize the stability of their capital and the reliability of the team managing it. In this episode, Charles discusses what passive investors look for when investing in multifamily syndications.

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Talking Points:

  • I have been a passive real estate investor since 2018, and during that time, I have invested in 3 dozen properties, as single syndications and as funds, while also speaking to hundreds of passive investors for our own deals.
  • When speaking to a passive investor about a specific deal or during an introductory call, the investor usually has a few parts of the deal that they are most interested in. If they have just sold a property and want to offset taxes, they might be mainly interested in the tax benefits of your deal. If they invested in a poor-quality property or in a less-than-ideal area and lost money previously, they might be really interested in the property’s condition and the surrounding area. I always make notes of this when speaking to them, but overall, there are a few things I have found most important for passive investors.
  • 1. Sponsor Team
    • How many deals have you done? 
    • Have you gone full cycle (bought → executed → sold/refinanced)? 
    • How did past deals perform vs projections? 
    • Have you handled downturns or challenges?
    • Alignment of Interests. What percentage of the raise is coming from the general partners?
    • Communication and Transparency. Regular updates monthly or quarterly? What is included? Do you have samples of these updates?
    • Property Management and the sponsor’s relationship with them. How long have you used them?
    • Lender and the sponsor’s relationship with them. How many loans do you have with them?
  • 2. Risk Profile.
    • Conservative underwriting?
    • Accurate rent comparables?
    • Downside protection: find the closest apartment building, in the same vintage, with the same amenities, and condition; what is the difference in rents? That is your true downside protection.
    • Test the business plan: find the closest apartment building, in the same vintage, with the same amenities, and in a renovated condition; what is the difference in rents? Now you can see if their rent assumptions are even possible.
    • What is the break-even occupancy? Can you cover all expenses and debt servicing with 20% or 25% vacancy?
    • How much do you have in reserves? How many months of expenses?
  • 3. Market and Location.
    • Population and job growth 
    • Landlord-friendly regulations of the state and municipality
    • Diverse employment base
    • Google Map and Justice Map review of the area. 
    • Growing markets provide more margin for error.
  • 4. Business Plan.
    • What is the story of the property? Why are they selling?
    • What is the business plan? Has the business plan already been started?
    • How will the business plan be adjusted in a pullback?
    • Anticipated hold time and the requirements and process for investing.
    • How are you also raising the NOI without raising rents?
  • 5. Returns.
  • I believe most passive investors have a couple of points that they are mainly focused on, but the deals that consistently get funded aren’t the ones with the flashiest projections; they are the ones that clearly communicate a solid plan, realistic assumptions, and strong alignment.
  • If you would like to learn how to minimize your risk when investing passively, check out episode SS117.

Transcript:

Charles:
I’ve been to passive real estate investors since 2018, investing in over 30 properties while speaking with hundreds of passive investors, and I started noticing a pattern. While new passive investors focus mainly on returns, some of the most successful passive investors focus primarily on limiting their downside risk. Welcome to Strategy Saturday, I’m Charles Carlo, and today we’re breaking down what passive investors actually look for in apartment deals. Let’s get started. I’ve been a past real estate investor since 2018, and during that time I’ve invested in three dozen properties as single syndications and as funds, also speaking to hundreds of passive investors for our own deals. When speaking to a past investor about a specific deal or during an introductory call, the investor usually has a few parts of the deal they’re most interested in. If they have just sold a property and wanna offset taxes, they might be mainly interested in the tax benefits of your deal.

Charles:
If they’ve invested in a poor quality property or in a less than ideal area and lost money previously, they might be really interested in the property’s condition and the surrounding area. I always make notes of this when speaking to them, but overall, there are a few things I have found most important for passive investors. Number one is sponsor team. So how many deals have you done? And this is as a syndicator, and then also with your own funds because if you just go off of this is their second syndication deal, you’re not taking to the relationship all the other previous deals that they’ve done with your own money. Have you gone full cycle, bought, executed, sold, and refinanced? How did past deals perform versus projections? Have you handled downturns or challenges before? The alignment of interest, what percentage of the raise is coming from the general partners?

Charles:
Communication, transparency, regular updates, monthly or quarterly, and what is included? Do you have samples of these updates? Property management and the sponsor’s relationship with them? How long have you used them and lender and the sponsor’s relationship with them? How many loans do they have with them? Number two is risk profile. Is the underwriting actually conservative? Are the rent comparables accurate? What is the downside protection find and closest apartment building in the same vintage with the same amenities and condition? What is the difference in rents? That is your true downside protection. Now, test the business plan. Find the closest apartment building in the same vintage with the same amenities, and in a renovated condition. What is the difference in rents? Now, you can see if the rent assumptions are even possible after they have executed the business plan. What does a break even occupancy? Can you cover all expenses and debt surfacing with say, a 20% or 25% vacancy?

Charles:
How much do you have in reserves? How many months of expenses are in reserves? Number three is market and location. So we wanna look at population and job growth, landlord friendly regulations of the state, municipality, diverse employment base. We don’t wanna see one employer or industry being over, say, 20% of the employment base. Look at the property in both Google Map and justice maps. Justice maps breaks up an area as an overlay over Google Maps by income, so you can actually see if the people can afford the rent that are living there. Growing markets provide more margin of error, so if you’re investing in a stagnant market, you have to make sure your numbers are 110% on because there’s not gonna be any kind of buffer if you make a mistake. Number four is the business plan. So what is the story of the property?

Charles:
Why are these people selling the property? What is the new owner’s business plan and has the business plan already been started? Which you’ll see a lot in value add properties is that someone’s selling the property takes a hundred units and maybe 10 of the units they’ve gone through and done the renovations, and then what they’ve done is what these renovations they can now prove to the new owners. People. There is a demand for this renovation and people are paying $300 more per month for it. How will the business plan be adjusted in a pullback? What does the anticipated hold time in the requirement and process for investing? And how are you raising the NOI without raising rents, which kind of goes hand in hand with investing in a pullback or the business plan being adjusted in the pullback? Number five are returns, sort as the cash on cash return, the preferred return, the IRR, the internal rate of return, the proposed equity multiple, and any tax advantages and benefits of investing.

Charles:
I believe most passive investors have a couple of points that they’re mainly focused on, but the deals that can consistently get funded aren’t the ones with the flashiest projections. They’re the ones that clearly communicate a solid plan, realistic assumptions and strong alignment of interest. If you’d like to learn how to minimize your risk when investing passively, check out episode SS 1 1 7. That’s SS 1 1 7. I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics@globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our mentoring programs@syndicationsuperstars.com. That is syndication superstars.com. Look forward to another episode next week. See you then.

Links Mentioned In The Episode:

  • SS117: How to Minimize Risk When Investing Passively in Real Estate Syndications

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