“Ninety percent of all millionaires become

so through owning real estate” ~ Andrew Carnegie

Not all real estate is the same. Take multi-family vs. single-family. The difference between the two is how the property’s value is established. With a single-family structure i.e. a house, we find ourselves at the mercy of the marketplace. The value here is determined by comps or comparable sales meaning recently sold homes that are similar to the property you’re trying to buy or sell in terms of location, size, condition, and features. Appraisers will look at comparable properties that have been sold in the last 90 days, and if there are not enough to compare, they may go back 12 months. In a real-world application, it could look like this scenario… let’s say you purchase a home to flip, you pour in a ton of money, not to mention the sweat equity, into the renovation, only to have the guy across the street dump his house for an under market price because he lost his job. The decision of your neighbor regardless of motivation just took a direct hit to your battleship, so to speak, and you just lost all of the potential value of your new reno and are now upside down in your investment.

However, in the multi-family space, “forced appreciation” is one of the primary distinctions between investing in a house, and investing in an apartment complex.

You see, the banks value apartment complexes based on their income stream (cash flow) and their “net operating income”. This means all the income minus the expenses, not counting the mortgage (also called “debt service”). Here at Gibbys Capital, we know how to facilitate forced appreciation by raising the monthly cash flow. How do we accomplish this? We do so either through increasing incoming revenue, reducing expenses, or both. We call these strategies “value add opportunities”.

Real-world example, say the previous owner has been paying too much for utilities, vendor contracts, payroll, or marketing. We identify inefficiencies or poor management practices and reduce those expenses. This results in a rise in monthly cash flow which impacts property value by making it go up. By the same token, if the tenants are paying less than the “market rent” (amount of rent compared to similar properties), we raise the rents to be competitive. In addition to this by adding other amenities that generate revenue (laundry facility, vending machines, pet deposits, pet rent, preferred covered parking, etc…) monthly cash flow rises, and again we see the property value go up. All of this adds up quickly. Take for example a 100 unit property, by simply raising the rent by $100/month (100 units x $100 x 12 months x 10-year hold) we see the value increase by $1,200,000. That is not too shabby!

What is multifamily syndication?

Multifamily syndication is a real estate investment with multiple investors pooling their money to purchase the asset. There is a sponsor that locates the deal, coordinates the transaction and financing, and manages the investment once the deal has closed. This sponsor is referred to as the general partner (GP). Passive investors supply most of the capital required in exchange for an equity stake in the real estate.

Multifamily investing is attractive to a lot of investors because they provide consistent income and are considered one of the safer types of real estate investments. Investors receive regular cash flow from the liquid portion of revenue from paid rents after the debt service is paid, and an equity payment when the property is sold or refinanced after the 3, 5, or 7 year hold period.

So why invest in multifamily syndication?

We are glad you asked! The primary reason investors like syndication deals are because they are passive. The investor doesn’t have to be involved with any of the property management or worry about managing or engaging residents. They simply collect their regular cash flow payments without wondering if someone is going to call and complain about their broken toilet or a leaky faucet.

How then is a real estate syndication deal structured?

Great question! Multifamily syndications can be as unique as the property, however, they generally follow a structure similar to this:

1. The deal sponsor finds a multifamily property and puts it under contract.

2. The sponsor forms either a limited partnership or an LLC.

3. A private placement memorandum is drafted. This outlines the specific details of the investment and how the partnership is structured, discusses risks, discloses all fees associated, and includes the subscription agreement.

4. Any required SEC registrations or notices are filed.

5. The syndication sponsor secures the financing on the investment (they are the one that signs on the loan and are responsible for it). The other investors aren’t liable for the repayment of the loan.

6. The sponsor finds potential investors for the capital requirements on the deal.

7. The deal is closed once enough money is raised to cover the down payment and closing costs.

8. The sponsor manages the investment. They may or may not actually manage the property. Oftentimes, a third-party property management company is brought in.

9. The deal sponsor distributes the cash flow to the investors based on the agreed-upon structure.

10. The exit strategy typically involves selling the property at some point in the future. The investors receive their share of the equity from the sale. They should profit from any appreciation and equity built from paying down the principal balance on the loan.

So, now you have a basic understanding of “how this works”.

The question isn’t really why you should invest with us.

The question is why have you waited this long?

“Ninety percent of all millionaires become

so through owning real estate”.

~ Andrew Carnegie