Real estate syndication is a popular way to invest in commercial properties, especially for those who don’t have the time or expertise to invest in real estate directly. Real estate syndication involves pooling funds from multiple investors to acquire, operate, and sell a commercial property. In this article, we’ll explore the five phases of a value-add multifamily syndication, which is a common type of real estate investments.
Phase #1 – Acquire
The first phase of a value-add multifamily syndication involves acquiring a property. This can be a challenging phase since finding a great property requires impeccable underwriting skills and solid projection calculations. Once a property is under contract, the sponsor works diligently to discover the property’s needs, record estimated expenses, and update the business plan accordingly. After the sponsor and investors are confident with the research, deal, and projections, investors send in their funds, and the property is closed.
Phase #2 – Add Value
The term “value-add” means adding value to the property, which is why renovations typically kick off upon closing. The transition begins with the property management team and renovations on any vacant units. This phase can last 12 to 18 months or longer, depending on the time it takes for all tenants’ leases to expire and for all old units to be renovated. Exterior and common area renovations may also be made, such as updating or adding light fixtures, a dog park, covered parking, or landscaping.
Phase #3 – Refinance
Since commercial properties are valued according to the income they generate, the whole point of the renovation phase is to fetch rent premiums to increase revenue. Most tenants will happily pay an additional $100 per month for the opportunity to move into an updated unit. With that additional equity, a sponsor may attempt to refinance or sell the property early. Through a refinance or supplemental loan, investors would receive a portion of their initial investment back while still cash flowing as if the entire amount were still invested.
Phase #4 – Hold
The next phase is holding the asset while collecting cash-on-cash returns (cash flow). Since the value-add phases are complete and the riskiest phases have passed, the focus shifts toward attracting great tenants and generating strong revenue. Throughout the hold period, rent increases at a nominally low percentage each year, thus increasing revenue and contributing toward a steady appreciation of the property. The length of this phase, preferably 5 years or less, is based on the individual property, sponsor, and business plan.
Phase #5 – Sell
At this point, the property exhibits completed updates, increased revenues, and appreciation. So, the best use of investor capital is to sell the property so that they can seek their next investment project. During the disposition phase, sponsors prepare the asset for sale. Sometimes the asset can be sold off-market, creating minimal disruption for tenants. Otherwise, sponsors muster through the whole listing and sale process. Occasionally, if investors agree, a 1031 exchange may be initiated. This allows investors to roll their capital and proceeds into another deal with the same sponsor. Either way, once the sale is complete, investors get their original capital back, plus a percentage of the profits.
In summary, real estate syndication is a great way to invest in commercial properties. The five phases of a value-add multifamily syndication are acquiring, adding value, refinancing, holding, and selling. Every deal is different, and not all syndications go through all five phases. As a passive investor, it’s essential to thoroughly understand the typical phases of the value-add multifamily syndication process so that you’re informed every step of the way. Real estate syndication allows investors to reap the benefits of investing in commercial real estate without the hassle of managing a property themselves.
