In this article, we will explore the five phases of a value-add multifamily investment syndication. The five phases include acquiring, adding value, refinancing, holding, and selling the asset. Investors can benefit from this strategy, which focuses on the improvements of an existing asset to increase the overall value of the property. To understand the true power of value-add read our blog: Unleashing the Power of Value-Add in Multifamily Syndication.
Phase 1: Acquire-
Finding the right property can be difficult, especially in today’s economy. Deals are struggling to pencil in due to high-interest rates and low cap rates. At Viking Capital, we have a specialized acquisitions team whose focus is to underwrite investments and carry out due diligence to find a property with a strong upside and minimal risk. Once the team has isolated a property our team makes an offer to the seller to strike a deal. After this process, Viking is awarded the property and the business plan begins to be carried out. This is called the value-add strategy.
Phase 2: Add- Value
The term “value-add” means to add value to the property. This is why the renovations typically get started right after closing. This phase begins with unoccupied units and moves to units whose leases expire until all older units have been renovated to the new model. This phase can also include general common area renovations such as landscaping, clubhouse, roof, or parking.
Phase 3: Refinance
Since commercial properties are valued according to the income they generate. The purpose of the renovation phase is to obtain 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.
Refinancing can be beneficial. 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. A second benefit would be to lower the interest rate of the loan. Changes to the loan terms can increase cash flow by lowering the overall mortgage cost. It is important to note that the refinance phase is not always the best option and each value-add strategy may not include this in the overall business model.
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 annually, thus increasing revenue and contributing toward a steady property appreciation. This phase is typically five years or less but is based on the individual property, sponsor, and business plan.
Phase 5: Sell
The disposition phase is the final phase of the business plan. At this point, all value-add renovations have been completed. The property has increased NOI and has appreciated. The sponsors will now prepare the asset for sale. 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.
In today’s economy, the value-add strategy is the most effective way for sponsors to continue to make deals happen. With the uncertain economy, creating higher NOI by upgrading the property allows sponsors to underwrite investments that still pencil as profitable. As a passive investor, it’s essential to thoroughly understand the typical phases of the value-add multifamily syndication process. Real estate syndication allows investors to reap the benefits of investing in commercial real estate without the hassle of managing the assets themselves.
To learn about Viking Capital and our current value-add investment opportunity visit our website.