Genwealth Capital

Invest With Us
by

Once you’ve made the decision to start investing in syndication deals, naturally, your next step will be to start looking for a syndication company to work with, or you may even start looking for a specific deal to invest in.

You’ll most likely start your hunt through a simple Google search, and wind up with page after page of search results for different syndication companies and deals. You’ll submit your contact info on some websites, and suddenly, your email will be filled with investment opportunities.

It may feel overwhelming at first, seeing percentages, financial projections, timelines, and other information, over and over again. Everything will look like a potential opportunity until you can successfully vet a potential syndication deal and pick the best of the bunch.

Below, we will go over 2 quick steps to help you break down and filter through potential syndication deals in under 5 minutes (minus the brain overloads and headaches).

1) Determine if the type of deal you’re reviewing is right for you.

There are numerous types of apartment syndication deals, from development, to value add and stabilized properties. The first thing you want to do is make sure the deal matches your investment goals and your appetite for risk. Do you prefer lower-risk stabilized opportunities, or would you take a higher risk for a higher return opportunity, like a development opportunity? That is the type of question you need to ask yourself, and if the opportunity doesn’t match your investment profile and goals, then you should move on to the next opportunity.

This is an example of the type of key points you need to identify:

  • Type of asset: B-class multifamily
  • Market: Houston, TX
  • Hold time: 6 years
  • Minimum investment: $50,000
  • Deadline for funding: 30 days from now

You want to look at these key factors before diving into the business plan and preferred returns. You could look at a potential deal and realize that the property is a B-class multifamily, but you want more profit potential with a value-add property, or maybe the deadline for funding is 30 days and you would need 45 days to gather your funds. These are quick factors to identify to assist you in weeding out the opportunities that don’t match your criteria.

If the opportunity doesn’t fit your requirements, then move on, and save yourself the hours you would have spent going over the investment summary. If the investment opportunity fits your criteria at first glance, then it’s time to dig deeper and go through the summary.

2) Take a look at the numbers.

There are many figures and projections that you’ll see in an investment opportunity presentation or summary. The most important numbers and percentages to understand will relate directly to your potential profit in the deal. A good summary will provide the following information:

  • Preferred return (“pref”) – ex. 8%
    • The preferred return is a threshold return that limited partners, or passive investors, are offered prior to any profit distribution to the GP.
    • A preferred return is provided to ensure that the passive investors will receive the first portion of any available profit distribution before the GP get their split. This helps make sure investors getting their interest payments is a top priority.
    • The preferred returns can vary depending on many factors, such as the experience and track record of the GP, however, the most common preferred return is usually 8% or higher.
    • If you invested $50,000 into a deal that offers the passive investors a preferred rate of return of 8%, then you should expect to get 8% of your $50,000 in payments paid out during the year. This would be around $4,000/year and $333.33/month if the payments are paid out to the investors in monthly cash flow distributions.
  • Average cash-on-cash return (CoC) – ex. 9%
    • The cash-on-cash return is the relationship between an investor’s cash flow from the property and the initial equity investment.
    • This metric is the cash yield of investment, calculated by dividing the annual cash return by the initial investment.
    • If the cash-on-cash return is 9%, and the preferred return is 8%, this means that the passive investors will receive a return higher than 8% during some part of the life cycle of the syndication.
  • Average annual return (AAR) – ex. 20%
    • The average annual return represents the total return that you can expect in a syndication deal, averaged over the total hold time of the property.
    • The metric takes into account the sale of the property and the corresponding gains.
    • If you invested $50,000 into a syndication deal with a 20% average annual return, this would mean that you can expect an overall return of $100,000 spread over 5 years, which would be 100% of your original equity investment. (100% return/5 years = 20% average annual return)
  • Internal Rate of Return (IRR) – ex. 17%
    • The internal rate of return (IRR) takes into account the time delay in receiving your returns over the holding period of the property. If the holding period is 5 years, you will not receive your returns at one time, and you will not be able to earn interest on the returns or invest those returns. This delay is taken into account in the internal rate of return.
    • This metric is important to compare across deals to analyze the time value of money. Two deals can have a similar AAR, but one may depend on a high return at sale while the other may cash flow day one and provide more consistent annual yield
  • Equity Multiple – ex. 2.0x
    • The equity multiple gives you a general idea of how your investment will grow. This figure will use the cash flow distribution that the passive investors receive, as well as the profit distribution that the passive investors receive when the property is sold.
    • If the equity multiple is 2.0, then you can expect your $50,000 investment to turn into $100,000 by the end of the life cycle of the project.
  • Minimum investment – ex. $50,000
    • As implied, this is the minimum amount of capital that an investor will need to contribute as a passive investor to be apart of the syndication deal.
  • Hold time – ex. 5 years
    • This will be the projected length of the life of the syndication deal. At the end of the holding period, the GP will organize and facilitate the sale of the apartment community, and the passive investors will receive the remaining equity investment, as well as their distribution of additional profits. During the time, your initial investment will be locked into the deal, and you will not be able to liquidate the funds.

Hope this helps explain the process of evaluating a syndication deal quickly!