frequently asked questions
It is related to less buying and selling apartments. All the business operations are controlled with a mutual fund or general partner.
Have you been looking for an accredited passive investor or investing apartment syndication deals? Look no further – you’re in the right place.
During the recent discussion, one of my investors had asked me the best solution for learning about investing in apartment syndication deals.
I had no specific answer for it. To understand the question, you have to go through different sources to find the relevant information and develop an understanding with investing in apartment syndication deals.
This page is designed to provide all the essential information that you need while decision making in passive investor syndication deals.
I hold hundreds of accredited investors with thousands of conversations. Based on prior experience, we have categorized information into three sections;
First, establish passively investing in an apartment syndication strategy that is aligned with your investment goals.
Second, you need to know the essential information about apartment syndication terms with a few examples of how the terms are followed by active and passive investors.
Third, be eligible for the opportunity and save the maximum possible money. I will provide you with questions for specific deals, deals, locations, general partners, and professional teams that will implement the business plan.
Let’s begin.
There are a few components such as knowing what you are, identifying your strength, goals and objectives, and the role that you might get in investment before dealing with the apartment. It begins with determining if you want to be an active or real-estate passive investor.
Active Investing
Active investing requires active participants that can qualify an apartment building with one’s capital and make the successful supervision of a business plan.
Passive investing
It is related to less buying and selling apartments. All the business operations are controlled with a mutual fund or general partner
- Are you engaged with a full-time or part-time job and want to invest in an apartment?
- Are you lacking expertise and financial resources to acquire apartment buildings and get the maximum benefit of your investment?
- Do you want to have a trusted real estate business fund investor? Passive investing in apartment syndications is aligned with your investment goals if you answered “Yes”. If you answer “no” for the first two questions, passive investing may not work for you at this time. To become an active apartment investor, you need to explore a passive investing world with an educational foundation and prior experience. But if “no” to the third question, you won’t be a passive investor, because it requires a general partner with a team that can implement your business plan. If you respond to all three questions with “Yes” but you wish to become an active apartment investor, our bridge allows you to keep yourself committed with passive investing in terms of time, professionalism, and experience. When you become familiar with the things you must know the process for acquisition, management, and deposition process and you can handle all the activities on your own. Furthermore, the process will help you to discuss active investing details with lender and broker while transitioning.
- Distressed Property Distressed property refers to the non stabilized apartment community where the economic occupancy rate is less than 85% due to poor operations, tenants’ issues, outdated interior or facilities, lacking in management and deferred maintenance, etc.
- Value-Add Property Value-added property is opposite to distressed property where the stable apartment community with more than 85% economic occupancy rate is continued. The value-added property carries several opportunities to be improved by adding value, making operation better than before, renovation increases to boost the income and reduce the expenses.
Accredited Investor
An accredited investor is one of the sophisticated investors which hold special status about financial regulation or invest in apartment syndication as a limited partner. An accredited investor has engaged in fulfilling the requirement about income or net worth. The existing requirement to be eligible is an annual income of $200,000 or $300,000 for the mutual income for the last two years with the same earning expectations or higher exceeding $1 million individually or jointly with a spouse.
For more FAQs about accredited investors click here and get approved answers by the Security Exchange Commission (SEC).
Apartment Syndication
It is temporary financial regulation services that are formed owing to handle harder or near to impossible apartment transitions for the companies. Furthermore, it allows entities to pool their resources and mitigate the risk and return. However, syndication is characterized by the partnership between limited partners and general partners to gain or acquire, manage, and sell apartment communities to distribute the return.
Sophisticated Investor
A sophisticated Investor is a person who holds versatile experience and ability to respond to the investment deal, analyze risk, return, merits, and investment opportunities.
General Partner (GP)
It is the basic form of partnership or an owner who has unlimited liability. A general partner is engaged to manage day-to-day business affairs and entire project operations. General Partner is also known as a sponsor or syndicator.
Limited Partner (LP)
A limited partnership continues when two or more partners engage to conduct a business in which they are legally responsible for the amount of liability and debt. The general partner oversees the business operations while a limited partner doesn’t take part in managing business operations.
Operating Expense
Operating expense is the type of expense whose overhead is running to maintain the daily operation of the property.
The list of common expenses is shown below;
Payroll | ($239,790) |
Maintenance | ($65,397) |
Contract Services | ($82,837) |
Turn/Make Ready | ($43,598) |
Advertising | ($32,699) |
Admin | ($32,699) |
Utilities | ($190,742) |
Mgmt Fees | ($65,788) |
Taxes | ($280,825) |
Reserves | ($54,000) |
Insurance | ($49,048) |
Total Expenses | ($1,137,424) |
Debt Service
Debt is the amount of cash that is required to the repayment of interest along with the principal amount for a specific period.
For example, a 24-month $11,505,500 loan with 5.28% interest amortized over 30 years results in debt service of $60,977 per month.
Net operating income
Revenue minus cost of the property or investment, excluding capital expenditure and interest or debt service.
For example, a 216-unit apartment community with a total income of $2,000,000 and total operating expenses of $1,200,000 results in a NOI of $800,000.
Capitalization rate
Capitalization rate refers to the cap rate which determines the profitability matrix and returns over real estate investment. The formula of finding rate is to divide property net operating income by current market value.
For example, a 216-unit apartment community with an NOI of $600,000 that was purchased for $1,200,000.
As we know, cap rate = NOI/Current Market Value=600,000/14,200,000 = 4.2%
Price per unit
It is the cost of purchasing an apartment community based on the total price of each unit. Price per unit can be calculated by keeping the denominator as the purchase price and numerator as the total number of units purchased.
For example, a 216 community purchased for $20,000,000 per unit price of $50000, we get $4000 each.
Cash Flow
The word cash flow is the difference between the net amount of cash and cash equivalent being transferred out of business. Cash flow can simply be calculated by subtracting operating expenses and debt service from the profit of the passive investment.
Suppose a 216 unit apartment community observes following cash flow;
Net sales | $1,800,000 |
Total Operating Expense | $1,000,000 |
Debt Service | $500,000 |
$40,000 | |
Cash Flow | $260,000 |
Closing Cost
Closing cost is the property or business overhead that the seller and buyer incur to complete a financial transaction of real estate.
A prime example of closing cost is originated fees, application fees, attorney fees, credit search fees, underwriting fees, and due diligence fees, etc.
Financing Fees
Financing fees are the amount that is charged by the lender over the borrowed amount in a specific period. The purchase fees typically fall around 1.75% of the purchase price.
For Example, here is the 216 community unit apartment purchase for $11,000,000 with an estimated $200,500 financing fee.
Operating account funding
It is the amount that is kept to cover the unexpected dips in occupancy, tax payment, insurance expenses, and other necessary expenditures. The operating account fund is generally pooled to create to raise extra money from the limited partner.
Equity Investment
Equity investment refers to the cost of purchasing a community apartment. The major upfront cost includes down payment for the loan, financing fees, closing costs, operating account fund, and other several fees that are paid to the general partner.
Sales Proceeds
It is the amount that is collected from the sale of the apartment community.
For example, a 216-unit apartment community acquire at $12,200,000 and sold after a five value-added business plan;
Exit NOI | $1,134,723 |
Exit Cap Rate | 5.9% |
Exit Price | $19,232,593 |
($192,326) | |
Remaining Debt | ($10,711,909) |
Sales Proceeds | $8,328,358 |
Internal Rate of Return
Internal rate of return allows you to know at what percentage amount of inflow equals to the amount of outflow. Internal Rate of return is one of the prime financial calculations that every mutual fund investor performs before taking the risk.
Cash on cash (CoC) return
It is the rate which expresses the percentage based on the cash flow and equity investment. Cash on Cash can be calculated by dividing cash flow with the initial investment.
For example, here is the cash flow for a 216-unit apartment;
Cash flow $330,383
Initial Investment $3843270
CoC Return 8.6%
Equity Multiplier
EM is the rate of return based on net sales or net profit and equity investment. It can be calculated by dividing the sum of total net profit and the equity investment.
For example, limited partners invested $3,843,270 into a 216-unit apartment community with a 5-year gross cash flow of $2,030,172 and total proceeds at sale of $6,002,116, the EM is ($2,030,172 +$ 6,002,116) / $3842,270 = 2.09.
Market Rent
The market determines a rent on which both tenants and owners are willing to form an agreement. Market rent is calculated by performing a rent comparable analysis.
The Gross potential Income
The gross potential rent (GPR) is the imaginary amount of revenue if the apartment community was 100% leased year-round at market rental rates.
Loss to lease (LtL)
The loss to lease is the amount of revenue based on market rent and the actual rent. I can be calculated by dividing gross potential rent minus actual rent collected by the gross potential rent.
For example, here is a 216-unit community apartment with GPR of $183,072, and with an actual rent of $157,270 has a LtL of 14%.
Bad Debt
In this account, the tenant is not willing to pay the amount or unlikely to pay due to several reasons.
Concession
The concession is a preferential allowance that is given to application fees, offset rent, and several multiple streams to capture the attention of targeted tenants.
Model Unit
It is a representative unit used as a sales tool that indicates the pattern, configuration, and/or future products in the same line of investing activity.
Employee Unit
An employee unit rent determines the discount or free of cost unit that is offered to the employee.
Vacancy Unit
The vacancy unit is the number of unoccupied units. We can calculate the vacancy unit by dividing the total number of unoccupied units by the total number of units.
For example, there are 17 vacant units in a 216-unit apartment at a rate of 7.9%
Vacancy loss
It is the amount of revenue that lost unpaid and unoccupied units.
For example, there are 17 vacant units that rent averagely at $777 per unit each month and have a loss of $158,508 annually.
Effective Gross income (EGI)
It is the constructive cash flow of an apartment community. EGI can be calculated by taking the potential gross income and adding other forms of income that are taken from the property and subtract from the vacancy and losses collection.
Economic Occupancy Rate
Economic occupancy refers to the rate of paying tenants for an apartment, building, or some other rented out space like an office building based on the possible revenue. It can be calculated by dividing actual revenue collected by Gross potential Income (GPI).
Break-Even Occupancy
The breakeven occupancy is one apartment occupancy rate that covers all the expenses. The formula to calculate the breakeven occupancy is to divide the sum of the operating expenses and debt service with gross potential income (GPI).
For example, here is a 216-unit apartment community expenses and debt services and gross potential income;
Operating Expenses | 1,166,489 |
Debt Service | 581,090 |
Debt Service | 2,263,624 |
Breakeven occupancy | 77.2% |
Physical Occupancy Rate
It is the percentage rate of occupied units. The physical occupancy rate can be determined by dividing the total number of occupied units with the total number of units.
Suppose, 199 occupied units have a rate of 92% occupancy in a 216-unit community apartment.
Gross Rent Multiplier
The gross rental multiplier is the possible number of years to be paid based on gross potential rent (GPR). GRM can be found by dividing the purchase price with annual GPR.
Such as, a 216-unit apartment community buys for $12,200,000 with a GPR of $183,072 each month and has a Gross Rent Multiplier of 5.6.
Rent Premium
It is the premium amount over rent that increases due to performing renovations to the interior or exterior of a 216-community apartment. The rent premium is determined based on general partner consideration amid the underwriting process based on the rental rates of spontaneous units.
Debt Service Coverage Ratio (DSCR)
The term debt service ratio is clear itself as it is the measure of cash flow that is available to pay the long term or short term debt obligations. To calculate DSCR divide net operating income with total debt service. Furthermore, DSCR depicts enough capacity to cover the income if the figure is in 1.0 (100% capacity to pay the obligation). If there is 1.25 means the ratio is perfect or higher than expected. Similarly, as the ratio number increases the chances of paying obligation increase.
For example, debt service of $581,090 and an NOI of $960,029 has a DSCR of 1.65 in a 216-unit community apartment.
Interest Rate
It is the rate that a lender asks the borrower to pay over the principal amount.
Interest-only payment
In interest-only payment, a borrower is required to pay the monthly interest to the lender over the principal amount of loan. Whereas, the period of interest-only payment is made on the market-determined rate where both lender and borrower sign a memorandum to make the contract.
London Inter-bank Offered Rate (LIBOR)
The London Inter-Bank Offered Rate (LIBOR) is a benchmark rate for the short term and long terms loans which are followed by several banks across the world. LIBOR is a determined rate which can be calculated with the interest rate on several loans such as commercial loans across the globe.
Bridge Loan
Bridge Loan is the sum of the money that is used to cover an interval between transactions for a person or company. The bridge loan is also known as interim financing, which holds a higher interest rate. However, the loan is more than perfect for the reposting of a community apartment.
Permanent Agency Loan
A Permanent Agency Loan is a long term mortgage loan. The permanent loan is comparatively lower than the bridge loan in terms of interest and return. The length of return permanent agency loan is 5,7, or 19 years amortized over 20-30 years.
Prepayment Penalty
A prepayment penalty is an article or clause in a mortgage contract that determines that the penalty will be imposed if the mortgage is paid off within specific tenure.
Refinance
Refinancing is an amount that is paid to refinance the current debt obligation with another debt obligation with different terms and conditions. This can be availed by apartment syndication and general partner once the value of property raise.
Appreciation
It is the amount that increases over the estimated life of an asset. Appreciation is divided into two types; natural and forced. Natural appreciation takes place when the cap rate is naturally reduced. While the force appreciation occurs when the net operating income (NOI) increases.
Ratio Utility Billing System (RUBS)
A Ratio Utility Billing System is inclined to calculate the utility bills of tenants based on the occupancy and apartment square. The amount is billed back to residents once it is estimated. The ratio utility billing system is one of the components that trigger revenue at large scale.
Property Neighborhood Classes
The property neighborhood classes are categorized into four sections such as A, B, C, D. These classes are bifurcated based on several factors, meanwhile, these classes are followed by certain guidelines as;
Property Classes
- Class A: New construction area with the highest rent and apex end facilities.
- Class B: 10-15 years old, well maintained and a little deferred maintenance
- Class C: It is built within the last 30 years, shows the age and deferred maintenance
- Class D: No amenity package, over 30 years old, low occupancy, and required a piece of work.
Neighborhood Class
- Class A: Most luxurious home with the affluent neighborhood, expensive home with a near golf club
- Class B: Safe Neighborhood with middle-class part of town
- Class C: Low to moderate social-economic status neighborhood
- Class D: Insecure neighborhood, high crime ratio, safety issues
Preferred Return
Preferred return is the threshold return that limited partners are offered prior to the general partner receiving payment.
Distribution
Distribution is the amount of portion profit for limited partners which is sent monthly, quarterly, semi-annually, and annually for refinancing purposes.
Subjective Property
The subjective property is the form of the apartment that a general partner plans to purchase.
Underwriting
Underwriting is the method to evaluate an apartment community that determines the return and offered price.
Pro-forma
It leads to the budget projection for a community apartment with an itemized line for income and expenses for the next 12 months and 5 years.
For Example, a community apartment Pro-forma for five years is shown below {Insert Proforma Image}
Rent Roll
It is detailed documents that provide the entire information about each unit at the community apartment. Likewise excel sheet, a rent roll is designed with rows and columns where data is summarized in tabular form.
For the 216-unit apartment community, the rent roll is shown below {insert image}
Profit and Loss Statement
The profit and loss statement is designed based on net sales minus expenses and debt service and net income. It shows the revenue for the community apartment over a specific period.
The profit and loss statement for the 216-unit community apartment is here. {insert image}
Exit strategy
The strategy is the course of action that we establish to achieve the goals and objectives. However, the exit strategy refers to the closing of the business plan and selling the community apartment.
Rent Comparable Analysis
The rent comparable analysis is the course of action to analyze the market rent of across the specific community apartment area.
Sub Market
The market is the broader term and the submarket is part of it. The submarket is the family of the market which is geographically divided.
For example, Dallas-Fort Worth is a renowned market in the U.S. Whereas, Richardson, Carrollton and Arlington are submarkets.
Metropolitan Statistical Area (MSA)
Metropolitan Statistical Area (MSA) is the geographical region in the U.S with high population density having a high degree of economic and social integration throughout the area.
Acquisition Fee
The acquisition fee is the amount of fee which is paid by the buyer while acquiring a community apartment. The fee range is determined by the magnitude of the deal. Normally, the acquisition fee falls between 0.5% to 5%.
Asset Management Fee
The asset management fee is charged by the fund manager or mutual fund investor on the capital investment. As per recent trends, the asset management fee is 2% over the collected income or $250 each unit annually.
Property Management Fee
The property management fee is collected monthly in order to manage day-to-day business operations. This fee is charged from 2% to 8% over property monthly collection. The fee range can be changed as it depends on the size or scale of the deal.
Refinancing Fee
The refinancing fee is the amount of fee that is paid for work required to refinance the possessions. For new loan closing, a fee of 0.5% to 2%of the total amount that is paid to the general partner.
Guarantee Fee
The guarantee fee is the amount of fee that is paid by the guarantor at the specific date. This confirms that the loan guarantor guarantees the loan. Guaranty fee 0.25% to 1% over the principal amount of the mortgage loan.
Private Placement Memorandum
Private Placement Memorandum is the documents that deal with various terms and conditions of investment and risk factors that can occur. Mainly it includes four sections such as introduction, a brief summary of offering, asset description and basic disclosures, the subscription agreement, and legal agreement.
Finding an all-rounder team partner is one of the most desirable tasks for a passive investor. Though, you have the right to ask questions from the general partner in order to know that you both aligned with investment goals and objectives. You can find all questions that will address most of your concerns before a contract with a general partner.
What kind of reporting do the investors receive?
The general partner should be persistently updated on the deal status, once it is closed. You can find the report monthly of what my company performs. There is a different discussion of the update, as most of the general partners share updates quarterly; few GPs provide annual updates and others don’t provide an update. However, the update frequency depends on your preference and likeness.
We provide occupancy rates in monthly reports, the number of renovated units, rental premium updates, capital expenditure updates, project evaluation and event updates, etc. Furthermore, we provide each quarter report linked to financial statements that include the income statement and rent roll.
You can find the complete status of the business plan and rental projections.
Do you assure the guarantee of return?
The General Partner won’t guarantee a return. If they ran away, a preferred return SHOULD BE projected, not a guarantee!
What would take place if you can’t make the projected cash flow?
The cash flow consideration is widely known for general partner projection if return exceeds the preferred return would be offered. Meanwhile, if you fail to achieve the projected returns, they will still share the full of preferred returns.
What are prime risk factors for the project?
Starting with a question, “what happens if the project fails?”, there are still such questions that need to be answered rationally. If the GP tells there is no risk means they are lacking in experience or they are lying.
The risk is always associated with every business such as apartment dealing, market, and risk of return. To mitigate the risk factor and ensure the boosting economy you unfold three Immutable Laws of Real Estate Investing to make things better than before.
What is the time duration to keep my money in the deal?
A General Partner needs to make you aware of projected time, exit strategy, and holding period before you make a deal. The time duration is generally 5 years and General Partner is supposed to keep your capital in the deal unless the deal takes place.
What arises if I want to make use of my investment for something else? Can I pull it out?
Using your investment money for something else will depend on the terms and conditions. Everything is structured and pulling out money is backed by the PPM process that one needs to follow. The process usually requires selling shares to another party with a mutual consensus of the general partner.
How do you make money?
The major source of generating money for the General Partner (GP) includes acquisition fees, asset management fees, and equity ownership charges. The charging pattern of all fees should be listed in PPM.
Once you find the fee list, you can ask them why and how? The fee charged is determined on the basis of the value of the deal. They should not be charged a fee if they fail to unfold the details of the fee.
How much money will you have in the deal?
The general partner is more inclined to focus on this question, as they own the fund and make extra level interest. This means if you earn money, the GP earns money. Moreover, GP always makes money in a deal in which they are confident to get a satisfying return. The deal is followed by financial budgeting techniques such as payback period, IRR, MIRR, and Cash-on-Cash Return.
How frequently will I get paid?
The distribution frequency is followed by the General Partner preferences and the capability of their team to do so from an authority point of view.
The frequency of pay is monthly, quarterly, and annually. However, the monthly return is aimed to distribute based on preferred return every 12 months. Similarly, you can receive your monthly, quarterly, and annually at the end of the 30-45 days period.
What is the Minimum Investment?
The minimum investment is based on the capacity of dealing. Additionally, the minimum investment varies the financial capability to respond to the deal. However, most of the GP gets minimum investment while the experience favors the higher investment project deals.
Do I need to submit a financial statement to anyone?
As per the 506b syndicate offering, you are not required to submit your financials. You need to submit the financial if you go with a 506c offer.
Have you worked with LLCs investors?
A passive investor will make a deal and invest with their name while establishing an LLC and make the investment by it. I would suggest you ask your CPA that is befitting a particular situation before you go around the LLCs investor.
Can I invest with an SD-IRA?
SD-IRA stands for Self-Directed IRA. It encourages you to invest and get the tax advantage. So, if you are intending to invest with the SD-IRA be assured you are working with a professional SD-IRA real estate investor.
What is the difference between a 506(b) and 506(c) apartment syndication offering?
Most of the general partners sell their securities to limited partners under the aforementioned rules. However, both rules hold key differences, as 506(c) allows advertising to deal with the public while 506(b) does not. The next difference is in which type of person can invest in offering. For the 506(b), there may be up to 35 unaccredited but experienced investors. 506 (c) is rigorously focused on accredited investors.
However, if the general partner is doing their investment under 506(c) they need to verify the accredited investor with a third party. But if the general partner is doing a deal under 506(b) they are not required to verify with the third party. Still, some general partners prefer to work with accredited investors even under 506(b). Furthermore, article 506(b) is completely based on the solicit offer which states that passive investors must demonstrate the relationship with the public to make a deal.
Do you ever observe the worst syndication or most difficult deal?
You don’t need to think of the worst deal as you are a passive investor. The deal won’t be difficult as there is a general partner to handle it.
There are still significant questions such as “will you have a bad experience with syndication or a difficult deal?” Will you be able to preserve investment in the deal, and return distribution?
Before selling property, have you ever sold your own share?
It is quite important to know why the General partner sells their share before the property syndication. There is quite a reason for it: GP aims to invest the share to get the interest over it and if the interest is not up to the market, the GP sells their share.
What are the investing steps?
The General partner often takes you on through their private email list. You can ask investment summary and other details if you’re already dealing under contract.
Often, the process is followed by five-step such as, ask investment package, passive investor notified about the deal, new investment offering call, secure commitments, and complete required documents.
Do you have family and or friends that invest in these opportunities?
As a passive investor, you need to be optimistic and have a high level of confidence with the general partner, as you should trust them. However to determine the question if family or friends invest in their deals, we need to think as a passive investor.
Friends are more trustworthy and subjective than your family so you can ask them who invests in a deal. How long have they known them? Where did they meet? These are just a few questions to build trust and invest.
How long have you known the investor who has been investing in your deals the longest?
As we discussed in the previous question about family and friends who invest. This question addresses how they know the longest. How do they know them? An accredited investor can mitigate the trust issue as they know the GP for a long period of time.
How do the taxes work with this investment?
For all tax-related questions consult with an accountant. A passive investor is generally attracted to real estate due to depreciation or reduction in asset value. Depreciation is greater than need to be paid at the end of each year. The depreciation is advantageous to reduce the payable tax amount. Furthermore, there are five factors of taxes such as; depreciation benefits, accelerated depreciation via cost segregation, depreciation recapture, bonus depreciation, and capital gains tax at sale.
What are the types of financing that typically do with these assets?
The financing changes are case-by-case and if the general partner performs renovations they will receive the short-term loan, preferably interest only financing, and then preeminent loan when the renovation is completed. Moreover, a well experienced GP can secure more loans, short term, and long-term agency obligations such as capital expenditure.
What are the pros of securing an interest-only loan?
It provides additional cash flow for distribution and it is opposed to paying down the principal. What are the advantages and disadvantages of fixed-rate and floating-rate loans?
The difference between fixed and floating rates differs as per terms and conditions. Most of the lenders lend their money to charge interest over a period to get a return. Lenders such as Fannie and Freddie offer fixed-rate debt. The lender always focuses to generate the expected amount of money. Meanwhile, there is a high prepayment penalty if a general partner sells or refinances. Furthermore, most of the short term loans are followed by LIBOR.
If we talk about the advantages and disadvantages of fix rate and floating rate loan there will be quite a large scale difference. At a high level, both loans are good options. Though, GP typically chooses a floating rate or fixed rate depending on the size of the business plan. Both loans are characterized by different elements, so if you need to have loan check rules and consideration before dealing for a fixed rate or floating rate loan.
How can you find deals?
Finding an apartment deal is not a complicated issue. There are two methods to find the deals; one on-market and other off-market. The off-market deals have brought lots of benefits as compared to on-market deals. Additionally, the deals of off-market are low in competition and high in opportunities for negotiations, this typically depicts the better cash-on-cash returns.
What if the project fails?
As the general partner is a concern to perform due diligence on the asset and execute the business plan, the project won’t fail. If the project fails and you don’t receive the preferred returns and/or initial equity investment at the sale. Still, there is the possibility of failure in the project. So, the prime purpose of this question is to extract, their plan of action and if dip in return, the action that they do to shift the risk (associate with the market, team, and deal) and with apartment syndication.
In the end, before you get into the project ask to see the sensitivity of analysis, return, rent premium, exit cap rate, interest rate, purchase rate, and occupancy rate, etc.
Has your company been sued or being sued now?
The lawsuit suggests a drawback in policies and processes or flaws in the GP. If the general partner sued, ask why, what is the issue, is there an issue in policy implementation. By asking such questions you can mitigate the suing chances.
What types of reserves are typically made with each property to shield the investors from any potential capital call?
To cover the operating fund shortfall, the general partner (GP) should have a contingency plan. If there is any requirement for renovation, ask for a budget to GP. Usually, a rule of thumb refers to 10% to 20% of the renovation budget.
Moreover, ask them the financial strength to mitigate the shortfall such as unexpected occupancy dip, unexpected maintenance issues, taxes, and insurance, etc.
Ultimately, ask them the amount of money they keep annually. A good rule of thumb $250-$300 per unit each year. In case they don’t have a budget for these obstacles, they may come and ask for the budget as it will reduce the return on your investment.
What does my money go towards?
The investment money is used for a variety of costs that are associated with purchasing a community apartment. The money includes, down payment for the loan, financing fees, renovation cost, and general partner fee, etc.
Is everyone notified at the same time when you have a new opportunity?
It is a systematic process in which a general partner notifies all passive investors, while others might prefer to inform investors first. The process is based on the “first come first serve” in which all the investors are notified.
What is the difference between cash-on-cash return and internal rate of return?
The major difference between cash on cash return and internal rate of return (IRR) is metrics time. Furthermore, if a limited partner gets the amount of the money monthly, quarterly, annually the cash-on-cash amount will remain the same, but the internal rate of return determines the time values of money after discounting.
What is the considered return of the capital vs. return on capital?
Mainly, deciding the structure of the budget is based on the general partner understanding. Under the PPM section, distributable cash you will find “Distributions of Distributable Cash” and/or “Allocations of Profits, Gains, and Losses.”
The investment is typically made up that limited partners are offered a preferred return based on capital account. It begins with an equal amount of initial equity investment and the remaining profit is divided between the general partner and limited partner.
Additionally, capital is the term that is used to express financial assets and special financial resources. However, the return of capital is the amount or return that is received from an investment and that is not considered taxed as income.
The general partner considers the aforementioned as the return of capital. If the return of capital reduces the capital account that means the preferred return is also reduced.
Why is the owner selling?
The major reason behind the selling of value-add apartment syndication is that they have reached the end of the business plan. However, a few owners sell because they purchased the property for cash flow and there is not an improvement to get the competitive return.
Is the property being acquired below comparable properties in the area?
The combination of costs associated with property acquiring and the capital expenditure costs should be lower value of comparable property in the area. That is the free equity difference and it will increase the sales proceeds.
However, if the amount of capital expenditure is equal or higher than comparable properties which leads to a question that the general partner is paying too much and your profit may be reduced.
What is the going-in cap rate?
The going-in cap rate is the rate that is based on the buying price and ongoing net operating income. If you want to know the going-in cap rate, you need to compare it to the cap rate. As it determines that the property is purchased below the market value, hence the higher going-in cap is a symbol of a good rate.
What is the hold period?
The holding period is the range of time in which the general partner holds a deal. This period will guide you on how long you will keep blocked capital amount into a deal.
What is the breakdown of the capital expenditure budget?
The general partner should keep secret overall expenditures (CapEx) budget and they should not render you. As you need to know how much money is budgeted for each project. Furthermore, you want to know how the calculation is made for the CapEx budget and how the GP assumed the CapEx costs, etc.
Ultimately, you aim to know about the contingency fund. The contingency fund should fall within 10% to 20% of the total CapEx costs.
How does the year 1 income projection compare to the trailing 12-month financials?
You need to know why if there is a difference between trailing 12-months financial (T12) and 1 income projection.
As we know that the revenue is determined on the market rents, losses and leases, bad debt, employee model, concession, and other income. If any of the given items is different from T-12, you must ask the general partner (GP) about the assumptions.
What annual income growth factor is being used?
The gross potential income projects the revenue and some general partner will base this factor as a historical rate.
How do the year one expense projections compare to the trailing 12-months financials?
If there is a difference between the projection of year 1 expense projection than actual trailing 12-month financials, you need to know why the general partner made such considerations. However, comparing the 12-months financials applies to all apartment syndicate investment courses of actions.
What assumptions are being used to calculate the annual taxes?
The tax assumption can be calculated by locating the tax rate on a county’s website and multiplying it by the projected acquire price.
What is the annual expense growth factor?
Generally, a conservative annual expense that my company uses is 2%. It is the projected factor that is similar to the annual gross potential gross factor.
How much money are you placing into reserve each year?
In a reserve, a company should save $250 to $300 every year. This amount is used to cover all the shortfalls or an unexpected capital expenditures project.
What is the debt structure?
As we already know that the general partner has secured debt financing. However, the interest rate is locked or it is floating (means it may change). Finally, you need to know that it is a short term or long term loan. Furthermore, the loan needs to be determined on the basis of purchase extension.
What are the sales assumptions?
Sales assumptions are based on a few elements such as exit net operating income, exit capitalization rate (it is the rate higher or lower that is purchase cap rate), the closing cost, and the remaining debt.
How do you calculate the exit cap rate?
At the initial stage you need to look at the exit cap rate we need to calculate in-place or going-in cap rate, the rate is based on the acquiring or purchase and the in-place net operating income. However, to calculate the exit cap rate we’ve required 20-50 points to the in-place cap rate. This return secures the projection amid a downturn, essentially improves the ongoing returns if the market remains the same or developed.
What is the projection return?
The projection return refers to the amount that a general partner projected. The GP needs to calculate the return by using factors such as cash-on-cash, internal rate of return, and equity multiplier. While calculating, you need to determine the calculation that is made and your decision based on the consideration of projected returns.
What percent of your investor has invested multiple times?
Have you been looking to know what percentage of passive investors are returning?
As we know that return investment is made at least once a deal, that takes a large percentage of the return investor that you’re dealing with high-quality GP. Additionally, if the general partner has finished a handful of deals they might have fewer investors because the return investor did not receive initial capital back yet.
What is your experience?
How many deals have you completed? If the general partner has a great background in terms of dealing with the project then a passive investor should tap the opportunity and make a deal. Furthermore, if a general partner has not successfully taken a deal full cycle then there would be the risk of investment as there is no proper record and success stories.
While qualifying general partners, a passive investor needs to read four things such as the business plan, alignment of interests, transparency, and credibility.
Do you currently have deals under contract?
This is one of the important questions that need to be asked from a general partner. This question states how you can make things correct with the general partner.
Who is part of your team?
There is a group of people that manage investment dealing. Not only the general partner but rest team members are responsible for a successful deal. There are a number of partners who own different responsibilities in order to respond to the changes. However, a team member should be flexible and constant with working conditions.
Who owns the property?
Most of the general partners will establish an LLC and buy a property with LLC. As a limited partner, you can acquire the share of that LLC.
Who manages the property?
The apartment is supposed to be managed by a professional property management company, a third party company or owned by the general partner (GP).
What are my responsibilities?
Being a limited partner, your major duty is the funding of the deal. After the process, you should hands-off while reviewing the investor property and perform tax at the end of the year.
What are my responsibilities?
The general partner will find the deal, review and qualify the deal through the underwriting process, negotiation offer, coordination of activities with professionals, seeking for best financing options, attorney contracts to establish the LLC, due diligence and market research, etc are the common responsibilities that you need to follow.
Are there any other asset classes that you focus on?
Some of the general partners will focus on the apartment syndicate while others focus on the asset classes, single-family homes, mobile homes, self-storage, retails and development, etc. Meanwhile, their prime focus is on the apartment syndicate as it is just the side of the red flag business.
Have you ever taken a deal full cycle?
Mainly, there are three major parts of apartment syndication such as acquisition, management, and sale. Each part is characterized by certain unique items and challenges. Though the GP has acquired the deal, you don’t know that they are capable of doing things or not.
Who will be my point person?
The point person refers to the individual in the general partner that comes to you and addresses the question or concerns about the deal. These persons are actively involved in dealing with and managing the ongoing responsibilities and duties.
Can investing as a limited partner help me with lenders for future deals I do on my own?
If we go through the whole concept that we already discussed we may find three benefits that an active investor receives from a limited partner such as practicing evaluating and underwriting deals for large apartments, the knack to ask the question to an experienced syndicator, credibility as a partner in the large deal. All the benefits play a pivotal role in dealing but the third one is most important as it directly helps you to speak and make deals with the lender.
How do you qualify a market?
There are a number of factors that can help you to qualify a market. Important factors include unemployment change, population growth, demographics (i.e. age, economic status, gender) ethnic diversity, and top employers.
How is the school district?
One of the top factors tenants will use to evaluate an area is the school district. Though targeted tenants have smaller families, they still may gauge the quality of the entire market. They look at the elementary, middle, and high school rankings as well.
Is there a crime issue?
Everyone wants to live in a peaceful area where they feel safe. However, if we look at crime status for the market, there would still be a number of properties that are more unsafe than others.
What is the median income?
Median income is one of the best sources to determine if the potential residents’ income will support the rent projection. According to recently published data, most of the people spend 25% to 30% of their annual income on rent or mortgage payments.
What is the market vacancy rate?
The market vacancy rate is based on the number of vacant units. To determine the vacancy rate for an area, we take the number of vacant units and multiply it by 100 and divide that result by total number units in the same area.
Most/ all of your deals are in one market. Why are you diversified across multiple markets?
First, you want to know how to qualify the property if you want to invest in a single MSA. As long as the market is properly qualified with each new deal, diversification around several MSAs isn’t relevant, because you are investing with a one-time deal.