How to Screen for Multifamily Deals as a Limited Partner

As a limited partner (LP) in a multifamily syndication deal, your role is to provide capital and receive passive income and appreciation in return. However, not all syndication deals are created equal, and it’s important to screen potential deals to ensure they align with your investment goals and risk tolerance. In this post, I want to cover some key factors to consider when screening multifamily syndication deals as an LP. Specifically, we will be covering the importance of the sponsor’s track record, market analysis, property analysis, and deal structure.

Note – I have provided a list of definitions to some of the terms I use at the end of this post. More detailed definitions, along with examples, can be found on our glossary page.

Sponsor Track Record & Investment Criteria

One of the most important factors to consider when evaluating a syndication deal is the sponsor’s track record. You should research the sponsor’s past deals and their performance, as well as their experience and expertise in the multifamily space. Look for sponsors with a proven track record of success in the market . More so, knowing a multifamily syndicator’s investment criteria is important when investing as a limited partner (LP) because it helps you understand the sponsor’s strategy and goals for the investment. This information can help you determine whether the syndicator’s investment objectives align with your own investment goals and risk tolerance. For example, a syndicator may have a value-add business plan where they seek to acquire properties with the target in mind of increasing rents and cash flow through renovations and improving management. This strategy typically involves higher risk but also has the potential for yielding high returns. On the other hand, a syndicator may take a core approach and seek to acquire properties that are already stabilized. The core approach typically involves lower risk as the asset is already performing well and generating cash flow. By understanding the syndicator’s investment criteria, you can better evaluate the potential risk and return of the investment. You can also ensure that the syndicator is focused on the same goals as you, such as cash flow or long-term appreciation.

Understanding the syndicator’s approach to acquiring properties can make you comfortable with their strategy. Additionally, understanding the syndicator’s investment criteria can also help you evaluate the potential for future deals with the same sponsor. If you are satisfied with the sponsor’s investment strategy and performance on previous deals, you may be more likely to invest with them again in the future. Overall, understanding a multifamily syndicator’s investment criteria and track record is an important step in evaluating potential investments and ensuring that you are comfortable with the investment strategy and potential risk and return of the investment.

Market Analysis

Analyzing the market is a critical step when investing with a multifamily sponsor because the market conditions can have a significant impact on the property’s performance and potential for appreciation. Understanding the market dynamics and trends can help you make informed investment decisions and identify opportunities to maximize your return on investment.

You should look to make sure that the syndicator is investing in deals in markets with strong job growth, population growth, and favorable economic conditions. Consider the supply and demand dynamics of the market, including vacancy rates and rent growth projections. If there is high demand for rental units and limited supply, rents are likely to be higher, and the property may be a good investment opportunity. On the other hand, if there happens to be oversupply in a market, then it may be more difficult to attract and retain tenants and as a result the property may not perform well. More so, analyzing rent trends in the market can help you determine the potential rental income for a multifamily property. By comparing the asking rents for similar properties in the market, you can determine whether the property is priced competitively and whether there is potential to increase rents over time. You’ll want to analyze the underwriting of the sponsor and make sure that their rent projections align with your analysis of the rent trends in the market. In terms of employment and economic growth, strong employment growth and a healthy local economy can create a favorable environment for real estate investments. Conversely, a stagnant or declining economy may make it more difficult to attract and retain tenants, and property values may be negatively impacted. Lastly, it’s crucial that you understand the demographics of the market, including the age, income, and education levels of the population as that can help you identify the potential target tenants for the property. You should consider looking at the property from the perspective of the target tenant pool and ask yourself why from that perspective you would want to live in the deal your analyzing.

I’ll note that markets that are characterized by favorable economic conditions, low supply and high demand, increasing rent, a strong job market, and a financially stable demographic pool tend to price the multifamily assets higher. Keep in mind that real estate is hyper local and while a market with favorable characteristics is preferable, there is still money to be made by investing in areas that some people would identify as less desirable. Nevertheless, a thorough market analysis is a critical component of any successful multifamily investment strategy and you should understand the market a sponsor is investing in before you allow them to manage your money.

Property Analysis

Perhaps the most important analysis you need to do as a limited partner is on the property the sponsor is presenting. You’ll want to understand the assumptions that the sponsor is making in their underwriting because it helps you evaluate the accuracy of the projected returns of the deal. Some of the underwriting inputs you’ll want to analyze and understand the rational for are the proforma rents, exit cap rate, refinance assumptions (if there is one), and operating expenses amongst other factors. By understanding these factors you can run a sensitivity analysis on the deal or in other words stress the inputs to get an understanding of what it would take for the deal to break (i.e. perform poorly). I recommend stressing the proforma rents, operating expenses, vacancy, and exit cap rate to see how much room there is for error before the deal performs poorly. For example, let’s say that you run a vacancy stress test and come to the conclusion that if there is above a 10% vacancy that the property won’t generate enough cash flow to pay the debt payments. Given your understanding of the market and what the vacancy is in that area, the deal may not be a good investment because the probability of having 10% vacancy is somewhat high.

In general, making sure that the opportunity the sponsor presents has a strong value-add component is a good rule of thumb. Properties with underperforming rents or deferred maintenance that can be addressed to increase cash flow and appreciation are a good opportunity so long as the sponsor has a good track record of stabilizing those kinds of properties. You should also evaluate the property’s location, age, and physical condition, as well as the unit mix and tenant demographics. These factors give you an indication as to what the capital expenditure (capex) budget should be and based on your analysis you should reconcile that with what the sponsor is projecting. With this being said, I’ll recap what I said in this portion of the post in a more digestible way by providing a list of several steps that help to evaluate the property’s financial performance, potential risks, and investment potential.

1. Gather property information: The first step is to gather basic information about the property, including its location, size, age, number of units, and amenities. This information will help to identify the property’s strengths and weaknesses.
2. Review financial statements: Review the property’s financial statements, including the trailing income statements. This will provide a detailed overview of the property’s financial performance, including rental income, expenses, and net operating income (NOI).
3. Analyze rent roll: Review the property’s rent roll to understand the current and potential rental income. This will help to identify any rental rate discrepancies and potential rental growth opportunities.
4. Evaluate market rents: Evaluate the market rents in the area to determine whether the property is underperforming or overperforming compared to the market. This will help to identify potential rental income growth opportunities.
5. Review occupancy rates: Review the property’s historical occupancy rates to determine if there are any seasonal patterns or trends. This will help to identify potential vacancies and opportunities for rent increases.
6. Assess property condition: Assess the condition of the property, including its age, maintenance history, and potential capital expenditures. This will help to identify any immediate or future repair or replacement costs.
7. Evaluate competition: Evaluate the competition in the area, including other multifamily properties and single-family rentals. This will help to identify potential market saturation and competitive rental rates.
8. Perform a valuation: Finally, perform a valuation of the property to determine its market value and potential return on investment. This will help to evaluate the property’s investment potential and make an informed investment decision.

Deal Structure

It is important for you as a limited partner to understand the deal structure of the multifamily syndication you’re looking to invest in because the structure can have a significant impact on the the returns and level of involvement in the investment. Some deals may offer a preferred return to limited partners before the general partners receive any distributions. Other deals may offer a split of profits between limited and general partners. By understanding the deal structure, you can better evaluate the potential returns and determine if the investment aligns with your financial goals. The deal structure can also impact the fees paid by the limited partners. Some syndications charge upfront fees, ongoing management fees, or performance-based fees. By understanding the fees associated with the deal, you can evaluate whether the fees are reasonable and whether you are comfortable with the fee structure. The deal structure can also impact the level of risk assumed by the limited partners. For example, some syndications may offer a preferred return but also require you to assume a higher level of risk in the investment. By understanding the deal structure, you can evaluate the potential risks associated with the investment and determine if they are comfortable with the level of risk. Finally, the deal structure can impact the level of involvement of the limited partners in the investment. Some deals may offer more involvement (although this is rare from what I’ve seen) and transparency, while others may limit the limited partner’s involvement. By understanding the deal structure, you can evaluate the level of involvement you are comfortable with and determine if the syndication is a good fit. Overall, understanding the deal structure of a multifamily syndication is important because it can impact your returns, fees, level of risk, and involvement in the investment.

Conclusion

As a limited partner in a multifamily syndication deal, it’s important to carefully screen potential investments to ensure they align with your investment goals and risk tolerance. By considering factors such as sponsor track record, market analysis, property analysis, and deal structure, you can make informed decisions about which syndication deals to invest in. As a side note, most syndications require you to invest a minimum amount ($50,000 is common) and if you don’t feel comfortable investing that amount of money or don’t have that much capital, you’ll have to look for a syndicator who has a lower minimum investment requirement. At JP Acquisitions, we have a lower requirement of $10,000 which helps us provide access to a larger variety of investors. Nevertheless, I trust that this post has helped you understand how to go about vetting a deal that a syndicator is presenting to you. With this knowledge, you’re one step closer to achieving financial freedom.

If you have any questions regarding the terms and concepts in this post or previous ones, don’t hesitate to reach out to either me (tedi.nati@jpacq.com) or someone on our team so we can help explain what is causing the confusion. If you’re interested in investing with us at JP Acquisitions, you can contact us via email (contact@jpacq.com), LinkedIn, Instagram, or our investor portal to set up a meeting.

As always, I hope you enjoyed reading this post as much as I have writing it. Best of luck!