The Steps for Purchasing and Syndicating an Apartment Building

Quite often when learning about multifamily syndications you’ll find that the resources available to you never really clearly outline the process by which to complete a transaction and close on a property. After reading numerous books, watching countless hours of podcasts/videos, and talking to real estate professionals, that was the realization I came to. If you’re not aware, an apartment syndication is a fancy way of saying multiple individuals pulling their capital and expertise in order to acquire an apartment building. I’ll note that prior to reading this post you may want to familiarize yourself with the structure of a syndication and that information can be found on the glossary page of our website under “Syndication Deal Structure.” That being said, how is it that you acquire an apartment building using the capital of others? In this post, we will seek to answer this question from start to finish. I will get somewhat into the details of the process but for the most part, keep it at a high level because otherwise this post would be far too long. The process starts with educating yourself to finding an opportunity and eventually sourcing funds and closing on an apartment building. I feel as if this post has been long awaited and I’m excited to be sharing this process with you, let’s jump in!

1 – Education

When investing in real estate, similar to any other asset, you must first educate yourself. Without understanding the terminology and numbers (i.e., underwriting), you may do more harm than good and find yourself invested in a bad deal. Investing in real estate requires consistent education. Thankfully, the wealth of content on our website via blog posts, the glossary, podcasts, and more is a great starting point.

2 – Market Selection

The next step to acquiring or syndicating an apartment building requires that you select a market. When first starting it’s often recommended that you invest in the area you live in, but certainly you may choose to invest in a market in which you don’t reside. You’ll want to learn everything that you can about that market including but not limited to population growth, job diversity, medium income, etc. Understanding these factors will help you while underwriting, pitching to investors (if you’re syndicating), getting an understanding of the potential tenant base, etc.

3 – Building a Team

Believe it or not, real estate is a team effort. At this point in the process, you’ve likely put in a ton of effort educating yourself and narrowing down a market and are ready to put together your team of professionals to help you close. The team will consist of a real estate attorney, broker, SEC attorney (if you’re syndicating), lender, and closing attorney/title agency. More so, you’ll want to at least start thinking about the inspection company you’ll want to use during the due diligence process as well as the general contractor (if you’re rehabbing the property) and property management company (if you’re not self-managing).

4 – Sourcing Capital

Of course in order to close on an apartment building, you’ll need capital. When syndicating you’ll need to network with potential investors and get what are known as soft commitments (i.e., people who express that they want to invest with you). Depending on how you see things and what type of personality you have, finding investors may be the hardest part of syndicating a property. Nevertheless, if you’re goal is to scale then you’ll want to always be networking with people and building relationships so as to have a funnel of capital at the ready for your deals. If you market well and continuously communicate with people, over time you’ll find that people will be reaching out to you as opposed to the other way around.

5 – Finding an Investment Opportunity

In step 4 I mentioned that some people consider sourcing capital to be the hardest part of this process, however finding a strong investment opportunity may just be harder. Before you can start looking for a deal, you’ll want to establish your investment criteria. The investment criteria will help you stay focused, and be able to be taken seriously by brokers. As a word of caution and especially when you’re starting, you’ll want to not waste a broker’s time. Brokers can provide you not only with off-market deals but also valuable information about what is going on in a given market, but I digress. Once you have your investment criteria, you’ll want to continuously look for deals and early on most of the deals that are available to you will be those that are on the market. As you look through deals you’ll have to underwrite them to determine if they’re worth the investment. Based on experience, if you look at 100 deals, you’ll probably throw out 90 of them and find yourself underwriting 10. Of those 10 you’ll find that 7 weren’t as good as you thought and the remaining 3 you’ll make an offer on. This part of the process can be quite discouraging, but the reward is well worth it. One final thing to note in this section, you don’t have to do all of this alone and it’s to your benefit to find a business partner(s).

6 – Making an Offer

When you make an offer, you’ll submit what is known as a letter of intent (see the glossary page for a definition). If you (the buyer) and the seller agree on the purchase price, you’ll both sign what is known as a purchase and sale agreement (PSA). Once the PSA is signed, the property is officially “under contract.”

7 – The Syndication Documents

After the property is under contract, you will want to reach out to your SEC (Securities and Exchange Commission) attorney so that they can draft a PPM (private placement memorandum). The PPM lays out all the investment details for investors in accordance with SEC guidelines. The document includes and spells out the following:

1. Executive Summary
2. Introduction and Offering Terms
3. Business Plan
4. Management Team Bios
5. Legal and Risk Disclosures
6. Financial Statements
7. Offering and Subscription Agreement
8. Investor Questionnaire
9. Subscription Documents

8 – Due Diligence

Once the property is under contract, you will go into what is known as the due diligence period. The length of the due diligence period is spelled out in the letter of intent and the PSA. During this period you will verify the information that was represented in the offering memorandum (the broker’s investment offering package). More specifically, you will verify the rental income, utilities, rent roll, etc. In addition, you will want to walk the property again and order the various reports such as the inspection report, environmental, and structural (if necessary).

9 – Financing

At the same time that steps 7 and 8 are happening, you will work with a commercial lender to meet their underwriting needs. Lenders will want to see the due diligence documents, get an appraisal done, and confirm various other pieces of information. I’ll note that the relationship should have been started at step 3 when you were building your team and at this point in time you’ll simply be communicating with the lender to get the terms and loan agreement clarified, signed (at closing), and confirmed.

10 – Investor Capital

By now you’re in the due diligence process and simultaneously juggling steps 7-9. While those pieces are moving, this is when you’ll want to reach back out to your investors who expressed interest in investing with you and walk them through the deal. Typically, a sponsor team will prepare an investment package (i.e., PowerPoint presentation or some other marketing material) and share that with their investors. What is also common is for a sponsor team to hold some sort of webinar or live event to explain the deal to their investors. Depending on the scale that you are working at, you may be fine with meeting with the investors and simply talking to them about the deal. Nonetheless, you’ll pass out the investment documents (investor questionnaire and subscription agreement) for your investors to sign and have them wire the funds to you prior to closing.

11 – Closing

Finally, you arrive at your favorite table… the closing table. With the financing in place, the capital in your account, and the business plan in place, you’ll sign the documents. The property is then acquired and placed under the ownership of the LLC you created. You’ll communicate the closing to all your investors and have a little celebration (or not) before getting to work on the next step, executing the business plan.

12 – Business Plan

After closing, you’ll work shortly thereafter to get your property management company communicating with the tenants or if you’re self-managing you’ll introduce yourself to the tenants directly. You’ll want to establish fine boundaries with how rent will be collected, maintenance requests will be taken care of, and how communication is to take place. If you’re rehabbing the property, you’ll communicate with the party responsible for the renovations and get to work. The goal is to get everything done in a timely fashion so as to hit the returns that you presented to investors. Depending on how you set things up, you’ll send distributions to your investors either monthly, quarterly, or annually. Updates need to be communicated to your investors until the property is sold.

13 – Sale

The final step of the cycle is the sale of the property which means returning investors their original capital in addition to their respective share of the sale proceeds. Typical syndications last from 5-10 years but depending on market conditions the process can be sped up or slowed down.

Conclusion

This brings us to the end of yet another post. In this post you’ve learned the full life cycle of syndicating/acquiring an apartment building through 13 steps. While this process may sound simple due to the condensed format, there is a lot more work then you may expect. For that reason, I recommend finding a business parter or multiple partners so as to share the work and not burn yourself out. Also, having partners makes this process far more enjoyable. One final thing to note is that the process of acquiring an apartment building does not always look exactly like this but for the most part this is what you can expect. Expect to learn as you navigate the process and understand that it’s ok to not know everything. Our word of advice, seek to stay conscious, ask questions, and embrace failure as it’s part of the process. That being said, with this knowledge your one step closer to 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!