Multifamily syndication business plans come in all shapes and sizes. One common theme in the majority of plans though is a timeline of about 3-7 years. Sometimes investors wonder why we wouldn't hold the property longer. While there are some business plans that call for this longer timeline, most do not and today's article will discuss the reasons why this is the case.
1. Maximizing Return
The traditional value add business plan takes approximately 2-3 years to see through to completion. During this time, the NOI is maximized on the property through increased income and operational efficiency. However, once these goals have been achieved, the NOI increases at a much slower rate. If one plots the change in value of the property with time, you will see that this causes the value of the property to increase substantially the first few years of ownership. However, after this time the value does not increase as quickly which means the investors actually see diminished average annual returns if the property is held longer. It is therefore in the best interest of the investors to sell this property and reinvest in another value add project to maximize the returns their money provides them.
2. Sponsorship Team Returns
The general partners (or sponsorship team) on a multifamily syndication have the enormous responsibility of executing the value add business plan that will ultimately make the investment successful for both themselves and their passive investors. Most sponsors will have tremendous skin in the game by offering preferred returns, waterfall structures, personal money invested and loan guarantees. The typical result of this is that the sponsorship team sees minimal compensation for their efforts until the time of sale. While most good sponsors will have no issue with this for 3-7 years, business plans longer than this do not incentivize sponsors who are receiving most of their compensation at the time of sale.
3. Additional Capital Injection Needed
Another thing that most syndication business plans call for is a large injection of capital into the property upon acquisition. These funds are used for renovations that will drive the value add business plan for the property. As units are renovated, the manger can charge higher rent premiums which increases the NOI and therefore the value of the property. One a unit has been used for 5-7 years, it will then be time for yet another capital injection to keep the property operating in it's best state. While a few sponsors will chose to use a cash out refinance for this next capital injection, most opt to sell thereby allowing the next owners to execute on their value all business plan.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please check out our free ebook "Achieving Financial Freedom Through Multifamily Investing."
