Much like the well-remembered structure of a five-paragraph essay, the journey through a value-add multifamily real estate syndication unfolds in distinct phases—each possessing a defined purpose, contributing to the overall narrative, and adhering to a meticulous business plan.
Phase #1 – Acquire
Commencing the journey, sponsors initiate the first phase by securing a property under contract. This initial step demands not only the identification of an exceptional property but also relies on impeccable underwriting skills and accurate projection calculations. Once under contract, sponsors delve into understanding the property’s needs, estimating expenses, and refining the business plan. With thorough research and confident projections, the deal is presented to investors, and upon receiving funds, the property acquisition is finalized.
Phase #2 – Add Value
The essence of “value-add” becomes tangible in this phase as renovations kick off immediately after the property acquisition. Aligned with the business plan, property management teams initiate transitions and renovations on vacant units. This transformative phase, spanning 12 to 18 months or more, witnesses not only the refurbishment of individual units but also external enhancements like light fixtures, recreational areas, and landscaping.
Phase #3 – Refinance
With the completion of renovations, the focus shifts to realizing rent premiums and augmenting revenue. The objective is to increase the property’s value, potentially leading to a refinance or early sale, though not guaranteed. Rent premiums, often willingly paid by tenants for upgraded units, contribute significantly to additional rental income. Through a refinance or supplemental loan, investors may receive a portion of their initial investment back, maintaining cash flow as if the entire amount were still invested.
Consider this scenario: An investor, having invested $100,000, celebrates as sponsors refinance the property after 18 months, returning 40 percent of the original capital while continuing to receive cash flow distributions.
Phase #4 – Hold
As the asset enters the holding phase, the focus shifts to collecting cash-on-cash returns and stabilizing the property. With the riskier phases concluded, attention turns to attracting quality tenants and cultivating robust revenue streams. Rent increases contribute to steady appreciation during this phase, which ideally lasts five years or less, contingent on property specifics, sponsor strategy, and the business plan.
Phase #5 – Sell
As the property showcases completed updates, increased revenues, and appreciation, the logical progression is to sell the asset, allowing investors to explore new ventures. In the disposition phase, sponsors prepare the property for sale, either through an off-market transaction or the traditional listing process. Investors may opt for a 1031 exchange if they agree, enabling the rolling of capital and proceeds into another deal with the same sponsor. Upon completion of the sale, investors retrieve their original capital along with a percentage of the profits, marking a triumphant conclusion to the syndication journey.
In essence, these five phases, akin to the structure of a well-crafted essay, offer both structure and fluidity, providing a comprehensive understanding of the value-add multifamily syndication process. Passive investors, while spared the legwork, benefit from a thorough comprehension of these phases, ensuring informed participation throughout the syndication endeavor.
