“How do I know if I am ready to do multifamily syndication?”
“How do I know if I am equipped to raise money to buy apartment communities with investors and share in the profits?”
Aside from being one of the most common questions I receive from clients, it is also the main question that was keeping me from transitioning from SFR investing to multifamily syndication. “How do I know whether or not I am ready to use other people’s money to scale my business?” Through speaking with countless successful syndicators, and being one myself, I have discovered that there are two main requirements one must meet before becoming a multifamily syndicator.
Requirement #1 – Education
First, you need to establish a solid educational foundation. If you have the book knowledge and if you know the terminology, then you can start the process of raising money and looking at multifamily properties. To “establish a solid foundation”, at the very least, you should have a basic understanding of:
- Forced appreciation
- Cash flow and cash-on-cash return
- Effective gross income (EGI)
- Net operating income (NOI)
- Capitalization rate
- Gross income
- Vacancy rate
- Operating expenses
- Debt service
- Price per unit
- Debt service coverage ratio
- Gross rent multiplier
- Breakeven occupancy
- Internal rate of return
- Neighborhood and property classes
- Loss to lease
- Bad debt
- Preferred return
- Equity multiple
Most of these terms will come up when discussing a potential deal with your investors. Therefore, if you don’t know the definitions or how to immediately calculate them, you aren’t ready.
Requirement #2 – Experience
Once you’ve covered your basis, that is, established a foundation and understood the terminology, then the next requirement is having a track record in business and/or real estate.
- What is your real estate background? Are you already successful in real estate? Do you have a track record of successfully investing your own money in SFRs, small multifamily, etc.?
- What is your business track record? Have you received business awards? Have you received promotions? Do you have project management experience? Would your business colleagues/employer describe you as successful?
If you are lacking in both of these areas, then you are not ready to become a multifamily syndicator. You must either have previous real estate success or a solid business background.
If you have success in business, then you can easily translate that into buying apartment communities with investors. Although, since you are lacking in real estate knowledge, it is vital that you surround yourself with the right group of advisors.
On the other hand, if you already have real estate experience, it will be a more seamless transition. However, it might be more challenging to bring on investors. Since you have solely focused on real estate, you will likely have fewer relationships with individuals that are outside the real estate world. This is important because I personally believe that it is better to have investors who are more focused on a non-real estate, full-time job. They may have some interest in real estate, but they don’t have the time to invest themselves – hence why they are investing with me – because they are busy making money elsewhere.
If you have built the foundation of knowledge and have the track record in business and/or real estate, then you are ready to begin your career as a multifamily syndicator. If not, and you want to raise money to invest in apartments, strategize what steps you must take to complete these two requirements.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.