The 4 Phases of Value-Add Real Estate Syndications
For folks that aren’t familiar with Real Estate Syndications, it involves multiple investors pooling their capital together to purchase no-hassle, hands-off investment properties that deliver passive income and appreciation to the investor.
While each syndication business plan is unique, there are four common phases that each typically follows:
The total length of these four phases can vary based on the individual property, sponsor, and business plan, but a typical investment is around 3-5 years from acquisition to liquidation.
Phase 1 - The Acquisition Phase
The first phase of a real estate syndication is the acquisition of the asset. There are a number of tasks that are performed during this phase such as:
Marketing and networking to find the right deal
Analyzing the deal to determine its profit potential
Negotiating the purchase contract
Creating a business plan for the property
Auditing the property’s financial records
Performing physical inspections on the property
Validating the title and clearing any impediments to closing
Shopping for real estate loans and applying for the most appropriate one
Ordering commercial appraisals
Creating the entity (LLC, corporation, etc.) that will hold the asset.
Raising cash from passive investors for the acquisition and business plan
Closing on the property
Because of all of these steps, the acquisition phase usually lasts several months, and can take even longer if the sponsor cannot find a property that meets their criteria.
Phase 2 - The Value-Add Phase
The next phase of a real estate syndication is where the sponsor executes on their business plan to add value by making upgrades to the property and the management of the asset. These value-add improvements enable the rental rates to be raised which then increases the value of the property.
Most of the time, this starts with a transition of the property management team, which helps the property operate more efficiently thus driving down costs and increasing net operating income (NOI).
The renovations begin almost immediately, and usually start with the vacant units.Then, as leases come due, tenants have the opportunity to move into the freshly renovated units (and most of them are ecstatic when they see the brand new units), which allows renovations to continue in the units those tenants vacate. This process continues until all of the units have been upgraded.
Based on the property and the business plan, renovations may also include exterior and common area renovations, such as renaming and rebranding the asset, adding a dog park, adding covered parking, cleaning up the landscaping, sprucing up the pool area, and more.
Typically, this phase can last anywhere from a few months to a few years depending on the number of units in the property and the improvements that will be made. In a heavy value-add property, where most, if not all, the units need to be updated, the unit renovations can take 12 to 18 months or longer.
Phase 3 - The Operation Phase
After the value-add phase, the sponsor transitions into the operation phase. During this time, the sponsor and property management company focuses on:
Performing routine maintenance
Marketing and leasing vacant units
Settling legal disputes, including evictions
Paying mandatory expenses like property taxes and insurance
Distributing cash flow payments to the passive investors
Providing regular reports on the physical and financial condition of the asset to passive investors along with providing tax returns (Form K-1)
The operation phase is probably the lowest risk phase of the entire process. The heavy lifting of the value-add renovations has been completed so the goal is just to stay the course. The sponsor will rent the units to quality tenants at a premium and continue generating strong revenue.
Phase 4 - The Liquidation Phase
The final phase is liquidation of the property that returns capital to the investors via a sale of the asset or refinance of the loan. At this point, the business plan has been executed, the value-add improvements have driven revenues higher, and the asset has appreciated in value.
Rather than hold the asset forever, the best use of investor capital at this point is to liquidate property and return investor capital, so that it can be invested into another value-add project that offers a strong investment return. Once the liquidation has been completed, investors receive their initial investment back, along with their share of the profits that were made from the asset increasing in value from the original purchase price.
These four phases of a value-add multifamily real estate syndication give structure to the investment, help investors know what to expect, and allow the sponsors to focus on executing the business plan. As passive investors, you don’t need to worry about performing any of the work above or dealing with the headaches of managing the property. You simply make your investment, then get to experience the benefits of owning no-hassle, hands-off real estate!
One of the keys to selecting a great real estate syndication investment is performing due diligence and detailed analysis on the Sponsor, Market, and the Property through the lens of the four phases outlined above. Our team here at Limitless Investing independently reviews every syndication opportunity prior to sharing with our investors to ensure they are only receiving high-quality, pre-vetted opportunities.
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