We get it — you’re busy.

Perhaps it’s a full-time job, new kiddo or you simply want to enjoy your retirement. Whatever the case may be, you can still passively invest in apartment syndications and achieve returns that are greater than those of stocks, bonds, REITs, and other investment vehicles.
If you choose to pursue passive multifamily investing, consider these tips to scale your business well into the future.

Identify a Qualified Apartment Syndication Team

The first step is to find a quality apartment syndicator and evaluate their team. Since you’re handing over your hard-earned capital to someone else, you must trust this group to preserve your wealth and distribute the return projections in-full and on-time.

To do so, you’ll want to thoroughly vet the apartment syndicator and their team. Here are some questions for them.

  1. How many deals have you taken full cycle?
  2. Were those deals successful? Did the actual returns meet or exceed your projections?  
  3. Who is the property management company? What’s their background? How large is their operation? Have they worked with your company before? How long have you partnered with them?
  4. How often do you send updates on deals? What information is included? Are the reports customized?
  5. Who is my point person with your office? Can I have his or her cell phone number?

As Tony Robbins says, “Success leaves clues.” You can trust a syndication team with a solid track record of taking multiple deals full cycle that exceeded projections more than a syndicator that is attempting their first deal or failed on others. And always remember, successful passive investors have their fingers on the pulse of the projects. This is impossible if the syndicator isn’t transparent or has poor communication practices.

Understand the Market Fundamentals
The next step is to understand the fundamentals of the syndicator’s target market. One strategy is to simply assume that the syndication team would only select the best markets in which to invest. But successful passive investors conduct their own market evaluation. You can trust, but always verify.

Here are the five market factors to evaluate:

  1. Unemployment: People need jobs to pay for rent. Ideally, the unemployment rate is low and/or decreasing.
  2. Population: To fill vacant units, you need people who need a place to live. The more people who move to a market, the more demand there is for apartment rentals. Ideally, the population is and has been trending up.
  3. Job Diversity: This is the most important market factor. Sure, people need jobs to pay for rent, but what happens if the main industry takes a hit? How many jobs are affected? That’s why the main industry in the strongest apartment markets employ less than 25 percent of the population.
  4. Vacancy Rates: The vacancy rate indicates the level of demand in a market. The lower the vacancy rate, the higher the demand for rentals, which means higher rents and higher economic occupancy. Ideally, the market vacancy rate is 5 percent or lower or is decreasing. 
  5. Rents: A market’s median rent also indicates the level of demand in a market. Increasing median rents indicates a higher demand for rentals, which means greater returns. However, make sure that the median rent is less than 30 percent of the median income, or else the majority of the population will not be able to afford rent.

Other relevant market factors to be aware of are crime rates, school district rankings, Fortune 500 Companies, number of new builds, and population age.

Invest in Conservatively Underwritten Deals
Lastly, successfully passive investors only invest in conservatively underwritten deals. To determine if the return projections are conservative or aggressive, ask the syndicator the following questions:

  1. Is the property being acquired at a price below the comparable properties in the area?
  2. What is the in-place/going-in cap rate?
  3. What is the status of the apartment’s major systems?
  4. What is the capital expenditure budget?
  5. How do the trailing 12-month profits and losses compare to your pro forma?
  6. How much money are you placing in reserves up front and each year?
  7. Is the debt term equal to/longer than the projected hold period?
  8. What are the sales assumptions? How do you calculate the exit cap rate?
  9. What are the projected returns?

The syndication team, the market, and the deal are the three major risk points for a passive apartment investor. By following these three tips, you will minimize these risks and be on your way to making this year your best ever!

Categories | Article | Operations
  • Joe Fairless

    Joe Fairless is the co-founder of Ashcroft Capital, which has over $1.5B in assets under management. Joe created the Best Real Estate Investing Advice Ever Show podcast, which is the longest-running daily real estate podcast in the world and generates over 500,000 monthly downloads. He is also a proud member of the Texas Tech Alumni Advisor Board for the College of Media and Communication, and is recognized as Outstanding Alumni at Texas Tech University, where he is a former adjunct professor. He is currently a Junior Achievement board member and volunteer for the Cincinnati chapter and has been recognized by the Junior Achievement’s Free Enterprise Society. Joe volunteers at Crossroads Hospice and was recognized as Multifamily Investor of the Year by Think Realty Magazine.

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