20 Jun Multifamily Syndication with Ben Leybovich – CREPN #201
A classically trained musician, Ben was encouraged to seek an alternative means for generating income after he was diagnosed with MS. In his search for an alternative to his planned career as a musician, he found real estate.
Since he was located in, Cincinnati, OH, he started investing locally in single family & smaller multiple units. For ten years, he built a real estate portfolio in Ohio, then he moved his family to Arizona for the health benefits. This is when he began his educational journey into multifamily investing.
His original real estate investment mentor encouraged Ben to continuously grow. Once you master single family, get a duplex. After the duplex, get a 4 plex, etc.
He realized managing properties was not his interest. However, his experience with his smaller properties, gave him valuable hands on experience that provides Ben with a unique perspective on the market, he would not otherwise have.
The dictionary definition of to syndicate is “to pool together”.
Together, investors can do more than they can on their own. For multifamily investing, it means pooling investor funds for the purpose of buying a single property.
As such, Ben and his partner Sam Grooms focus on finding multifamily value add opportunities in Phoenix, AZ where they pull together investors to invest in a large multifamily properties.
Syndication is essentially a partnership, pulled together investors. But it is not a democracy. The partners do not have equal say in the decisions. Instead, there is a division amongst the partners; Limited Partners and General Partners.
The Limited Partners are able to invest with an expectation of return on their investment, but have no say in how the investment is managed.
The decision makers are referred to as the General Partners. All the management and operation decisions for the property is their responsibility of the General Partners. It is their job to find the property and present it to potential investors following all of the SEC guidelines regarding securities.
This “pooling together” of Limited Partners with the General Partners forms the Syndication.
Why did Ben get into Multifamily?
The answer is multi faceted. When Ben asked his real estate mentor, “How do I know if I am moving in the right direction?” The mentor answered, “Make sure each step is slightly bigger than your last. Doing this, will assure that your continued growth.” So the natural progression is towards multiple units.
The experience of building his portfolio gave Ben an education on how people, markets and assets behave as the market goes through its cycle. As he moved through the cycle, he was able to ask questions, “why did this happen?” His answers were available from the rearview mirror perspective. Ben attributes eighty percent of his real estate investing education from this rearview perspective, being invested in the market. The balance he learned from reading books.
The experience gained from over 10 years as an investor gives his syndication business a real sense of what is likely to happen as opposed to a theoretical view from just reading.
Plus, from a mathematical perspective, larger multifamily properties just make more sense especially when comparing the expenses of operating smaller properties.
Ben & Sam are very methodical about their underwriting. Given the market cycles, they always underwrite for a 10 year hold. This is not because they want to hold for 10 years, but because this length of time, allows them to safely ride out any down turn in the market. At this point in the market, if they did not do this, they could get stuck with the need to sell or refinance when the market is not favorable to do so.
Today’s cash flow is tomorrow’s “Cap X”, capital expense. Every investor looks for cashflow. But if you have not owned a building for four or eight years, you have not experienced a Capital Expense Cycle. The Capital Expense Cycle is a function of building mechanicals as they get used up and need to be replaced. The replacement of these systems are capital expense.
The cost of replacement is significant, and is why the IRS provides for depreciation and cost segregation studies to help investors plan and prepare for these events. Ideally, your positive cash flow is put into reserve so that you have funds for these events.
With this in mind, Ben underwrites for a minimal amount of cash flow starting in Q4. As the value add improvements get implemented, the cash flow will continue to increase.
The true measure of profits in real estate is defined by appreciation, regardless if you are buying and selling single family or multifamily.
In single family properties, homes sell based on what the neighbors homes are selling for. This market gives the investor no opportunity to push the value.
In multifamily, the market value is established by market cap rates and the property net operating income. Multifamily investors have some control over income and expenses which gives them control over the net operating income. When you increase the NOI, you increase the value. Your ability to increase NOI is the appeal to multifamily investors.
Multifamily Market Outlook
The Multifamily Market Outlook is favorable based on multiple data points. The Federal Reserve’s set goal is to keep inflation at 2%. This is manageable and will naturally push the cost of rent up.
Add to this the growing demand for rental housing due to population growth, formation of families and the growing segment that does not want to own a property.
The cost of new construction is prohibitive when compared to cost to rent for a potential buyer making the median income. This will keep the amount of multifamily supply from growing out of control and the demand high.
How do I exit this syndication? This is a reasonable question from someone who has pooled their money with others. Ben is very conservative, and underwrites to a 14% internal rate of return for 10 years. He does not want to be in for 10 years, but does not promise any returns to his investors until the ultimate sale.
Only after the value add plan has been substantially implemented, does Ben begin to project cash flow, usually by Q4. His experience has taught him that cash flow needs to be accumulated for future capital expenses. By keeping the property well maintained, he can drive future sale value.
Each week I ask my guest what is the Biggest Risk they see that real estate investors face.
BIGGEST RISK: The BIGGEST RISK is always, you don’t know what it is. Strictly buying for cash flow without an idea for how you are going to get out.
How to manage the risk: Underwrite each deal for a 10 year hold. Not because I want to hold it for 10 years, but for safety if we need to.
For more goto:
Podcast: Multifamily Syndication Unscripted