Walking Through the 4 Phases of Value-Add Multifamily Syndications

by Christopher Levarek

“Self-confidence is the first requisite to great undertakings.”

- Samuel Johnson


Early in our journey in real estate, we purchased a 13 unit in North Carolina of garden-home apartments. On one of the very first turnovers or renovations done on an apartment unit that someone had just moved out of, we found hundreds of roaches on the walls and in the ceilings.

The trash and leftover debris of this tenant was scattered everywhere preventing passage in some places.

I was amazed that anyone had even lived under such conditions. We quickly began renovating the unit and ultimately went over budget on the unit due to the vast damage and lack of cleanliness.

However, our efforts to provide a newly fresh unit with new paint, appliances flooring and “no bugs” ultimately rented to give someone a place to call home.

This is one of the rewards of value-add multifamily. Improving the local community and providing a renovated and clean place to live for someone.

Value-add real estate syndications follow this very process as the above story example.

There are actually 4 phases involved in purchasing apartment complexes, adding value and ultimately renting to new tenants as per a business plan.


The 4 Basic Phases of Value-Add Real Estate Syndications

Phase 1 - Acquire the Property

analysis

In this first phase, the partners or operators of the project are finding a good property that fits the business plan needs. This requires sending multiple offers and underwriting various different deals to ultimately bring a property “under contract”.

Once under contract, the sponsors will tour the property and perform their due diligence to understand what the property actually looks like. The business plan is further updated to reflect the findings and reviewed by the sponsors and participating partners, aka. us.

At this point, we begin sharing the opportunity with our investors and interested network to gauge interest. Funds are raised for the project with investors and the property is finally closed upon.

Phase 2 - Add Value

paint

Similar to the story at the start of this post, in this phase, we begin adding value to the property. This means renovations which start almost immediately after closing.

As per the business plan, this can involve improving the current on-site staff, renovating existing vacant units, turning units as they become vacant and adding exterior improvements to the grounds. Often a dog run or playground will be added to benefit tenants or even the installation of covered parking for example.

This phase can take 1-2 years depending on the size of the property as leases need to expire on existing tenants in order to be able to renovate those units.

Phase 3 - Hold

Once the property has been fully renovated, we enter the Hold phase. With rents increased to the new renovated rate, the asset performs much better then at acquisition. This means cash flow or cash-on-cash returns to our investors.

However, throughout this period, rent increases will continue gradually at a low percentage per year, increasing revenue and appreciation of the property. Although this Hold period can vary, in our projects we typically keep this period at 5 years or less.

Phase 4 - Sale

relax

Now the value has been added and the property has appreciated, we enter the Sale Phase. The property will have completed updates, increased revenues and thus have a new value or price tag.

We prepare to sell the asset so investors may move on to seek their next investment project. Profit-from-sale returns and any remaining cashflows are distributed to the investors along with original investor capital.

The asset can be sold via listing like a normal single-family purchase or even “off-market” as many of these apartment complexes are more common to. The off-market approach can be less intrusive on existing tenants but it can depend on the economic market conditions as to which method is used.

Once the sale is complete and all investor capital plus profit-from-sale is distributed, the project is completed. It’s time to celebrate!


In Final

As you can see, investing in apartments or multifamily is very similar to investing into another house or duplex. Value-add projects in real estate thus become easier to understand then say a stock market purchase. Adding value increases the asset value and allows for rent increases leading to increased revenues.

However, the real reward in value-add projects is seeing the positive outcome on the community and the face of the new renter as they enter the unit. This is the true benefit of participating in such projects and one not to be easily forgotten.

We invite you to join the Valkere Investor Club to learn how you can be part of these types of investment opportunities.