How I Started Investing in Multifamily Syndications, Part 2: Offering Memorandums
Learn alongside first-time investor Jeff Hamann as he finds his way around various offering memorandums while searching for the right multifamily syndication.
Just about every syndication has an offering memorandum (or OM) for investors to look over. You'll need to know what to look for (as well as what to ignore) to make the most of these documents when investing in a multifamily syndication.
Side note, and a bit of a shameless plug: If you want to get a look at the basics of what an OM contains, just check out any of the great deals listed on our Engage platform.
Today, in the second part of my series on syndications, I'll walk through my process in looking at the first few I came across.
Quick Recap: How and Why to Invest
Last week, I wrote the first part of this ongoing series about multifamily syndication.
Before moving ahead, you should have a quick glance through it. That's especially true if you're not sure you're able to invest in multifamily syndications — or why you'd even want to right now.
Remember, if you're interested in actually investing in a multifamily syndication as an LP — e.g., for passive income — this whole series is intended for you.
If you're interested in learning how to run your first (or next) multifamily syndication as a GP, however, your absolute best resource is Janover Connect's syndicator guide to multifamily investment.
Offering Memorandums
First and foremost, OMs are documents used by syndicators to market deals to investors. This is important to remember, because I can't emphasize enough that reading an OM alone is not doing due diligence.
Still, even if I don't completely rely on an OM, it can be a very useful tool. It helps me to understand what the syndicator is planning with an asset, and that gives me insights into whether it's a fit for my portfolio.
The first thing to know about an OM is what you should expect to find inside. Nearly every OM you see will have:
- An executive summary
- Property details
- Market details
- Photos of the asset
- Sources and uses of funding
- Syndicator (and other organizational) info
- Risk factors
- Competitive factors (e.g. sales comps)
- What is the property's current debt service coverage ratio?
- What percentage of units will be vacant during renovation work, and how will this impact cashflow?
- Tell me the financing terms of the senior debt you're taking on. Is it fixed or floating? What's the LTV ratio?
Let's dig in to a few of these, and how your own research can shed additional light.
Property Details
You'll find a lot of information here. For starters, you should easily understand where the property is, its size, unit mix, in-place rents, occupancy, age, and so on.
Market Details
Most syndicators will give an overview of how the metro's multifamily market is doing. Note that this generally bears further research — you won't become an expert on a market just by reading what the syndicator tells you about it.
For example, one of the OMs I was looking at focused on how high-growth a market Dallas-Fort Worth is. That's certainly true in many ways, but the market analysis neglected to mention the huge amount of construction underway in the metro. I did my own research on this to fill this gap, and I recognized it as a potential risk to the profitability of the investment.
Sources and Uses of Funding
This is an extremely important part of any offering memorandum, as it tells you precisely what the syndicator is planning to do with the property — and how they're getting the money to execute on their plans.
Many syndicators go for value-add properties — that is, assets that can be renovated, driving appreciation and rent growth — but that's certainly not always the case. It's essential to know their strategy, and you can then see if it is something you find palatable.
Risk Factors
This is an important part of any OM, but often it's a cookie-cutter section that gives you fairly boilerplate language about how money invested in syndications is money at risk due to cost overruns, changes in market conditions, and so on.
Still, review it. Some OMs get granular with risks, and it's worth seeing how the syndicator is looking at the investment opportunity. Once you're done with that, though, there are a few additional steps you can take.
First, do some comprehensive review of your market's (and submarket's) multifamily metrics, plus any other key economic indicators — like employment growth, for example. Also, see if you can talk to someone who has invested with your syndicator before. A former LP may be able to speak to how well (or poorly) the syndicator adapts to challenges or hard times, which can be enlightening.
Competitive Factors
This is generally where you'll find your comparables. Sales comps are great ways to understand the value of the target property relative to similar assets in the immediate area. Most OMs should list at least three or four properties, and all should be very, very close by. If you're looking at a 190-unit community in Los Angeles' Koreatown, for example, a 200-unit property in Hollywood won't be a great comparison for obvious reasons.
Comps don't only matter when it comes to property values, though. Be sure to understand the differences between properties in rents and occupancy, as you don't want to take the syndicator's word that their projected rents are accurate.
Even so, sales comps can be cherry picked. It's always best to verify any data with third-party sources (think CoStar, Yardi Matrix, RealPage, and so on). When I was looking at my syndication opportunities, I called an old friend at Yardi Matrix to throw some numbers together for me — it helped me truly understand the property (and the comparables) from a different angle.
Company Info
Often one of the final parts of an OM, information about the companies you're dealing with is important. Many syndicators aren't the only players involved in a property, and they may work with a third-party management company, a joint venture partner, and other companies for various purposes (like general contracting for renovations, etc.).
While, of course, most company descriptions will paint a flattering picture of them, it's best to do some research. I prefer to research each company on Google News, for example, to see if there are any red flags that have come up in recent history.
Doing Your Due Diligence
I know this entry has likely raised some questions for you to think through as you examine your opportunities. It definitely did for me.
Just remember, your syndicator should be much more at this stage in the process than a person who just throws the OM your way. They are actively involved in making this investment profitable, too, so they'll have done their homework — and if they haven't, asking a few questions will make this painfully obvious.
Some questions I asked one syndicator fairly early on in the process included:
All these questions (and many more) can help shed light on the good, bad, and unknown of the investment. If your syndicator isn't willing to provide you with data points upon request, this could be a sign that you haven't found the right one just yet.
What's Coming in Part 3?
Glad you asked. I'll be writing the third part of this series — likely in early January — to talk about my conversation with a CPA about investing.
And this is where it all went a bit off the rails. Stay tuned for more!