Passively investing in multifamily syndications can be a great way to grow your wealth and build passive income. However, choosing the right deal requires an understanding of key factors and always asking the right questions.
I’m not saying that you need to be an expert in deal analysis – far from it – I just want you to know what to look for in deals. So in this article, I’ll give you a guide to evaluating multifamily syndications by looking at three things:
- The asset class
- The operator
- The deal itself
And I’ll give you some questions to ask to operators when a deal does come across your desk.
Let’s do this.
The Asset Class
How fundamentally strong is the asset class? In this case, I’m talking about multifamily real estate – are the fundamentals there? Absolutely. The best way to measure those fundamentals is through demand, and in the multifamily space, that’s something called the “net absorption rate.”
That’s a term that refers to how many apartment units are being “absorbed” or rented by tenants.
Net absorption of 153,000 units was the second-highest Q3 total since 1985 and 72% above the pre-pandemic average. And net absorption totaled roughly 440,000 units through last year, up 171,080 units one year prior. America needs apartments and its people are filling them up.
So that’s how we measure demand.
It’s also why we picked multifamily investing over other investments and real estate: because the fundamentals are so strong, they have been for many years, and they will continue to be strong during the coming years.
They’re temporarily undervalued for a couple of different reasons, like interest rates, the new administration, and hesitation from investors. But all that means to me, and I hope you can see this too, is that we can pick up assets with strong demand for cheaper than they normally are.
Additionally, with limited affordable housing, and a future decrease in supply as fewer new units come online, that will drive up rents over time. That’s something you like to see in an asset class.
One more thing before we move on, during recessions and down cycles, multifamily doesn’t see a huge spike in vacancies and a giant drop in rents. Typically we see a flattening of both of those, not a crash.
Here are some questions you can ask about the asset class to test its fundamentals:
- How is the asset performing now?
- How has the asset performed in the past?
- How does it perform in down markets and recessions?
- Is there demand now and will there be demand in 5 years?
So those are the fundamentals of the asset class. Let’s move on to the second part of evaluating a multifamily investment: the operator.
The Operator
The second thing you need to consider when evaluating a multifamily deal as a passive investor is the operator.
The operator is responsible for picking the right market, conducting thorough due diligence, picking the right asset in the market, and establishing a property manager after the close. That’s their responsibility so that you don’t have to do all of it.
Look for these two things when you’re vetting your operators:
What is the track record of the partners? Operators do joint ventures all the time to leverage the “Who not How” mentality. But how many deals have the partners actually done together? For example, at Nighthawk Equity, Garrett, Drew, and I have been together since 2017 and we’ve done 21 deals during that time. That’s the type of experience you want to see in partnerships: success together.
And the second thing is to make sure that they’re true operators. True operators aren’t just capital raisers, they’re not just bringing the deal to you for money. True operators actually have in-house property management and construction teams. They’re equipped to successfully operate a deal to protect your money.
So really look at the operators and their collective track record.
The Deal Itself
The last component of evaluating a multifamily syndication as a passive investor is looking at the deal itself. This is different from the fundamentals of the deal.
In this step you’ll be looking at numbers, financials, and business plans. Don’t worry, like I said, you don’t have to be an expert in deal analysis to be able to do this. This step involves mostly just asking the right questions to your operators.
Here’s a shortlist of the questions you should be asking about the deal:
- What’s the business plan?
Are they doing a full renovation of the units? How long are they expecting it to take to raise rents? Does their plan make sense?
- What’s behind their projections?
For example, how conservative are their assumptions? If they’re doing a value-add deal, why would they be projecting a 10% vacancy rate year one when they’re constantly turning over units and ripping everything out? Shouldn’t vacancies be up?
- Are there plenty of reserves?
Reserves for expenses or construction. Are the reserves being taken out of the cash flow, sort of like an emergency fund? If so, then your returns will be higher at the sale.
Final Thoughts
As a passive investor, your role is to evaluate deals and operators carefully. By focusing on the market, business plan, financials, underwriting assumptions, and risk, you can make confident decisions and avoid common pitfalls.
At the end of the day, it’s not just about the projected returns—it’s about whether the story behind the deal makes sense and aligns with your goals. Take the time to ask questions, review materials, and trust your instincts.
If you’re ready to explore multifamily syndication opportunities or learn more, check out Nighthawk Equity. Our experienced team is here to guide you every step of the way. Let’s grow your passive income together!
