To Syndicate or Not – This is The Question (What Would You Do?)
Indeed – this is the question I need answered. As you can imagine, I am leaning in one direction in this matter, but I need you to check my thorough process and offer an opinion.
My answer – an emphatic YES.The next deal that I do is going to be a syndicate. My feeling on this stems from the success I’ve had creating equity and cash flow with small multiplex, and now I am ready to add a “0” or two to every number in the deal.
To clearly define the moving parts, allow me to update you as to the status of the Symphony 10-Unit. I wrote about it in an article entitled How I Bought a 10-plex With 1.5% Down – Case Study.
Purchase Price: $373,500
1st Mortgage (commercial portfolio note): 70%
2nd Mortgage (private note): 25%
Required Down-payment: 5% *
Monthly Gross Income: $5,800
Monthly Operating Costs: $2,400
Monthly NOI: $3,400
Cost of Money: $2,400
CASH FLOW: $1,000
CAPITALIZED VALUE $408,000 **
EQUITY POSITION $54,000 ***
Several points here:
- While the down-payment requirement was 5% ($18,675), after prorations and credits I ended up closing with about $5,300 out of pocket, and this was the first ever deal that I brought money to – bummer…I couldn’t sleep over it for days!
- A building such as what this is in the location it is in commands a 10 CAP. Therefore, annual NOI of $40,800 ($3,400 x 12) justified a value for this building of $408,000 at 10 CAP. Having paid $373,500 I received a bit of a discount against the capitalized value.
- The total outstanding debt on this building was, and still basically is about $354,000. Juxtaposed against capitalized value of $408,000, my equity position at the outset was about $54,000.
I evicted bums, hiked rents, and lowered expenses. Due to my efforts, the current monthly NOI is about $3,870. My current Cash Flow on this building is roughly $1,500/month, and the annual NOI $46,500 justifies a value of a bit under $465,000 at the same 10 CAP.
Thus – I’ve managed to drive the Cash Flow up by 50%, and my current equity position is $111,000:
Equity Position = Capitalized Valuation – Outstanding Debt
Equity Position = $465,000 – $354,000 = $111,000
A Bit Of Perspective On Syndication
My desire and pretty much decision at this point, to syndicate comes from a simple mental exercise of adding a “0” to every number in this transaction. Of course, in this case I’d be talking about buying 100-unit apartment community for $3,735,000 with initial Cash Flow of $10,000/month and improving that to $15,000/month, and in the process putting a million bucks on my balance sheet.
I am aware that the process, though more involved and expensive, is basically the same. So, in lieu of playing with tens of thousands as we do in SFR, or hundreds of thousands as we do in small multi, I would much rather syndicate and play with millions – the game is the same…