What is a typical return from a multi-family syndication investment?

**Expected Returns on Multi-Family Syndication**

Real estate continues to be one of the most attractive investments in the marketplace today. Multi-family or apartments investments are known for their stability especially in growing markets because everyone needs a place to live. Even during the pandemic with eviction moratoriums in place, this asset class continues to perform well.

Many investors have found a simplified process for putting their money to work in the multi-family space by participating in syndications. In our multi-family syndications, we target “value-add” opportunities. In the value-add model, the syndicator locates properties that are cash flowing, and they develop a plan to optimize the property.Once acquired, the syndicator implements and optimizes the property by increasing cash flow and forcing appreciation to the benefit of all participants. Passive investors benefit by sharing in the cash distributions throughout the life of the project (typically 3 to 7 years). In addition, they share in the big prize at the end, which is the profits from the forced appreciation.

So, what should a passive investor expect for a return on their investment? We will provide the answer by discussing three important metrics that are used to gauge performance. These metrics are Cash-on-Cash Return, Internal Rate of Return, and Equity Multiple. These three metrics, when understood, will allow you to make an informed decision about the syndication compared to other investment options.

**Cash-on-Cash Return**

Cash-on-Cash Return is a measure of your return on investment (ROI). It is calculated on an annual basis by simply taking the cash flow you receive and dividing it by your initial investment. For example, an investor participates in a syndication opportunity by putting $100,000 into the deal (typical for a syndication opportunity). The investor receives $8,000 in distributions during the first year. So, $8,000 divided by $100,000 equals an 8% Cash-on-Cash Return or an 8% return on your investment.

For a value-add multi-family syndication opportunity, it is typical to realize an annual Cash-on-Cash Return from 5% to 10%. The Cash-on-Cash Return should increase each year you are in the deal as the sponsor implements the plan to optimize the property. Over the life of the investment the Cash-on Cash Return will typically average around 8% per year. This annual average is referred to as the Average Annual Return.

Also, keep in mind that the Cash-on-Cash Return does not include the big prize at the end of the investment period when the property is sold or refinanced.

**Equity Multiple**

Up next is the Equity Multiple best described using the Las Vegas analogy. You go to Vegas and play the roulette wheel. You put $100,000 on black, and it hits winning you another $100,000. You doubled your money. It is that simple with equity multiple. This metric tells you how much you multiplied your initial investment.

Let’s look at a real investment example. At the beginning of a 5-year investment, you put in $100,000. Each year your share of the cash distributions is as follows:

- Year 1 = $6,000
- Year 2 = $7,000
- Year 3 = $8,000
- Year 4 = $9,000
- Year 5 = $10,000

Plus, your share of proceeds from the sale (the big prize at the end) is $160,000. Adding all of this up, the sponsor paid out $200,000 on top of your initial investment. If you divide the $200,000 by the initial investment ($100,000), we get 2 or an Equity Multiple of 2x.

This shows that over the life of the investment your initial investment to this multi-family project has doubled. I don’t know about you but doubling your investment in five years without hardly lifting a finger is awesome! Not to mention the tax benefits, but that’s a different discussion.

As a passive investor you should typically realize an Equity Multiple 1.5X to 2.5X on a 5-year investment. Anything below 1.5X is most likely not worth time or money. Anything over 2.5X, the deal is probably too good to be true, and you should exercise caution before investing.

**Internal Rate of Return**

Internal Rate of Return (IRR) is defined as the discount rate that makes the Net Present Value (NPV) of

all cash flow equal to zero. It is a calculation of the annual rate of growth an investment is expected to

generate. Here is your formula…

To determine the IRR, NPV is set to zero. Now plug that into your calculator! An easier way to think about IRR is that it calculates the growth rate of your investment annually. It also takes into account the time value of money and how much it is worth today versus in the future. Don’t confuse IRR with your annual or average return because it is different. IRR is a calculation of how much your money is growing annually and incorporates all cash distributions including proceeds from the sale or a refinance.

With the help of a spreadsheet, you can easily calculate the IRR. For example, using the same numbers from the example above, input the following values into a list on a spreadsheet:

- ($100,000); negative one hundred thousand, which is the initial investment
- $6,000
- $7,000
- $8,000
- $9,000
- $170,000 ($10,000 in cash flow plus $160,000 in distributions from sales proceeds)

If using Microsoft Excel, type in, “=IRR” and reference the cells in the list. The spreadsheet will do the rest. Your formula should provide a value of 16%. Here is an example of what your spreadsheet should look like:

This shows that your money is growing by 16% annually. In the syndication world, you should look for investments that can deliver an IRR in the mid to high teens. Anything over a 20% IRR should be approached with caution as the number may be inflated to attract investors. Anything under 12% is below what should be expected with this type of investment.

**Putting It All Together**

Using all three of the performance indicators discussed above tell a more complete story about the potential of the investment. Maybe you are getting a 2.5X equity multiple, and you like the idea of more than doubling your money. Remember, equity multiple does not account for time. So, it may take you 10 years or more to get to the 2.5X equity multiple, but your IRR would be low. Using the guidelines provided for all three performance indicators, you can make an informed decision about your participation in a multi-family syndication.

Always keep in mind that these are projected returns, and they are not guaranteed.

At Victory Capital Group, we evaluate our acquisitions to provide our investors with about an 8% average Cash-on-Cash Return. We target Equity Multiples in the range of 1.5x to 2.5x, and the IRR should be in the mid to high teens. Combining these three indicators provides our passive investors with strong returns while minimizing risk and realizing the tax benefits for their returns.

One last piece of advice that is more important than the numbers… make sure you get to know your syndicator and can trust their process!

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