Let’s talk about the Multi-family Deal Lifecycle. This is at a high level, but this is what might happen with a multi-family project over a period of two to 10 years roughly. So, the first step here is to buy the property. Now, a lot goes into this. There’s a lot of underwriting that happens, a lot of financial modeling, assumptions that a sponsor’s gonna do on what they think the rents are gonna be.
What expenses are gonna be, and there’s some educated guesses in triangulating of data from different sources on what the sponsor thinks the returns are gonna be to investors. Now, in a syndication, this is the most important thing on front side is, it’s entirely investor return driven. So, what do you conservatively feel you can project as returns for investors. That’s the sponsor’s role is to go out and find that property.
So once you’ve found a property, and there’s a whole process there on finding it, negotiating it, actually winning the deal. If it’s a marketed deal, there might be numerous offers on that property, so that’s certainly a process into itself. But, let’s assume that a sponsor gets through that process, actually gets the property under contract, goes through their due diligence period.
Usually 30 days where they have to do their own inspections, and inspect every unit, and validate some assumptions, make sure there’s not any massive deferred maintenance or issues that are gonna blow the budget, so to speak. So once you get through the process and actually close on it, then you get to work on the repositioning. Now, I’m speaking specifically about a syndication where we’re pooling capital from investors to go out and purchase a property, and I’m speaking specifically about value-add properties.
Meaning that there’s something that we’re gonna go in and do to improve the financial performance of that property. So, assuming it’s a syndication, and that’s a value-add project, we’re gonna buy it, and as soon as we close on it, we’re gonna start to execute our repositioning plan. Typically, you work from the outside in, so you wanna make the property nicer on the outside in terms of improving curb appeal.
Maybe there’s a rebrand of the property, maybe you’re doing landscaping, painting, new signage, all the above so that it’s clear that there’s a new owner, and there’s some improvements being made to the property. So, this period might take anywhere from months, to a year and a half, or sometimes even a multi-year depending on how large the property is, and how much improvements you’re doing to the property.
So, let’s assume you’re 18 months into it, you’ve been able to execute your improvements. Maybe you’re improving renovating units, you’re improving common areas, maybe you’re adding some amenities like a dog park, or those kind of things. So, after a while, you’re gonna have an improvement in your net operating income. And then we come to kind of a fork in the road here.
And there’s really two options, once you’ve improved the property. One is to refinance. So, if you’ve improved the net operating income of the property, you could take it back to the bank, and say hey look, we’ve got new net operating income number, we want to refinance it, or add a supplemental loan, which is kind of a form of refinancing in a way. But you could do that.
And, the goal of a refinance here is to pull out some investor equity, and give it back to investors. This could be 30, 40, 50, 100% of the investor equity, refinance and give it back to the investors. And, if you’re able to do that it’s really fantastic, because you still own the asset, and it’s still cash flowing. So, if you’ve recouped 100% of your investment and it’s still cash flowing, that becomes what we call an infinite return there.
So, that’s a great scenario. You may not opt to refi, you may just go ahead and improve the property and keep it for cashflow. Usually, most operators are looking at a three to 10 year hold. My company typically underwrites a five year hold, although we’ve done ones that are shorter. And, you may underwrite a five year hold, but two and a half years in it’s looking really good and, you’ve done a good job with the property, and another owner wants to make you an offer that makes sense for you and the investors.
And maybe you wanna sell a little bit earlier, that could absolutely happen. So, you’re gonna buy it, reposition it, fix it up, and then maybe have the option to refinance, or maybe you wanna hang onto it in cashflow. And at some point, you’re gonna sell that asset, and that’s when you’re gonna receive any other gains that are coming at the end of the property.
And then, ideally you’re able to go out and take that capital, invest it into another project. You may even do what’s called a 10/31 exchange where you’re taking the proceeds and deferring taxes, and kicking the can down the road on paying taxes, and rolling that into another property. It’s called a like kind exchange, and it lets you take your profits from real estate, and put it into more real estate.
It’s the government’s way of incentivizing you to keep your money at work in various real estate projects so that people have a place to live. So, as a side note, the government has a lot of tax incentives for real estate investors to provide this kind of housing. And for us as investors, that’s a great thing. We’re doing the government’s bidding there, but we’re also reaping tax advantages, and a 10/31 exchange is one of those tax advantages.
So this is a high level look at the Multi-family Deal Lifecycle, and there can of course be nuances within that. But, this is what you try to get into here, and benefit from cashflow, appreciation, depreciation, and possible deferring of your capital gains on that.