So let’s talk about multifamily syndication advantages, and specifically principal pay down and what does this mean. Our typical multifamily syndication, a syndicator or a sponsor, meaning the person that’s putting the whole project together, will raise some equity from investors and put in some of their own money, and then they’ll also get a bank loan.
This might be … Let’s call it an 80/20 split for easy math. You’ve got 80% of the capital being provided by a bank, and we love these because the banks love to lend on them. They’re more oftentimes than not non-recourse debt, which is the gold standard in a loan product, and we also usually get longterm fixed rate debt. So you might get a loan at 4.8% fixed for 10 years on a large commercial project, which is hugely advantageous for many reasons.
So let’s say the bank’s got 80% of the total capital stack on a project. The bank’s loaning let’s call it $4 million on a project. Well, every month there’s going to be a payment due to the bank, and oftentimes it’s going to be comprised of interest and some principal. Now sometimes … A little side note here, we do get interest only periods of one, two, three, four, as many as five years I’ve seen, which helps our cashflow, but does not help us pay down principal.
But as some point usually in an amortization schedule over paying off a loan there’s going to be part of that payment to the bank that’s going to be consisting of interest and consisting of principal. Well that principal chunk … Let’s say you got a $4 million loan day one, every month you make the payment you are reducing that principal just a little bit, and over time that can have a powerful effect, right?
The beauty of this is what happens when you’re reducing principal. You’re essentially adding some equity back to the investors, right? It’s just like owning a house. If you owe $300,000 on your house, well every month you pay off a little bit. The difference is that every month on your house you’re paying it off. I’m paying off my mortgage out of my hard earned dollars. The advantage in commercial real estate or rental real estate is that your residents are paying that off for you. Huge advantage to multifamily syndications here.
This is principal paydown, and it’s typically not something that we talk about a lot in terms of returns because we’re usually focused on cashflow and things like that. But over time you’ve got your residents on the property paying that mortgage down for you, and if it starts out as a $4 million balance and ends up at some point in the future at a $3 million balance, we’ve got $1 million essentially of equity that’s been added back into that project that’s been paid down over time by the residents.
Huge advantage, and one of the many, many great reasons we love investing in residential real estate, or in this case we’ll call it commercial real estate on large multifamily projects. Thank you.