We're in the midst of this downturn for multifamily syndications. Concerns about real estate are swirling in every direction. And then: we got some good news in our inbox this week. A deal we invested in not quite three years ago is selling for a profit.
Before we get too excited: the profit is modest. It's better than a 10% annual return but far less than the pro formas suggested we might expect when we first invested in the deal. We will see what the documents show in the end, but the email suggested we might expect about an 11% internal rate of return for the hold period of between two and three years.
How should we feel about this outcome?
Let's put some rough numbers to this deal. We invested $50,000 in a pretty standard value-add multifamily deal in early 2021 with relatively experienced operators. They have done a good and steady job of communicating and paying a steady, if unexciting, cash-on-cash return. After a few months of stabilizing the property, they paid a little over $200 a month. In the past year, that has gone down a bit but they have still paid a quarterly distribution. They have carried out the business plan without much drama, updating the older units and increasing the rents accordingly. We've gotten the K1s on time with the usual depreciation benefits. It turns out the plan worked, in essence--and another buyer is ready to step in. This deal was pretty standard, not too risky, and it looks like the return will reflect that deal profile.
For us, this outcome is just fine. Not too fancy and not all we could have wanted, but fine. As we've reported on this blog, we have about 20 deals and funds active right now. To have this liquidity--let's call it $60,000 back at the liquidity event this fall--is nice and could allow us to do several things. Perhaps we will do our usual 1031 exchange and invest right away, putting off taxes for another day. Perhaps we will just sit on the cash and get a nearly 5% return (4.7% is what our money market is paying) until the time is right to re-invest.
We might change our minds, but it's our instinct right now not to jump into the mix right away again. Instead we imagine there may be some deals that will have to sell in the coming months or years given rising interest rates and the plethora of variable interest rates that multifamily syndicators took on. So perhaps we will sit on the sidelines with this cash to see if there's another goal deal in the coming year.
The return from this syndicator is not what they told us to expect in the pro forma, but we never really imagine the pro formas will be right on in any event. In fact, it's been our experience that is rare for the pro forma to be accurate. The reality is usually either a bit better for our conservatively-underwriting syndicators or somewhat worse. This form of "worse" than expected is no big deal. And it comes 2 1/2 years earlier than expected.
We always ask the question: "compared to what?" when it comes to our investments. Had we taken $50,000 in early 2021 and put it into stocks, would we have gotten an 11% IRR? Hard to say. We used an online calculator to figure this out: 8% per year was the answer--but with a very rocky ride. It would depend of course on precisely when we invested and when we sold, and in what we invested. The risk we would have taken in some stocks would have been quite high (witness the bouncy performance, say, of the S&P 500 in 2022: -19.6%).
Let's call the difference 11% (this real estate syndication) compared to 8% (stock market index fund). That's a fair deal for the absence of liquidity, we'd say, for that nearly three years.
Or if we'd kept it in cash, we surely would have gotten less back--essentially nothing in return in 2021 and 2022, then the 4.7% we are getting now in 2023, in total a couple of percent--far less than the 10%+ annual return of this multifamily deal.
Bottom line: for end of 2023, we'll take it--and likely reinvest in another deal. But probably not right away.