As an aspiring multifamily syndicator, you may need a little guidance when it comes to pitching your first deal. How do you introduce an opportunity to potential investors? Does it matter what you discuss first? What questions are they most likely to ask? Let’s think through your approach to speaking with investors and prepare answers to their top four concerns.
NOTHING TO LOSE?
You may assume that investors are most interested in finding out how much money they can MAKE, but the truth is, they are more concerned with how much they might LOSE. So, the first question you need to address with potential investors is: How risky is multifamily?
A good way to approach this question is by outlining the benefits of multifamily compared to other investment opportunities like stocks or CDs. Let your investors know that apartment buildings generate above-average returns, afford investors extraordinary tax benefits, and carry below-average risk. In fact, during the last recession, delinquency on multifamily loans was only 0.4%, while residential real estate suffered a 4% default rate!
NO ‘I’ IN TEAM
Once you’ve convinced an investor that multifamily is the way to go, the next issue to tackle is: Why you? And if you’re new to the syndicating game, this is a fair question. Now is a good time to talk about your team as well as your personal commitment to understanding the ins and outs of multifamily real estate investment.
Begin by sharing the reputation of the team you’ve put together, from the property manager to the real estate attorney to the lender who’s on board to work with you. From there, discuss the time you’ve spent in the market touring properties as well as the real estate education you have achieved through courses or coaching. Demonstrate your dedication to learning as much as you can about the nuances of multifamily, and investors are much more likely to entrust you with their money.
Now that your potential investor is on board with multifamily AND trusts you as a syndicator, it’s time to take on the next concern: What are the risks of this particular deal? It is important to tell the truth here and set realistic expectations. Take the investor step-by-step through your plans to deal with every issue that could arise.
Investors are savvy, and they know that no deal is completely without risk. If you contend that there is NO chance of losing money with your multifamily deal, they know that simply can’t be true. So, be upfront and afford investors your honest assessment of the opportunity at hand.
After you’ve addressed the benefits of multifamily, the benefits of working with you, and your plan for risk mitigation, NOW it’s appropriate to answer the investor’s next questions: What is the minimum investment? How long do you plan to hold my money? And what is my expected return? My advice is to find fewer investors who can contribute more to a project; for instance, a $1M raise can be realized quickly with 10 investors contributing $100K each. (It’s not a good idea to go below $50K when defining your minimum investment. I promise that it is NOT easier to raise such significant capital in $10K chunks.)
Most investors are looking to get their money back within five years, either through the outright sale or refinance of the property. In the case of a refi, look for terms that return at least 60% of the original capital. Most importantly, honor your word here. If you say investors will have their money back in five years, investors should have their money back in five years.
MANY HAPPY RETURNS
The very last thing to discuss with investors is the returns, both cash-on-cash and overall. Many investors are interested in how long it will take to double their money, and at a 14% average annual return rate, the answer is FIVE YEARS.
So, as you reach out to high-net-worth individuals with the means to invest in your project, be sure to answer:
- Why multifamily?
- Why you?
- What are the risks?
- What are the numbers?
Get comfortable addressing these questions—in this order—to impress investors and raise the capital you need to fund your first multifamily deal!