“If I’m going to invest 100 grand and I think I’m going to make 2,000 back in Year 5, which include my 100,000 but most of that return comes from the sale of the property, you really have to pay attention,” said Bickelhaupt.

Avoiding Pitfalls and Assumptions

(0:35) – Bickelhaupt talks about a property he was interested in but ended up getting out-bid on by $2 million. He explains, his firm and the one that wound up with the property both had similar insights for the majority of the project: they both planned renovations that would have raised rent about $200, and they both planned to spend around the same amount of money making approximately the same renovations. However, Bickelhaupt expected to only keep less than 78% occupancy for Year 1, whereas the people who bought the property assumed they would maintain 95% and planned around that.

(2:41) – Rent growth is another major assumption. It gets difficult to predict what’s going to happen years down the line, but right now rent growth seems likely. 

“If I’m going to invest 100 grand and I think I’m going to make 2,000 back in Year 5, which include my 100,000 but most of that return comes from the sale of the property, you really have to pay attention,” said Bickelhaupt.

“In scenarios like that exit cap rate and also the loan conditions at that period of time and how many buyers are in the market at that time that we don’t know about,” added Patrick Antrim, CEO of Multifamily Leadership LLC. 

(4:10) – Bickelhaupt also says to keep in mind that your cash flow is calculated based off your initial investment. It’s important to consider how you’re paying back capital. 

(5:35) – Little tweaks can have massive impacts.  

(5:50) – Syndication fees have a specific structure. Bickelhaupt explained, 

“Typically, a syndicator is going to have an acquisitions fee, which is going to be based off of whole purchase price. You’ll see, depending on the size of the deal, anywhere from – call it a half a percent, I’ve seen all the way up to 3% fee. Oftentimes, the syndicator will roll all or part that back in the fee, or not. Any fees they have have to be disclosed. Sometimes fees they don’t catch would be like the social management fee – which would be, if you’re doing major Cap X renovations, sometimes the syndicator will charge a 5% fee on those dollars for overseeing that capital or those improvements. When it goes to the property management fee, I’d say 3% is fairly standard. I have seen up to 5. Sometimes syndicators will have an asset management fee that will also go between 1-3%. That’s usually based off total income. That usually goes to pay for the tax returns, that sort of thing.”

Refinancing can also result in a 1% fee. Selling the asset can lead to a disposition fee from 1-3%. 

Antrim adds that syndicators will move those fees around to close the deal.

“That’s another Proforma thing,” said Bickelhaupt. “If you’re looking at your net return, what you think your return is going to be for the investors, are they calculating the fees and those expenses around the fees into their assumptions?”

(8:45) – Bickelhaupt says he likes to see the final, real number. Surprises are rarely good, so it’s important to be forthright with disclosure of the fees. That disclosure even includes assumptions for things like tax and for cost of the sale. 

“Those costs get embedded into the sale. If we sell for X, it just changes your returns,” said Bickelhaupt.