Differences in Rent: Fee Simple vs SyndicationsAug 27, 2021
Why do some investors buy pre-construction and others buy a few years later for a higher price?
Sherida, we do an apartment or a townhome project that's exclusively for rent, right? Oftentimes, we have investors that come and would buy a fourplex or a 20-Plex or something below market value, or at least that's what we represent, right? Why are they doing that? Versus somebody who buys it from that investor years later for much more, why are they doing that? Could you give some color to that?
Well, if you're buying it pre-construction, you're getting, for the sake of what we do, you're getting it at a wholesale price, right? So they're able to get in with less skin in the game. And then they're able to take advantage of the equity.
Whereas the builder, if you're buying something else, the builders, the one that's going to be taken advantage of the equity or the owner of that property, if you're buying an existing, they will have taken up some of that equity. So you're really buying it up retail if you're buying existing versus buying the new construction model. So there are pros and cons to that some people like to take advantage of that.
Build time takes a lot longer. So some people say, Hey, I don't want my money sitting on the sidelines, I need that income right now. I want that cash flow. So I want to buy existing, and they're willing to pay a little bit more for it because they know they're getting something that again, is stabilized versus something that is projected and could take them quite a bit of time. I know when we work and talk with investors, we say in our project, specifically plan on six months for it to be fully leased up, right.
That's the best-case scenario, but sometimes it's faster. Sometimes it's slower.
Even if you look at it, segueing somewhere a little bit different. You go to syndication. They'll tell them to plan on 12-18 months before you see any kind of return once it's completed. So every you know, we're talking about a bunch of different options here.
Well, I don't want to name-drop, but whenever somebody says they don't want to do something, that means they're about to do it anyway.
I've been on the podcast for the Real Estate Guys--Robert Helms, and Russell Gray. And they do a great job, I highly recommend their show to everybody reading. And they always say, "no investor left behind".
I think we're probably guilty that some use a word that investors may not understand. Sherida said, and we're going to kind of make this our thing everybody's witnessing, and we're making it a thing right here and right now. Right? The No, no investor left behind the component.
What is a Syndication? Why do investors prefer to get into syndications?
In a syndication, you invest in a partnership. You're taking a share of a company that then goes and buys an apartment building. You're not gonna see any returns for 12-18 months, at least, because the operator (the person that you invested with that's kind of leading the project) has a lot of work to do.
In apartments that are existing, oftentimes, that's referred to as a value add, they go by an old, dilapidated building, we're gonna go put a new carpet, new countertops, kick out the deadbeat tenants raise the rents by 100 bucks a door, that thing's worth a lot more all the sudden, but that just doesn't happen overnight. That's a complicated process.
So if you invest it into that syndication, they syndicated the capital, they're not gonna be ready to pay you any kind of returns or any cash flow until that process is really settled down, right? You get to take a little bit lower risk in that case, because you have a piece of a very broad and diverse asset.
With 200 units, what are the chances that you're not going to have cash flow? At any given time, over those 200 units, you're gonna have a vacancy rate. You're gonna have a certain percentage of tenants that are not paying you rent, right? Well, when you're the only owner of a property, you get to feel all of that vacancy, right.
So that's why a lot of people like to go into syndication because it's just a more even-keeled experience, right? those bumps get smoothed out through the syndication model. But if you buy what we would call fee simple, built around a real estate, that means you're the owner, just like the house that you live in, you probably own it fee simple. You can buy it, sell it mortgage it, it's your property, but you feel all the bumps when something like that happens because it's 100%. Your problem because you're the only owner, right?
Exactly. I think that's also the advantage of doing something where you're getting multiple doors versus one door, right? So if you buy just a single townhome or a single-family property right, if you're going into getting a duplex or triplex or fourplex something of that nature, you're not filling that pinches much when you don't have one tenant paying, versus if you own one door, and one tenant doesn't pay. You're next on the line for all of it.
You have multiple streams of income to service that debt, those taxes, the carrying costs associated with the property.