How Do Lead Investors (Syndicators) Determine Their Max Purchase Price?

Updated: Jan 9, 2021

As a passive investor, you join the party after the deal terms have been set between the seller and the Lead Investor. When analyzing a real estate deal, there are many factors that determine the optimal purchase price. Determining the max price is part art and part science; there are market and property-level factors that contribute to that decision, but there’s also some intuition – which comes from experience – that makes up some of the decision. Here are the main price drivers that Lead Investors take into consideration:

Cap Rate

Simply put, cap rate is the ratio of the property’s NOI or Net Operating Income (income minus expenses) and the Price. Basically: NOI/Price. The Lead Investor uses the cap rate when evaluating the price, mainly by comparing the deal’s cap rate to similar multifamily properties that have been recently sold in the area. This way, the Lead Investor can make sure they are not overpaying for the property. Even though cap rates do play an important role in any investment, many investors tend to focus on cap rates when assessing a deal, and not rightly so (assuming the deal cap rate is the area cap rate). A property can be sold for a 5.25% cap rate, but if the Lead Investor can increase the NOI, the cap rate will be higher within a few years, and the in-place cap rate (the cap rate at purchase) will be a little less relevant. Hence, the deal’s cap rate is important, but only to an extent.

The Deal’s Upside

Another important component in determining price is the deal’s upside. When it comes to real estate investing, an upside is any opportunity to increase the property’s profitability. The most common ways to find the upside are:

- Reducing expenses by bringing an experienced property management team to manage the property.

- Taking legal actions to appeal against your property tax assessment.