Multifamily syndication is used by many real estate investors to grow their wealth while diversifying their portfolios. Here’s the ultimate guide on multifamily syndication.
In its most fundamental form, real estate syndication refers to the pooling of resources. The term “multifamily syndication” refers to a group of investors pooling their funds to acquire an apartment complex as a whole.
Instead of having to undertake all of the labor of acquiring and operating a rental property on your own, multifamily syndication allows you to combine your funds with dozens, if not hundreds, of other investors to acquire an apartment community.
In this post, we’ll look at what multifamily syndication is, why investing in one may be a fantastic way to enhance your wealth, and how investors can prepare for the future.
How does multifamily syndication work?
The syndicator and the investors are the two key actors in each multifamily syndication transaction. What you need to know is as follows:
The syndicator, often known as the sponsor, is the person who has the expertise to make the agreement happen. They are in charge of all of the project’s hands-on tasks, such as:
- locating the property,
- negotiating the price,
- getting a loan,
- finding investors and raising money,
- employing a professional management company
- managing the property themselves,
- distributing dividends to investors depending on the conditions of the transaction, and more.
Being a landlord seems like a lot of hard work, and it is. It may take up a lot of time. Many people lack the time, finances, and know-how to locate, renovate, and manage multifamily real estate assets. This is why so many passive investors are interested in multifamily syndications. All of these activities are handled by the sponsor, while investors get a passive income.
Individual investors, often known as limited partners, are those who put money into multifamily syndication. Passive investors contribute all or part of the cash, but they are not in charge of the property’s day-to-day administration. Instead, they get regular payments when the property generates money in accordance with their syndicate agreement’s conditions.
Investors might also expect their shares to rise throughout the course of the project’s life. When the project comes to an end, which normally takes approximately 5 to 10 years, the investors get proportional shares of any equity growth.
Pros & Cons
Multifamily syndication has various benefits to both sponsors and limited partners. Here are some of the benefits of multifamily syndication.
- Passive Income
The ability to generate entirely passive recurring income flow is one of the key advantages of investing in a real estate syndication. This implies that every syndication contract you participate in generates a new source of passive income for you and your family, bringing you closer to financial independence.
Equity, which normally rises over time, is a significant benefit for investors in real estate syndications. Furthermore, by investing in a value-add multifamily syndication, you may benefit from forced appreciation by upgrading the property and improving the total income, resulting in a significant increase in the overall value.
- Tax Benefits
And, of course, there are taxes to consider. Many investors choose multifamily investment because of the tax benefits of cost segregation and accelerated depreciation. You get to keep your current cash flow in real life while reporting losses on paper, reducing your overall tax burden.
Leverage, which can take numerous forms in multifamily syndication, is another big benefit of apartment syndication. Clearly, there is leverage in the form of a loan used to acquire the property. You’re also utilizing the cash of other investors in the group, as well as the General Partners’ talents and experience, to gain access to an investment opportunity that might otherwise be unavailable to you on your own.
As it is the nature of every investment, multifamily syndication has some disadvantages as well. The most common disadvantages of multifamily syndication are as follows.
- Lack of Control over the Investment
Being passively invested in syndication may not be for you if you want to make critical decisions about where your money goes.
Many individuals appreciate the advantages of investing in a syndicate in a passive manner. They’re too preoccupied with their own business. They are well compensated. They don’t have the time to establish a new real estate firm from the ground up and invest several hours each week in it.
However, syndication may not be for you if you want to be hands-on and oversee everything – if you want to choose the flooring and paint colors, which tenants come and go, when to sell, when to refinance, who to refinance with, and all the other important decisions.
Syndication is designed to attract passive capital or passive investments from investors who want their money managed by a real estate professional. However, if you want to be a hands-on real estate specialist, syndication would be a disadvantage.
- Illiquid Nature of Real Estate
If you’re hoping for a very liquid investment where you can put your money in now and leave tomorrow, real estate syndication isn’t for you. If you want to travel about and trade real estate like securities, syndication may not be the best option for you.
On the other hand, many individuals appreciate real estate’s illiquidity. It drives students to make sensible judgments and think carefully about the money they’re investing. When they put their money in, it goes to work for them, and they don’t have to think about it again. They won’t be able to get their hands on it and spend it on something else.
That is why many passive investors choose to participate in syndications. It compels students to complete their homework. They go ahead and invest after conducting a thorough study and identifying a solid real estate investment opportunity. When the property is sold, they receive a large paycheck as well as all of the cash flow generated during the process. The money might then be rolled into another syndication.
For someone to invest in a real estate syndication, several rules and criteria must be satisfied. It makes no difference if you’re purchasing stocks. You may normally acquire stocks for whatever firm you like as long as you have the money.
When it comes to real estate syndications, though, you’ll almost always need to be an accredited investor first. To be eligible to join, you must meet certain income and asset requirements.
The majority of syndicators work in the exempt market. As a result, if you are not an accredited investor, you will be unable to participate in that investment offer. This is why most people are unaware of the finest real estate investing options available. Only a few accredited investors are provided with them and are aware of them. As a result, if you don’t match the qualifications of an accredited investor, you won’t be able to participate in that syndication. That would be a major disadvantage.
However, Peoples Capital Group creates real estate funds that CAN accept non-accredited investors. Peoples Capital Group can also work with Sophisticated Investors who are people that understand the investment opportunity, have ample income and savings, do not need to live off the returns of the investment, have some investment experience and plan to make the same or greater income in the future.
Real Estate Syndication Risks
The statements on fees, splits, and any other financial considerations will most likely be available within the private placement document or the offering memorandum. It may be intimidating to read, but you should go ahead and do it. It’s also a good idea to get it examined by a lawyer.
Equity is split up according to the amount of capital invested and the class of the share. Normally a larger investment will be rewarded with some type of bonus or priority in your equity ownership. Some real estate syndicate sponsors, also referred to as the operators, will take more equity ownership in exchange for charging less fees. Other operators will charge more fees but take less equity.
What’s important when investing passively is not only focusing on the percentage of equity offered in an investment but more importantly, the targeted return on investment for the passive investors. If a real estate sponsor is offering 50% ownership of a multifamily syndicate and a competing real estate sponsor is offering 75% ownership in a multifamily syndicate, the latter may seem like a smarter investment.
However, upon further review you may find that the first sponsor is offering a more profitable project with more ways to make income, perhaps through a more aggressive renovation plan or simply finding a better opportunity with a larger profit margin. Perhaps the first sponsor is going to need to be much more hands on as the building requires more repositioning but will result in larger long term gains for the passive investors.
The second sponsor may be offering a more turn key building requiring less involvement from the sponsor but also has more fees. If you add up the fees and the possibility of a less profitable investment, you may find a stronger return on investment with sponsor number one even though they are offering less equity.
Equity is important but when choosing where to invest your hard earned capital, the bottom line is your return on investment, your cash on cash return and your internal rate of return. Focus on these three calculations when deciding on the best multifamily syndicate for your investment goals and you should be able to build financial freedom over time.
Various fees are frequently paid to the sponsor as part of the arrangement. Fees in a multifamily sale aren’t usually a reason for concern on their own. It’s crucial to know how much each fee costs and how many there are. Some sponsors may attempt to charge investors so many expenditures that they are unable to earn a profit.
Some sponsors may even demand that their original expenditures be deducted from net income prior to any payouts. There will be a cost for property management to consider as well. This will be collected if the sponsor is also serving as the property manager. If not, it will be paid to the management firm.
The cost of property management varies depending on the type of property, its size, and its location. The management charge might be anything between 5% and 10% of the overall rental income.
Multifamily Syndication Opportunities
If you’re on board with the multifamily syndication idea but don’t know where to start, look no further! Peoples Capital Group has 30 years of experience in real estate investing and various opportunities for real estate investors to choose from!