Multifamily syndication refers to the practice of pooling together capital and resources from multiple investors to collectively acquire and manage a multifamily property or apartment complex. It is a form of real estate investment strategy that allows individual investors to participate in larger-scale projects that they might not have been able to pursue on their own.
In a multifamily syndication, there are typically two primary roles: the syndicator (also known as the sponsor or lead investor) and the passive investors. The syndicator takes on the responsibility of sourcing the deal, conducting due diligence, securing financing, managing the property, and overseeing its operations. They bring their expertise and experience to the table, guiding the project from start to finish.
On the other hand, passive investors are individuals or entities that contribute capital to the syndication but do not have an active role in the day-to-day operations. These investors provide financial resources and share in the profits generated by the property. They benefit from the syndicator’s knowledge and efforts in acquiring, improving, and managing the multifamily property.
The syndication structure typically involves the creation of a legal entity, such as a limited liability company (LLC), to hold the property. The syndicator acts as the managing member of the LLC, while the passive investors become members with ownership interests in proportion to their investments.
Multifamily syndication offers several advantages. It allows investors to diversify their real estate portfolios by gaining exposure to larger and potentially more lucrative properties. It also provides an opportunity to leverage the syndicator’s expertise, as they are responsible for executing the business plan, handling property management, and maximizing the investment’s returns.
However, it’s important for passive investors to carefully evaluate the syndicator’s track record, experience, and the investment opportunity itself before committing their capital. Real estate investments, including multifamily syndications, come with risks, and investors should conduct due diligence to ensure the investment aligns with their financial goals and risk tolerance.
I thought the only people who could own a big apartment complex were the extremely wealthy!
“Pardon me, do you have any Grey Poupon?”
WHAT IS APARTMENT SYNDICATION?
The most basic definition of syndication I can think of is, “a group of individuals or companies combining their resources (time, expertise, money, etc) to do something they couldn’t do, or that would be very hard to do, on their own.”
A LOT of people would love to benefit from owning an appreciating asset, like an apartment community, that provides cash flow and extremely attractive tax incentives. However, very few people have the ability (time, expertise, money, etc) to purchase a big apartment complex on their own.
Problem: Individual Ability
Solution: Real Estate Syndications
WHAT APARTMENT SYNDICATION IS NOT
For clarification, an apartment syndication is NOT the same thing as a REIT (real estate investment trust). A REIT is a privately or publicly traded company that owns and manages real estate holdings. When you invest into a REIT, you’re not investing into a specific investment, but rather into a specific company.
A syndication differs in that, when you invest with a syndicator, you own a percentage of the property itself. This is important because it allows you, as an investor, to actually own and benefit from all that real estate has to offer. One small example, (with a big impact), investing in a REIT doesn’t provide you the same tax shelters that come from owning a percentage of the actual property.
FINANCIAL ILLITERACY
The more I explore the investment world, the more I realize my own financial illiteracy. The more I talk about apartment syndications, the more I realize I’m not alone in that illiteracy. The majority of the population view their investment options as follows…
1- Owning their personal residence
This is not an investment. “Buying a house is a major financial decision that can give you peace of mind and a wonderful place to live. But it’s not an investment.”
2- The American 401k, 403b, or traditional IRA
“Employer match and tax breaks, not a bad deal, right? Until you’re ready to retire, that is. That’s when a 401k or 403b suddenly becomes the worst possible retirement plan.” -Michael Reese, Kiplinger
3- Stocks
These are the most well known type of investment. If you had money invested in stocks during the coronavirus pandemic you know they are also highly volatile.
4- Bonds
Very low yield. “At the end of 2018, the yield on the 10-year U.S. Treasury bond was 1.92 percent. That means that a 100 U.S. dollar Treasury bond purchased in 2019 would mature at a value of 101.92 in 2029.”
THE APARTMENT SYNDICATION ROLES
The Sponsor, also referred to as the general partner (GP), operator, or syndicator, are responsible for identifying the market, sourcing the property, securing the funding (debt & equity), developing and overseeing the business plan, and managing the property management company. This includes asset managers, investor relations, acquisitions and capital improvement teams.
The Limited Partners, also referred to as the LP’s, investors, or accredited investors, are responsible for investing the money needed to fund the deal. They typically have limited voting rights which also limits any liability should there be a lawsuit. The limited partner group is typically made up of a number of private investors who are looking to benefit from real estate without the headache or liability of operating the asset.
The Property Management team is an essential piece of the puzzle. They oversee the day-to-day operations of placing and caring for tenants, marketing the property, and overseeing any renovations.
THE PROFIT BREAKDOWN
The Sponsors make the majority of their money from the profits they split with the limited partners. That split can be structured a bunch of different ways, but it’s primarily a straight split (example: 70/30) or a waterfall structure (example: 7% preferred return to investors, after which split 70/30). Sponsors also make money from an acquisition fee upfront (for putting the deal together) and an asset management fee throughout the deal (for overseeing the managing asset). The Acquisition Fee is typically 1-5% of the purchase price and the Asset Management Fee is typically 2% of the gross income.
Limited Partners are typically the majority share holders in the deal and receive a large majority of the profits from the operations and sale of the asset. Profits are split in accordance to ownership percentage. The example of a 70/30 straight split (outlined above) would result in 70% of profits going to the Limited Partners and the remaining 30% of profits going to the Sponsors.
There are pro’s and con’s to each role. If you’d like to explore those in more detail, check out my “Passive or Active: What investing strategy makes since for you?” article.
CONCLUSION
An apartment syndication is a way for you to get access to institutional grade investments, investments that used to only be available to the largest of institutional investors.