If you’ve ever considered how real estate investors can purchase huge multifamily deals, this topic is for you. Though there are people who can afford to buy a $3 million apartment complex, it’s not feasible for most investors. Multifamily syndication can help even the most beginner investor accomplish their goal of owning multifamily properties.
What is Real Estate Syndication?
Multifamily syndication is a type of real estate investment in which a group of investors, called syndicators, pool their capital to purchase a multifamily property, such as an apartment building. One of the syndicators, known as the sponsor, initiates and leads the syndication process and is typically an experienced real estate investor. The sponsor is responsible for identifying investment opportunities, raising capital from investors, and managing the acquisition and operations of the property. The sponsor may also bring in a management company to handle the day-to-day management of the property. The sponsor typically receives a fee for their services and a share of the profits generated by the multifamily investment. In this partnership, the sponsor acts as the general partner, meaning that they have unlimited liability for the partnership’s debts and obligations. The goal of multifamily syndication is to generate income for the investors through rent payments and potentially sell the property for a profit in the future.(For more information, listen to this podcast episode on Apple or your favorite app.)
The roles in multifamily syndication are important ones–General Partners (GPs) structure and manage the deal. This is usually several people who focus on different parts of the syndication—such as: finding deals, underwriting, networking/relationships with investors, financing research, negotiation, and last but not least—due diligence. Limited Partners are much more passive investors. They will invest to receive equity from the deal.
Usually, multifamily syndications are legally formed as LLCs (Limited Liability Companies) or LPs (Limited Partnerships). LLC or LP agreement terms for the syndication include rights to distributions, GP’s rights for fees for managing the deal, and voting rights for both sponsors and investors.
Money for Multifamily Syndications
The two types of debt for multifamily syndications are recourse loans and non-recourse loans. The difference between these two loans is who is responsible in the event of foreclosure. The most popular choice is the non-recourse loan—which ensures that the sponsors are personally responsible for the amount borrowed. Although a much better choice for investors, non-recourse loans can come with higher interest rates and are only given to given to individuals with strong credit scores and financial history.
Along with debt, there are two types of financing that are generally used for apartment syndication deals: bridge loans or permanent agency loans. Joe Fairless explains that bridge loans are an interest-only short term loan that is used until a borrower (the GPs) can secure long-term financing. These are usually non-recourse and close quickly, but can be risky if the syndicator cannot secure a refinance when the end of the loan term arrives.
Permanent Agency loans are from Fannie Mae or Freddie Mac and can be longer-term. Compared to bridge loans, terms are 5, 7, or 10 years. At the end of the terms, the sponsor will have to choose to pay off the remaining balance, refinance, or sell. These are also generally non-recourse, but renovation costs cannot be included in the loan. Additionally, because these loans are government-backed, a property may not qualify if it is physically and operationally distressed.
Multifamily Syndication Benefits
Lower Risk
Because you’re passively investing, you are pooling money with other investors. You benefit by only being liable for losses that are equivalent to what you invested. Contributing to syndication means that you don’t have to bear the load of all the losses!
Occupancy
The larger the property, the less vacancy will take its toll on your pockets. Large multifamily units have a low rate of vacancy, making it possible to still cash-flow even there are several vacant units. With a single-family home, you would be stuck if a property stayed vacant for a longer period—leaving you to foot the bills!
Time
Multifamily syndication can be much less time-consuming than other investments. If you’re a limited partner, property management, deal research, and loans are all done by the GPs—leaving you with much more time and still reaping the benefits of real estate investing!
Property Management
Since there is a large pool of financial resources, a full-time property management company can be acquired. This takes the pressure and responsibility off of you to manage a large number of tenants. The PM company also helps conduct due diligence during the escrow process.
The Devil is in the Details
Get to know the sponsor and the details of the syndication. Don’t just throw your money at anyone. Research who you’re investing with and get referrals from fellow (trusted) investors. You’ll be able to find the good GPs in no time!
For the partner agreement, make sure you read through everything. Comb through it and if you’re unsure, have an attorney read over it as well. You don’t want to be caught up in a deal that is not beneficial to you. Consulting a professional will help give you even more confidence in the syndication deal.
By having the ability to invest passively, multifamily syndication can be a great way to build your real estate portfolio. It can also help you build your confidence in real estate investing. Whether you’re a beginning or experienced investor, the benefits of multifamily syndication will put you on the path to financial success.
If you’re looking for more information on multifamily investing, check out our blog posts “Jumping into Multifamily Investing” and “5 Keys to Raising Private Capital“.
