Why Investing in a Multifamily Real Estate Syndication, a Good Idea?
A multifamily real estate syndication is a great way for investors to diversify their portfolios and improve their wealth. Putting all your eggs in one real estate basket is a dangerous bet. For instance, if you invest entirely in single-family houses, the value of your portfolio can drop significantly if the housing market experiences a downturn or crisis.
Understanding the advantages of real estate syndication investing is crucial for anyone who seriously wants to create and maintain a solid position as a real estate investor. If you’re looking for a secure investment, rather than buying a single-family home, consider investing in a multifamily building through a reputable and trustworthy syndicate. Investors in a multifamily property syndication arrangement benefit from a stronger monthly income stream due to the larger rental buildings.
What Does Multifamily Syndication Mean?
By breaking down the word multifamily syndication into its parts, its meaning becomes clear. The size of a multifamily dwelling might range from a small duplex to a massive apartment building with hundreds of units. A real estate syndication is a form of property investment in which a single property is owned by a group of investors (limited partners) and managed by a single entity (the syndicator, manager, or sponsor). The property’s profits will be divided between the sponsor and the limited partners by the terms of the partnership agreement.
Investors in Multifamily Syndication
Accredited and non-accredited investors are the two categories of syndication investors (sophisticated). Both categories of investors are accepted in many modern property syndications as limited partners in multifamily investments. In most cases, you won’t need any prior expertise as an investor to join property syndication.
Furthermore, the number of investors in multifamily syndication is typically not capped. For an inexperienced investor, this is the best possible real estate transaction. It’s true that the more people that put money into property investment, the smaller the return will be for each investor. And yet, the more people put money into an investment enterprise, the less risk each person will take individually.
If multifamily syndication is classified as 506(C), only accredited investors will be able to participate. The Securities and Exchange Commission (SEC) establishes the criteria for a person to be considered an accredited investor. Individual or joint yearly income or net worth beyond a certain threshold is necessary for accredited investors.
Current SEC requirements for accredited investor status in real estate syndication transactions are as follows:
- You earned more than $200,000 in the past two years as an individual (or $300,000 as a couple). A reasonable expectation of maintaining or increasing your salary level in the coming year is also essential.
- You are considered ultra-high-net-worth individuals if you or your spouse have a net worth of over $1,000,000. Your home’s current market value is not factored toward the $1,000,000 cap.
Accredited and high-net-worth investors can participate in 506(B) multifamily syndications. Sophisticated investors do not have the high net worth necessary to qualify as accredited investors. Still, they have substantial investing knowledge and a previous solid connection with the general partner, making them ideal candidates for these types of investments (sponsor).
There may be a cap on the number of sophisticated (unaccredited) investors who can be limited partners in a syndicated investment arrangement. When it comes to significant property investments like apartment buildings, prominent syndicators don’t often give accredited investors the same number of investment options as experienced investors. Property syndicators generally give more weight to accredited investors than non-accredited investors.
Platforms for Investing Online
Those with the necessary financial wherewithal can find appealing multifamily syndicates for investing online. Start with one of the many internet platforms available, such as CrowdStreet, FundRise, or RealtyMogul. These online services include enticing opportunities in real estate investing (REI) and make REI accessible to newcomers and seasoned pros.
The initial investment required to begin investing in syndication projects is also significantly reduced on these digital marketplaces. Multifamily syndication agreements require as little as $500 to $1,000 to get started.
Structures of Multifamily Syndication
Multifamily syndication can be structured in many different ways by different syndicators. Before making a final investment decision, you will be given the information you need to feel comfortable with the structure.
In this way, you may estimate how much of a return you can expect to receive in the form of dividends.
There is a wide range of possible returns from each building type. Choose syndication that fits your investment objectives and needs.
- Straight Splits. The simplicity of a straight split makes it ideal for novice investors. In contrast to the benefits accruing to the syndicator (sponsor), the majority of wealth generated by this structure is shared among investors. When it comes to multifamily syndication arrangements, the most common splits are 70/30 and 80/20. The investors will share 70–80% of the profits, and the sponsor will get either 30–20%.
- Preferred Returns. The preferred return structures are commonly used in today’s multifamily syndicated transactions. According to this setup, limited partners (passive investors) are prioritized more than syndicators (general partners or sponsors). Before the sponsors collect any money, the passive investors are awarded a guaranteed percentage of the profits.
Preferred returns are normally between 6% and 8% of the investment. Passive investors will receive an extra 10% if the investment property provides a 6% return in the first year and an 8% return in the second year.
- Waterfall Structure. The principle of causality underpins each of these conceptual frameworks. Before going on to the next need, it must fulfill all requirements for a return on the syndicated investment. The syndicators can decide how many layers the waterfall will have.
The initial yield, for instance, could be 7%. After this point is reached, the profit may be divided 70/30 between the investors and the sponsor (syndicator). When the second return in a waterfall is made, the third return can be an 80/20 split.
The constant need for multifamily housing has made the syndication of multifamily properties one of the safest investment options. Further, the potential for passive income is very appealing for this property investment. Because of these two factors, the multifamily syndicated investment sector attracts many investors.
Should You Invest in a Multifamily Syndication?
Before deciding to enter into a multifamily syndication agreement, it is essential to have a complete understanding of the benefits and drawbacks of this type of real estate investment (REI) for each of the parties involved. This is because the agreement will affect each financial situation in various ways.
Advantages for Syndicators (Sponsors or General Partners)
- Leverage. With multifamily syndication, you, as the sponsor, can pool the resources of multiple investors (limited partners) to finance a substantial real estate purchase. It cannot be easy to amass the capital necessary to purchase a large multifamily building on your own.
- Control. For the benefit of yourself and the other investors in multifamily syndication, you act as the property manager for a huge apartment complex (limited partners).
- Equity and Appreciation. The key benefit for the sponsor in a multifamily syndication transaction is the equity that grows over time. Moreover, upgrades to the property could lead to significant price growth.
- Tax Advantage. Multifamily syndication investments typically have a much lower tax rate for rental revenue.
Drawbacks for Syndicators (Sponsors, General Partners)
- Excessive Setup Costs. Investment in a multifamily syndicate requires a large outlay of capital during the setup phase. This is a big consideration for your first time acting as a sponsor for a real estate investment of this kind.
- Difficult Fundraising Project. Funding a multifamily syndicated venture and motivating investors to do so is a challenging endeavor.
Advantages for Investors (Limited Partners, Passive Investors)
- Cash Flow. To capitalize on the sponsor’s expertise and generate passive income, consider investing in a multifamily syndication agreement.
- Freedom from Responsibilities. Investing in multifamily syndication might be a great option for people who don’t want to be landlords but want to make money.
- Inflation Hedge. The appreciation in the value of real estate prices often outpaces inflation. Participating in a multifamily syndicate purchase could shield your savings from the effects of inflation.
Disadvantages for Investors (Limited Partners, Passive Investors)
- Lack of Control. You not only have to devote a significant portion of your financial resources to a substantial investment, but you also have no say in the management of the venture. The sponsor is the one who decides all venture aspects, such as when to sell, make repairs, and whether or not to get new finance. Before investing money in a project, you should research and learn about the track record of the project’s sponsor.
- Sensitivity to Market Cycles. The real estate market as a whole has cyclical ups and downs. Because of this, your profits will also go down if the market goes down.
Ending Thoughts
When all of the important considerations are considered, investing in a multifamily syndicate is one of the most intelligent and risk-free choices. The primary reason for this is the continuously growing demand for apartment complexes as rental accommodation. A significant advantage of this kind of real estate investment is that it can provide investors with a source of passive income, which is a desirable outcome.
It is important to investigate the investment sponsor thoroughly to assess the likelihood of success with a multifamily syndication investment. The next step is to weigh the benefits and drawbacks of this REI involvement to determine if it represents the best way to achieve your financial goals.
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