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.
Put simply, multifamily syndication is a group investment. It allows sponsors to invest in properties that they otherwise would not be able to afford. The sponsor is responsible for researching and evaluating the property and raising the funds to purchase the property. Finding multiple investors to help fund a deal is essential in multifamily syndication. These syndicators share the risks and returns on the multifamily investment. (You can check out our podcast on syndication here)
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.
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.
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!
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!
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!
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.
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".