What is a Multifamily Syndication?
A multifamily syndication or in other words a multifamily real estate syndication is a partnership between a group of investors that combine their skills, resources, and capital to acquire a multifamily real estate property most commonly referred to as an apartment complex!
Frequently, although not always the case, investors that participate in multifamily syndications would not be able to afford the investment opportunity individually.
Multifamily syndications provide individual investors the opportunity to take advantage of the lucrative, income-producing asset class that they could not otherwise utilize on their own.
Who’s Involved in a Multifamily Syndication?
There are typically two types of multifamily syndication investors; that is the syndicator also known as the general partner or deal sponsor, and the limited partners also referred to as passive investors.
Your skills, abilities, capital, and the amount of time you are looking to devote to your investments will help you to determine which role you’re best suited for!
Becoming a syndicator is generally best for individuals who are looking for an extremely ‘hands-on investment’.
Syndicators are individuals or a group of individuals who essentially find potential investment opportunities, put together a deal to offer to investors, raise money to close the deal, and upon closing, syndicators make sure the deal is run effectively and profitably for all investors involved. (View the section below to get a deeper rundown of the responsibilities of a syndicator).
In real estate syndications, in some cases, syndicators or deal sponsors will invest their personal capital alongside passive investors.
When syndicators invest in the multifamily asset they are raising money for or in other words ‘put skin into the game’ this will build trust between the passive investors and the syndicator because it shows that the syndicator believes the deal will be successful and profitable!
2: Passive Investors
Passive investors in multifamily real estate syndications are frequently called Limited Partners. These are individuals who are looking for more of a ‘hands-off’ role within a multifamily syndication.
A passive investor’s primary role in multifamily real estate syndications is to provide the capital to acquire the multifamily property.
Passive Investors will receive passive income in the form of monthly, quarterly, or annual dividend returns from the capital they invested in the multifamily syndication.
What are Syndicators Role Within a Multifamily Syndication?
As mentioned previously syndicators are accountable for putting together the deal, finding investors, raising capital, closing the deal, and managing the asset until disposition!
In relation to finding potential investment opportunities for passive investors, a syndicator must extensively underwrite a deal to determine if the asset should be acquired for the multifamily syndication.
Overall, the syndicator should ensure that investors will receive an excellent return for the provided risk of the multifamily syndication.
Once an asset is acquired it is the responsibility of the syndicator to effectively communicate with the assets passive investors to keep them updated on the investment project through monthly or quarterly reports.
Syndicators will also be required to handle all the back-office operations relating to the multifamily syndication.
A few of these roles would include setting up bank accounts, handling insurance, K-1 tax collaboration, and interfacing with the property management team frequently to guarantee the project is on track with their investment strategy.
In most cases, syndicators will have an asset manager that will help to supervise the asset throughout the hold period to guarantee that the multifamily syndication is optimized and increases in income, cash flow, and profitability for all investors involved!
What are the Risks of a Syndicator?
When handling other individuals’ money, there will ALWAYS be a risk at hand.
As a syndicator, you must work to secure the profitability and stability of the multifamily syndication not only to ensure the safety of your own personal investment but for the safety of your passive investor’s capital.
In some cases, in multifamily real estate syndications, the underlying mortgage for the investment project will require a personal recourse guarantee on the loan which would add to the risk of the syndicator.
Additionally, the syndicator puts his/her reputation on the line. One misstep or mistake in a multifamily syndication and the sponsors’ credibility and capability to raise capital for future deals could be in jeopardy for the foreseeable future.
Therefore, it is incredibly important that if you are looking to pursue a career as a multifamily syndicator, you should work to consult or partner with other experts in the industry that will help you to make the best business decisions as possible.
Partnering with experts will help to mitigate your risk as a syndicator.
Who Can Invest Into a Multifamily Syndication?
There are various federal and state security laws that come into play when an investor is considering investing in a multifamily syndication.
On the most basic level, there are a couple of things that syndicators and investors should know.
All real estate syndications must be registered with the SEC.
If you are raising money for a Regulation D offering the securities law permits syndicators to raise unlimited funds from accredited investors, and approximately 35 from non-accredited investors.
Accredited investors are individuals who have a net worth of over $1 million, excluding their primary residence, or annual income of over $200,000 if filing as an individual or over $300,000 if filing with their spouse.
(For more info on accredited vs sophisticated investors check out this video).
Rules are altered for Regulation C offerings. Here are some guidelines on the differences in Regulation D and Regulation C offerings that can take place within multifamily syndications.
More than likely, as a syndicator, you will more than likely be looking for accredited investors.
How do Syndicators Get Paid?
Depending on the multifamily syndication structure, the syndicator or general partner might earn a portion of the remaining revenues after the preferred return is dispersed to the limited partners also referred to as ‘passive investors’.
For example, passive investors may get a 6% preferred return, and the earnings afterward are split between the passive investors and the syndicator (e.g., 50/50 , 80/20, 70/30).
The income split may change depending on the asset class of the property. This will be determined within the initial offering of the investment opportunity.
The profit split promotes hard work since the syndicator is financially incentivized to operate the multifamily asset so that the yearly return goes beyond the preferred return.
If the syndicator does not keep the asset performing, they will be missing out on out on an opportunity to make additional revenue.
For the passive investor, when the yearly returns surpass the preferred return, the syndicators receive a larger distribution.
Almost every apartment syndicator will charge an acquisition fee.
The acquisition fee is an advance, a one-time charge paid to the syndicator at time closing the multifamily syndication.
The acquisition fee varies from 1% to 5% of the purchase price, depending upon the size, scope, experience of the team, and earning potential of the investment.
It helps to think about the acquisition cost as a consulting fee paid to the syndicator for putting the entire project together.
Asset Management Fee.
The asset management charge is a continuous annual charge paid to the syndicator in return for overseeing the operations of the property and executing the business strategy.
The asset management fee is either a portion of the gathered income or a per-unit each year cost.
The basic percentage range is 2% to 3%, while the standard per unit annually is $200 to $300.
A refinancing fee is a cost that is paid to the syndicator for the work required to re-finance the property.
Of course, if the business strategy doesn’t result in a re-finance, the syndicator will not receive this fee.
The guarantor fee is normally a one-time fee, paid to a loan guarantor at closing for his or her role in guaranteeing the loan.
The syndicator may induce a person with a high net-worth/balance sheet to sign on the loan to get the best financing terms.
Alternatively, the syndicator may decide to sign the loan themselves.
The size of the cost depends on the type of loan. Typically, there are two types of debts: recourse and nonrecourse.
Recourse financial obligation permits the loan provider to collect what is owed for the debt even after they’ve taken collateral.
Nonrecourse debt does not permit the lending institution to pursue anything other than security. The guaranty cost will be greater for recourse loans compared to nonrecourse loans.
Construction Management Fee.
This is an on-going annual fee paid to the company managing the capital improvement process.
This cost varies from 5% to 10% of the restoration budget plan, depending on the size and complexity of the improvement strategy.
This fee may be included in the asset management fee.
If the syndicator has a hands-on role in the renovation process or if the syndicator has its own property management company, they may charge a building and construction management fee.
The organization fee is paid to the syndicator for assembling the investment group.
This is an upfront fee and ranges from 3% to 10% of the total money raised, depending upon the amount of money raised.
For some syndicators, this fee is a part of the acquisition fee, while for others, it’s a separate fee.
Multifamily Syndication Conclusion
Multifamily syndications are not a new way to invest in commercial real estate.
However, it is becoming increasingly popular for many investors, as multifamily syndications are an incredible way to diversify your investment portfolio and achieve very strong returns.
Whether you are interested in becoming a real estate syndicator or a passive investor in real estate, multifamily syndications can be a very lucrative investment opportunity to help grow you net worth and achieve your financial goals.