Entering the multifamily syndication is a great opportunity for investors new to syndications to grow their businesses and move into larger real estate deals.
Considering the potential for significant returns, long-term income generation, and wealth creation through real estate investing, it’s no wonder many investors are drawn to multifamily syndications to expand their property portfolios.
However, the road to success is filled with challenges and complexities that demand careful navigation. Speaking from experience, I encountered these obstacles firsthand while working on my initial syndication deal four years ago.
I created this guide to help you comprehend the market’s nuances, build a solid foundation, learn from my mistakes, and develop a flourishing multifamily syndication business.
TL;DR:
Multifamily has been a substantial focus area for syndicators for several years due to the potential for high returns.
Syndications involve General Partners (GPs) and Limited Partners (LPs).
The profit structure for multifamily syndications typically includes a preferred return for LPs and a promoted or carried interest for the GP.
What Is a Multifamily Syndication and How Does It Work?
A multifamily syndication deal is a collective investment structure that enables multiple investors to pool their resources and acquire large-scale multifamily developments and residential properties.
With this structure, real estate investors can access more significant and potentially more profitable deals than they could on their own.
In multifamily syndication, a sponsor or general partner identifies a promising property, establishes a legal entity (usually an LLC or LP), and raises capital from investors, often referred to as limited partners.
The syndicator then acquires and manages the property, implementing value-adding strategies to increase its net worth and rental income.
Investors in the syndication receive returns in cash flow distributions and profits from the eventual sale of the property based on their equity shares.
Passive investors can diversify their portfolios and benefit from the expertise of the syndicator.
The syndicator gains access to a larger pool of capital for more substantial investments.
Multifamily syndication generally follows a similar pattern. That being said, each multifamily investing side has unique characteristics and differences. This investment strategy can vary in terms of fees, deals, investment strategies, and how you split equity and cash.
Setting Up Your First Real Estate Syndication
Setting up your first real estate syndication involves several key steps. Here’s a step-by-step guide to help you get started:
Education and research: Begin by educating yourself about syndications, market trends, and investment strategies. Familiarize yourself with syndications’ legal and financial aspects, including securities laws, tax implications, and deal structures.
Build your team: Assemble a team of experienced professionals, such as real estate attorneys, accountants, property managers, and contractors, who can provide guidance and support throughout the process.
Identify a target market: Select a target market based on population growth, the job market, and demand for rental properties or commercial real estate. Research and analyze the local market to identify opportunities and potential challenges.
Network and build relationships: Establish connections to fill the gaps in your team with potential real estate investors, brokers, lenders, and other real estate professionals who can help you source deals and secure funding for your syndication.
Find a suitable property: Identify a profitable multifamily property that aligns with your investment criteria and objectives. Conduct due diligence, including property inspections, financial analysis, and market assessments, to ensure the property offers the potential for value appreciation and steady cash flow.
Form a legal entity: Create a legal entity, typically a Limited Liability Company (LLC) or Limited Partnership (LP), to facilitate the investment and protect you and your other investors from personal liability.
Prepare the offering documents: Work with your attorney to prepare the necessary offering documents, such as a Private Placement Memorandum (PPM) or Offering Memorandum (OM), Operating Agreement, and Subscription Agreement, which outline the terms of the investment, investor qualifications, and legal disclosures.
Raise capital: Present the investment opportunity to potential investors, highlighting the property’s potential returns and your strategy for managing and improving the asset—secure commitments from investors and collect their capital contributions to fund the acquisition.
Acquire the property: Negotiate the purchase price, finalize financing, and close the deal. Ensure all necessary paperwork is completed and title and ownership are transferred to the legal entity you created for the syndication.
Manage the asset: Oversee property management, implement value-adding strategies, and monitor the performance of the investment. Communicate regularly with your investors, providing updates on the property’s performance and relevant market developments. Real estate investor portals can help with this ongoing communication.
Exit strategy: After a predetermined holding period or when the property has reached its maximum value potential, sell the asset, distribute the profits among the investors based on their equity ownership, and dissolve the syndication.
Following these steps will ensure you have thought of everything when setting up your first multifamily syndicate.
Legal Entity Structures for Multifamily Syndication Deals (LLCs and LPs)
Syndications require a legal entity structure to facilitate investments and protect sponsors and other investors from personal liability.
Limited Liability Companies (LLCs) and Limited Partnerships (LPs) are the two most typical structures in these syndications.
These entities offer liability protection, tax benefits, sophisticated investors, and the flexibility to manage and distribute profits among members or partners.
Understanding the intricacies of each structure is crucial for successfully executing multifamily syndication and ensuring compliance with legal and financial requirements.
General Partners (GPs) vs. Limited Partners (LPs) in Multifamily Syndication
In a syndication investment, there are two main partner types: General Partners (GP) and Limited Partners (LP).
General Partners (GP)
In a real estate syndication, the General Partner (GP) is the party responsible for managing and operating the investment.
They play a crucial role in the success of the syndication and are sometimes referred to as the “sponsor” or “syndicator.”
The GP brings together the LPs, who provide the majority of the capital for the investment. The GP also oversees the property’s acquisition, management, and eventual disposition.
The General Partner typically receives compensation for their expertise and efforts through fees and a share of the profits, known as the “promote” or “carried interest.”
Limited Partners (LP)
In a real estate syndication, LPs contribute capital to the investment in exchange for equity shares in the real estate syndication deal.
Their primary role is to provide the necessary funds for acquiring and managing the property. At the same time, the general partner or syndicator is responsible for identifying the property, raising capital, and overseeing its management.
As the name suggests, these passive investors have limited liability in the real estate syndication process, which means their financial risk is typically restricted to the amount they have invested.
In return for their investment, limited partners receive a share of capital gains taxes, the cash flow generated by the investment property, and profits from its eventual sale based on the market value of their equity ownership.
This arrangement allows them to participate in more significant real estate deals and benefit from the expertise of the syndicator without taking on the burden of the active asset management fee itself.
Offering Memorandums (OMs) for Syndications
An Offering Memorandum (OM), or a Private Placement Memorandum (PPM), is a legal document used in real estate syndications to provide potential investors with essential information about the investment opportunity.
The OM outlines the terms and conditions of the syndication, including the deal structure, risks involved, projected returns, and exit strategy.
It serves as a disclosure document, ensuring that investors are well-informed and understand the nature of the investment before committing their capital.
Critical components of an Offering Memorandum for syndications typically include:
Executive Summary: This brief overview of the investment opportunity highlights the investment property’s location, size, and potential for value appreciation.
Property Description: Detailed information about the investment property includes its physical attributes, current condition, and planned improvements or renovations.
Market Analysis: An assessment of the local rental property market, including demographic trends, economic indicators, and competitive landscape.
Investment Strategy: A clear explanation of the syndicator’s strategy for managing and improving the investment property, such as increasing occupancy, securing reliable tenants, reducing expenses, or implementing value-adding initiatives.
Financial Projections: These are the projections of the property’s financial performance, including revenue, expenses, net operating income, and cash flow distributions to investors.
Deal Structure: An outline of the syndication’s legal structure, such as an LLC or LP, and the roles and responsibilities of the GP and LP.
Risk Factors: A comprehensive list of potential risks associated with the investment, ranging from economic downturns to changes in government regulations.
Subscription Process: Instructions for investors on participating in the syndication include the minimum investment amount, accredited investors, qualifications, and a subscription agreement.
Exit Strategy: A description of the planned exit strategy, such as selling the property after a specific holding period or achieving a predetermined return on investment.
Why You Should Invest in Multifamily Real Estate Syndications
Investors may find multifamily and real estate investments particularly appealing for several reasons:
Passive income: Multifamily property can generate stable, passive income through rental payments, allowing investors to diversify their income streams without active involvement in property management.
Professional management: The multifamily real estate syndication is typically managed by experienced sponsors, which allows investors to leverage the expertise of professionals in identifying, acquiring, and managing multifamily properties.
Asset diversification: Real estate investing helps investors diversify their portfolios, reducing reliance on traditional assets like stocks and bonds while mitigating overall portfolio risk.
Higher returns: Due to economies of scale and value-adding opportunities, multifamily properties can offer higher returns than other investment options, making them attractive to investors seeking to maximize their wealth.
Tax advantages: Investors can benefit from various tax advantages associated with investing in real estate, such as depreciation deductions, mortgage interest deductions, and potential capital gains tax treatment.
Inflation hedge: Multifamily real estate can act as a hedge against inflation, as rising living costs typically lead to increased rental rates, protecting diminishing purchasing power.
Leverage: Accredited investors can use leverage to acquire more significant investments with higher potential returns through financing, amplifying their investment power.
Limited liability: By investing in a real estate syndication, accredited investors can take advantage of structures like LLCs or LPs, which protect their assets from potential losses related to the investment.
Tangible asset: Income-producing real estate is a tangible asset that offers a sense of stability and security, often appealing to accredited investors looking for long-term wealth preservation.
How Much Money Can Passive Investors Make from Investing in A Multifamily Syndication?
The amount of money passive investors can make from investing in multifamily syndication depends on several factors, including the property’s performance, the multifamily syndication investment structure, and the overall market and conditions.
Investors should carefully review the real estate investment, offering documents and financial projections to estimate potential returns on prospective real estate investment, considering factors like income, appreciation, and exit strategy.
Projections in the OM are not guaranteed, and actual returns may vary depending on market conditions and property performance.
Investors should always conduct thorough due diligence and consult financial advisors before investing in multifamily real estate or syndication deals.
Understanding Fees & Costs
In multifamily syndication investment, investors can expect various fees and costs. These fees compensate the syndicator and other professionals involved in the deal for their expertise and management of the property.
Some standard fees and costs include:
Acquisition fee: This is a one-time fee paid to the real estate syndicators for sourcing, analyzing, and closing the deal.
Asset management fee: This ongoing fee compensates the syndicator for overseeing the property’s operations and management.
Property management fee: This fee is paid to the property management company responsible for the day-to-day operations of the property, such as rent collection, tenant relations, and maintenance.
Loan fees: Investors may be responsible for loan-related costs, such as origination fees, points, or loan assumption fees.
Refinance fee: If the property is refinanced during the holding period, the syndicator may charge a fee.
Disposition fee: When the property is sold, the syndicator may charge a fee for facilitating the sale.
Legal and organizational costs: An accredited investor may be responsible for their share of legal and administrative expenses, such as setting up the legal entity, preparing to offer documents, and conducting due diligence.
Capital expenditure reserve: A portion of the investment may be allocated to a reserve fund for future capital expenditures, such as property improvements or unexpected repairs.
Promoted or carried interest: This is the syndicator’s share of the profits after the investors have received their preferred return (if applicable).
Profit Structures for Multifamily Syndications
Profit structures for multifamily real estate syndications determine how profits from the property are distributed among the General Partner (GP) and Limited Partner (LP). These structures can vary depending on the specific deal, but some standard components include the following:
Preferred return: A preferred return is an annual percentage return that LPs receive before the GP gets any profit. This return is usually calculated based on the LPs’ initial investment, ranging from 6% to 10%.
Cash flow split: After the preferred return is paid (if applicable), the remaining cash flow is split between the GP and LPs based on a predetermined percentage outlined in the offering documents.
Equity split: The equity split determines how the profits from the property’s appreciation are divided upon the sale or refinance of the property. The equity split may be the same as the cash flow split or have a different structure based on the specific deal terms.
Waterfall distribution: Some multifamily or commercial real estate syndications use a waterfall distribution structure, meaning the profit split changes as certain return thresholds are met.
For example, once LPs have received a specified internal rate of return (IRR), the profit split might adjust to give the GP a higher share of the profits.
I suggest using real estate syndication software to help accurately calculate investor returns.
This structure incentivizes the GP to maximize the property’s performance and aligns their interests with those of sophisticated investors and the LPs.
Promote or carried interest: Promote interest, or carried interest, is the GP’s share of the profits after LPs have received their preferred return (if applicable). Promote interest is typically structured as a percentage split of the remaining profits. It is meant to compensate the GP for their expertise, effort, and risk in managing the investment.
Wrap Up
Multifamily syndication offers a win-win scenario for both syndicators and investors. Syndicators can scale their operations by pooling resources and expertise while investors gain access to more significant, income-generating, unattainable properties.
This collaborative approach enables portfolio diversification, spreads risk, and leverages collective knowledge, ultimately fostering growth and maximizing returns in the ever-evolving real estate market.
FAQ About Multifamily Real Estate Syndication
How do you syndicate a multifamily deal?
To syndicate a multifamily deal, identify a suitable investment property, and conduct thorough due diligence to assess its potential.
Next, establish a legal structure, such as an LLC or LP, and create offering documents outlining the terms of the investment.
Finally, assemble a group of investors, pooling their capital to acquire, manage, and profit from the property while leveraging the expertise of the General Partner.
How do you start multifamily syndication?
To start multifamily investing in real estate, begin by gaining knowledge of the real estate market, building a network of industry professionals and real estate investors, and identifying potential investment opportunities.
Then, create a solid business plan and a legal structure for the real estate investor to bring together investors, manage the property, and distribute profits.
How are syndications structured?
Syndications are structured with a GP who manages the investment and LPs who provide capital. The legal structure, typically an LLC or LP, outlines each party’s profit distribution, roles, and responsibilities.
What are the benefits of multifamily syndication?
Multifamily syndication investing benefits the GP by providing opportunities to scale their business and leverage private investor capital. LPs gain access to more significant investments, diversify their portfolios, and receive passive income from professionally managed multifamily properties.
Should I Start a Real Estate Investment Fund?
The decision to start a real estate investment fund instead of syndication depends on your goals, resources, and risk tolerance.
This strategy to make money in real estate investing offers diversification and can potentially manage risk better due to multiple properties in different locations. However, various assets require a larger initial capital investment and more complex management.
On the other hand, a real estate syndication focuses on a single property, giving investors a more direct understanding of their investment. It typically requires less initial capital and might be suitable for those with less experience in real estate investing.
Before deciding, consider consulting with a financial advisor or real estate professional to understand better which option aligns with your financial goals and risk tolerance.
Mike Stohler
Mike Stohler is the co-founder and managing partner of Gateway Private Equity Group, bringing over 20 years of experience in real estate investing. He has managed over 1500 apartment units, bought and sold complexes, and transitioned into hotel investing where he now syndicates projects in the US and internationally.
