Investing in multiple-unit residential real estate as a limited partner can be a wise and lucrative investment. Many successful REIs invest in out-of-state apartment buildings or complexes through reputable and experienced syndications.
Especially if you live in a high-priced real estate market area, out-of-state properties may be ideal investment choices. However, before getting started, perform some due diligence on syndication opportunities within your target market locales and funding limits.
Primary Role of a Limited Partner
Limited partners are passive real estate investors who each invest a portion of the funds required for purchasing an apartment building. Since their individual liability is limited to the proportion of their share in the property ownership, they are “limited” partners. Each limited partner gains an agreed rate of financial return on total profits based on the amount of their investment.
The limited partners in an apartment building investment do not take part in administering the property’s overall business plan. A limited partner in REI may be an individual or a group of individual investors. If a property investment involves a single limited partner, this party will fund the total equity investment.
Apartment investing through a syndication frequently involves partial investments from multiple limited partners. In apartment syndication investments, a limited partner is a passive investor, with the exception of tax management. Although limited partners should perform due diligence on all aspects of the syndication, they are not involved in any management area of a syndication investment.
Major Aspects of Real Estate Syndication
Real estate syndication enables a syndicator (sponsor or general partner) and one or multiple limited partners to invest as a group. By combining their funding resources, they can invest in properties that are significantly larger than each investor could afford alone. Today, upwards of 90 percent of large multi-unit apartment buildings are bought as syndication investments.
The syndication investment deal involves the general partner, the limited partners and the property management. Other members of the syndication investment team include attorneys, CPAs, lenders and a commercial broker. There may be other members of this investing team as well.
Role of the General Partner
The general partner (sponsor or syndicator) performs the operation of the property investment syndication. They identify the market, underwrite the property, obtain financing, introduce and monitor the business plan. The general partner also oversees any necessary renovations as well as the ongoing activities of the property manager. The sponsor’s role is to initiate and direct all aspects of the investment deal while maintaining good investor relations.
REI Syndication as an Ideal Profits Vehicle for Limited Partners
Real estate syndication is an effective passive investing vehicle that enables limited partners to gain valuable benefits, including the following:
Greater Diversification
Investing in real estate syndications makes it simpler and easier to diversify your property portfolio according to sponsor, region and investing niche. It is also essential in mitigating risk in your investments. Including property investments from a wide spectrum of property choices can greatly enhance profits while alleviating risk. Different types of REI diversification include the following:
- Geographic Diversity. When you include geographic diversity in your property investment portfolio, you can gain profits in varied regional real estate markets. As a limited partner in out-of-state property investing through syndication, you can profit from multiple growing markets. You can find greater value in top markets in different cities, states and regions.
With investing syndication, you can work with professionals displaying expert knowledge relative to widespread real estate markets and competition. This alliance with an experienced out-of-state sponsor gives you access to investment opportunities you would otherwise not know about.
- Niche Diversity. When you invest in property through syndications, you can benefit from stronger diversification among property asset classes. Most sponsors, or general partners, specialize in particular REI asset classes in which they have a competitive edge for investing.
By combining different types, sizes and price ranges of apartment buildings in your portfolio, you can gain a competitive advantage. Especially in a fluctuating economy, apartment buildings are more stable investments than some other REI niches.
- Sponsor Diversity. You can also improve your REI results by practicing sponsor diversification. Always vet sponsors thoroughly, and invest through multiple respected syndications. Do some research to determine whether each sponsor adheres to a well tested investing model with limited risk. Investing with a variety of sponsors also enables you to recognize good investing opportunities as well as undesirable ones.
Larger Cash-Flow REI Opportunities. Large multi-unit residential rental properties offer profitable real estate investing opportunities today. Investing syndications offer you the option of joining in a large property investment deal with other investors.
This enables you as a limited partner to make an investment in a property asset class priced at as much as $500,000,000. By pooling your money with other passive investors’ funds, you can gain investments in this high-priced asset class. By creating this type of investing opportunity, sponsors are designing an investment for REIs with $50,000 to $100,000 to invest.
In the operating agreement for this investment property, the sponsor will most likely list the minimal investment at about $25,000 to $30,000. This allows a wider range of interested investors to access and invest in this property as an optimal cash-flow investment.
Strong Passive Investing Option. When you take part in a group investment in a large apartment building, the syndicator will manage the entire deal. You will never need to perform property locating tasks or due diligence. You will not be involved with hiring property management personnel, issuing quarterly reports or managing investor relations.
The limited partners will pay the sponsor (syndicator) a percentage of the deal’s profits plus appreciation. A common split of profits between investors and the sponsor equals a 70/30 ratio split. Since you, as one of the limited partners, are paying the sponsor a fee, you can relax after investing.
After you and the other passive investors have funded the property deal, you can simply await your cash-flow distributions. These payments may be issued to you on a monthly or quarterly schedule. You will also receive lump sum payments when refinancing and disposition occur.
Deferred Tax Liability. When you group-invest in large multi-unit residential properties, some of these investments may use Limited Partnerships and LLCs. In this case, you become eligible for deferred tax liability. This status enables you to compound 100 percent of all proceeds that you receive from the fund.
In fact, this status will continue as long as you refrain from distributing these profits outside of this fund. According to current laws, investors in commercial properties that are considered pass-through entities gain the tax benefit of an extra 20 percent deduction.
If the investment property is sold, all investors will be liable for paying taxes on their distribution gains. Yet allowing your funds to compound without any required tax payments due is of great benefit to your property portfolio. Expert sponsors will roll your investments into your next property deal, deferring tax liability even longer.
Forced Appreciation. If you are planning to invest with an apartment syndicator, you should examine the sponsor’s plan to force appreciation. In other words, you need to determine the sponsor’s plan to reposition the asset. The three methods of forcing appreciation are to increase income, reduce expenses, or both, for this asset. Either of these two methods will bring an increase in net operating income (NOI).
Risk Level Reduction. When you join with other limited partners to invest via a reputable syndicator, the level of risk of the investment is shared among all passive investors. Syndication investing permits you to tailor your investment to a lower grade of risk.
By investing through a sponsor, you increase the degree of protection from any liability due to mismanagement or debt. In property syndications, the operating agreement includes two definite sides, the A Side and the B Side. The A Side lists the syndicator (sponsor or general partner) and any other managing members as decision makers.
The B Side lists the limited partner investor or investors who provide capital for the investment. Since the passive investors (B Side) have no involvement in decision making, they cannot incur legal charges concerning any questionable fund operational activities.
Scale-Related Savings. The greater the number of housing units your syndication investment has, the greater your capacity becomes to lower overall expenses. This increases your NOI since in-house management costs will be lower when your property includes a large number of apartments. If you renovate the property, your contractor’s per unit pricing will also be lower for a property with a large number of units.
Consistent Rates of Return. Limited partner investing in multiple-unit residential property through syndication results in consistent performance for the long term. For this reason, this asset class is an attractive and lucrative investment for many passive REIs.
Debt Paydown. When you invest in sizable multi-family apartment buildings, the rental income pays down debt and increases the property equity. If the property is sold, the investors will receive principal reductions.
Effective Inflation Offset. The advantages of syndication investing in large muli-unit apartment buildings increase during periods of escalating inflation. During these times, there is often a growing demand for rental housing and a limited supply of available apartments. In these circumstances, property values rise to prevent financial losses for limited partner REIs with syndication property investments.
In Conclusion
Although there are many different types of wealth building opportunities currently available, limited partner real estate investing is highly rated. When you invest in large apartment buildings through syndication, you can enjoy lucrative profits.
By investing in out-of-state properties through a thoroughly vetted syndicator, you can receive greater returns. You can build a reliable wealth-yielding property portfolio while generating an impressive stream of passive income.