If you are considering investing in large multifamily apartment properties, you may have questions about how to begin. Is investing in out-of-state real estate a good idea, or should you keep your investments closer to home? At first, it may seem safer and more practical to invest in properties in familiar neighborhoods. You may feel more comfortable working with real estate agents who you or your family and friends know.
Yet there are numerous REI markets in other states with excellent opportunities for investing in multi-unit apartment properties. Some are located in states in which rent control is not in effect or is quite limited. Other locales with attractive properties of this type may have only a small number of upscale rental buildings available.
Still other areas with high-quality rental properties may have extensive job or population growth. By identifying “landlord-friendly” locations with significant population growth and high employment rates, you can determine lucrative investing areas. You will gain confidence in these locales as good areas for investing in large apartment buildings or complexes.
Investing in Large Out-of-State Apartment Buildings Through Syndication
You may be familiar with the REI terms of “syndication and syndicator or sponsor.” However, you may not yet realize how helpful it can be to invest in multifamily properties through syndication. Especially if you plan to invest in out-of-state real estate, working with an experienced, reputable syndicator or sponsor can be your saving grace. It can enable you to make a quality, lucrative investment rather than a poor one that results in financial loss.
The Importance of Due Diligence
Identifying a quality investment opportunity in a sizable apartment building that is located in another state requires extensive due diligence. Locating the best investment market takes comprehensive market analysis. You need to determine the rental income growth and job growth of a potential investing locale.
It is also essential to examine the demographics of this area’s real estate market. If the area has a high population of baby boomers and millennials, it is an attractive investing market for large multi-unit rental buildings. These two age groups compose the largest segment of renters in the population of a locale.
The next major step in identifying a strong market for your property investing niche is performing analytics. The data you will need to examine includes demographics, population growth and metrics concerning relative property appreciation. Information about neighborhoods, local industries, main employment areas and job types must be evaluated. You should also consult VerticalRent® listings to determine whether a state is friendly to landlords.
Why struggle to accomplish all of these daunting tasks on your own as a new and inexperienced investor? When you make your out-of-state property investments through a syndicator, they will do all the work for you. These seemingly endless and complex tasks for potential property investment evaluations are routine to them. In addition, you as an out-of-state investor are operating in relatively unknown territory, which is the sponsor’s home base.
How REI Syndication Works With and For Investors
REI syndication enables investors to combine their financial resources, collective knowledge and investing experience to invest in properties. Syndication allows every investor to participate in much larger property investments than they could otherwise afford. It also provides a safe, reliable method for out-of-state investors to join in attractive property investments in unfamiliar locales.
In previous years, individuals who invested through real estate syndications were wealthy people with elite connections in the REI industry. Yet today, investors of multiple economic levels and investing experience can join together via real estate syndications to invest. The collective resources of the group enable large-scale investing in sizable multifamily rental properties.
Basic Aspects of Real Estate Syndication
Real estate syndication involves an investing transaction between a syndicator and multiple property investors. The syndicator is also termed the sponsor or general partner, and the investors are called passive investors or limited partners. The general partner is the administrator, manager and operator of the REI deal.
The general partner must scout high-quality investment properties and engage in fundraising. This sponsor also assumes management of the daily operations of the investment property. The first responsibility of the limited partners is doing due diligence to verify the sponsor’s credibility and investing expertise. Their second responsibility is providing the bulk of the financial equity needed for transacting the investment.
Since the sponsor performs all of the due diligence concerning prospective investment properties, the difficult or complicated work is done for passive investors. The general partner typically invests from 5 to 20 percent of the total amount of equity capital required. The limited partners generally invest from 80 to 95 percent of the total amount. Of course, the larger the amount of funding the general partner contributes, the better it is for the limited partners.
General Legal Structure of Real Estate Syndications
The legal structure of a real estate syndication is generally either a limited partnership or a limited liability company. The parties involved are the sponsor, acting as the manager or general partner, and the passive investors or limited partners. The essential documents pertaining to all activities of the syndication are the LP Partnership Agreement or the LLC Operating Agreement.
These agreements specify the legal rights of the general partner and the limited partners. These rights involve voting, distributions and the right of the general partner to payment for management of the investment. These legal documents provide protection for the general partner and the limited partners if the investment proves unprofitable. These documents are essential for out-of-state investors who depend on the sponsor for providing properties with strong high-profit-returning potential.
Primary Benefits of Multifamily Rental Property Investing via Syndication
Major benefits gained by investing in large multifamily rental properties through syndication include the following:
- Profitable passive investing opportunities;
- Property management by professional multifamily property asset managers;
- Ongoing access to larger REI deals;
- No problems relative to tenant relations; and
- Simple method of including property in your investing portfolio.
Profits from Real Estate Syndication Investments
There are two basic ways in which the general partner and limited partners gain financial returns through syndication investments. They make profits from property value appreciation and from rental income. The passive investors as limited partners are not directly involved in the administration or management of these activities.
Any rental income from syndicated real estate is issued to the passive investors by the sponsor. Distributions may be made on a monthly or quarterly schedule and are arranged in preset terms. Since property values typically appreciate over time, investors can receive higher rental payments and larger profits when properties are sold.
Rental income or profits distributions to investors are issued according to when the investment matures. While some property syndication investments mature within six to twelve months, others may not mature for ten years. All investors then receive a share in the total profits.
Sponsors frequently claim a profit at the start of each investment deal for property locating and acquisition. This acquisition fee is usually equal to 1 percent of the investment equity funded by the limited partners. In some instances, this fee may equal from 0.5 to 2 percent.
Prior to the sponsor taking a share of profits for promoting and managing an investment, the investors receive a payment. This payment is known as a “preferred return” and is issued to all investors in a deal. This return typically equals an annual amount of around 5 to 10 percent of the initial funds invested.
Example of REI Syndication Preferred Returns
For example, as a limited partner, you might invest $60k in a property syndication investing deal. With a 10 percent preferred return, you could receive $6k each year after the investment returns sufficient profits. Once every investor is issued a preferred return, the funds remaining are shared among the sponsor and investors. Distribution amounts follow the structure of the syndication’s agreed profit split.
According to a typical profit split ratio of 70/30, the investors receive 70 percent of the profits. This 70 percent is issued after the distribution of their preferred returns. The sponsor receives 30 percent of the profits following receipt of the preferred return.
In a large multifamily rental property investment, one million dollars might be available after the distribution of all preferred returns. In this case, the investors would be issued $700k while $300k would be issued to the sponsor.
Statistics Pertaining to Real Estate Syndication
Statistics from 2019 show that upwards of 120,000 property investors in the U.S. invested through syndications during that year. On average, the value of a sizable multifamily property offering equaled three million dollars. While limited partners funded from 80 to 95 percent of the initial capital needed, the sponsor funded from 5 to 20 percent.
The average preferred return for investors was 8 percent in a range of 5 to 10 percent. Sponsors received an acquisition fee ranging from 0.5 to 2 percent, and the average acquisition fee issued was 1 percent. Sponsors also received a property management payment of from 2 to 9 percent.
Investing in out-of-state properties through real estate syndication is a strong and growing trend for today and the future. By performing due diligence, you can locate a top-quality syndication in the state and region where you want to invest.
Experienced, responsible syndications with superior track records in offering property investments returning high profits are ideal to work with. They can bring you and other passive investors high financial returns over the long-term for leading portfolio investments.
Investing in out-of-state real estate is not difficult as long as you invest through a thoroughly vetted, reputable syndication. By taking this route to successful property investing in other states and regions, you can enjoy increasing profit levels. You can also benefit significantly from greater financial stability.