Reasons for Investing with Multifamily Real Estate Syndication


Multifamily real estate syndication investments are very attractive options for investors who want to increase their net worth while building a diversified portfolio of properties. It is risky to make all of your investments in one type of property. For instance, if you build a portfolio that consists solely of single-family homes, a slowdown or crisis in home sales can lower the value of your portfolio drastically.


For anyone with the serious desire to build and hold a strong position as a real estate investor, understanding the benefits of real estate syndication investing is essential. Investing in multifamily properties through a respected and reliable syndicate is a safer investment than putting your money into single-family homes. Large rental properties generate greater monthly income to be shared by all investors in a multi-family property syndication deal.


What Is Multifamily Syndication?


An easy way to understand multifamily syndication is to examine each part of this term. A multifamily home property can vary from a duplex to a large apartment complex with units for hundreds of tenants. The structure of a real estate syndication enables a syndicator (or a manager or sponsor) to secure funding from a number of investors (limited partners) for a property investment. Profits produced by this property will be distributed to the sponsor and the limited partners according to a prearranged percentage or split.


Multifamily Syndication Investors


There are two types of syndication investors, accredited and non-accredited (sophisticated). Many current property syndications allow both types of investors to participate as limited partners in multifamily investing deals. In most instances, there are no requirements for previous experience as a property syndication investor.


In addition, there is often no limit to the number of participating investors in a multifamily syndication. This is actually an ideal type of property deal for an inexperienced property investor. It is true that the larger the number of investors funding a property investment, the smaller the amount of financial return will be for each investor. Yet the larger the number of participating investors in an investment project, the lower the risk factor will be for each investor.


If a multifamily syndication has the status of 506(C), investing will only be open to accredited property investors. The requirements for becoming an accredited investor are set by the SEC. Accredited investors are required to have a specific net worth or annual income, either as an individual or jointly with a spouse.


The current SEC requirements for qualifying as an accredited investor for syndication property deals are as follows:


  • For the past two years, your income as an individual was more than $200,000 (or you and your spouse had a combined income of $300,000). You are also required to have the reasonable assurance of having the same amount of income or more during the current year.


  • You as an individual or jointly with your spouse have a net worth of more than one million dollars. The one million dollar amount does not include the market value of your primary residence.


Multifamily syndications with 506(B) status are open to both accredited and sophisticated investors. Although sophisticated investors do not have the high net worth that is required to qualify as accredited investors, those who are suitable for these types of investments have significant investing experience and a preexisting good relationship with the general partner (sponsor).


Some syndication investment deals may place limits on the number of participating limited partners who are sophisticated (unaccredited) investors. Often in large property investments like multifamily complexes, major syndicators will not offer as many investing opportunities to sophisticated investors as the number that are open to accredited investors. These property syndicators tend to place more value on the accredited investors due to their qualifications.


Online Investing Platforms


Both accredited and sophisticated investors can locate attractive online multifamily syndicates for investing. The platforms offered online by CrowdStreet, FundRise and RealtyMogul are good choices for getting started. These website platforms provide appealing real estate investing (REI) options, and they offer user-friendly investing for novices as well as experienced investors.


These online platforms also have much lower monetary requirements to start investing in syndication projects. Some multifamily syndication deals may permit you to start with an initial investment equaling $500 to $1,000 or less.


Multifamily Syndication Structures


Different syndicators may structure a multifamily syndication in various ways. As an investor, you will be thoroughly informed about the structure before the investment is finalized. This will enable you to have a basic idea of the amount of return that you will be issued as dividend payments. Each type of structure offers different rates of return. For this reason, you should select a syndication that suits your investing goals and needs.


  • Straight Splits. A straight split syndication is easy to understand. Since this structure offers a larger financial benefit to the investors than to the syndicator (or sponsor), it is quite popular among investors. The majority of straight split multifamily syndication deals offer a 70/30 or 80/20 split. This means that 70 or 80 percent of the profits will be split among the investors, and the sponsor will receive 30 or 20 percent.


  • Preferred Returns. Today, many multifamily syndication investments use a preferred returns structure. In this structure, the passive investors (limited partners) are preferred over the syndicators (general partners or sponsors). The passive investors are issued a guaranteed percentage of the profits before the sponsors receive any payment.


The percentage of the preferred returns is typically from six percent to eight percent. If the investment property produces a six percent return during the first year and then generates eight percent in the second year, the passive investors will be paid an additional ten percent.


  • Waterfall Structure. These structures are designed around the principle of cause and effect. After one return criterion is achieved, the syndication investment can proceed to the next criterion. As many layers as are desired can be added to the waterfall by the syndicators.


As an example, the initial return may be a seven percent payment. Once this criterion is achieved, the subsequent return may be a 70/30 split between the investors and the sponsor (syndicator). After the second layer of the waterfall is achieved, the third return may equal an 80/20 payout.


In general, multifamily property investments through syndication are viewed as one of the safest investing options due to the constant demand for multifamily housing. In addition, this type of property investing offers highly attractive potential for passive income for investors. For these two reasons, multifamily syndication investing continues to gain high volumes of investor participants.


Is Multifamily Syndication a Good Investing Option for You?


Before deciding to participate in a multifamily syndication deal, it is essential to understand the advantages and disadvantages of this type of REI for all of the parties involved.


Pros for Syndicators (Sponsors or General Partners)


  • Leverage. Multifamily syndication enables you as the sponsor to leverage the combined funds of other investors (limited partners) to initiate a large property investment. By yourself, you may not have sufficient finances to invest in a sizable multifamily property.


  • Control. As the sponsor of a multifamily syndication investment, you control the management of a large multi-unit rental property on behalf of yourself and all of the passive investors (limited partners).


  • Equity and Appreciation. For the sponsor in a multifamily syndication investment, the equity that typically increases with time is a primary benefit. Also, if the property undergoes renovations, it may experience impressive appreciation in value.


  • Tax Advantage. Your rental income from a multifamily syndication investment will be taxed at a significantly lower rate than many other investments.


Cons for Syndicators (Sponsors, General Partners)


  • Excessive Setup Costs. The initial expense of the setup of a multifamily syndication investment is very high. For your first experience as a sponsor for this type of property investment, this is a major issue to consider.


  • Difficult Fundraising Project. Motivating investors and raising sufficient funds for a multifamily syndication investment is not an easy task.


Pros for Investors (Limited Partners, Passive Investors)


  • Cash Flow. When you invest in a multifamily syndication deal, you can anticipate benefiting from a passive income as you leverage the knowledge, experience and skill set of the sponsor.


  • Freedom from Responsibilities. For anyone who lacks the time or interest for becoming a landlord, multifamily syndication investing can be ideal.


  • Inflation Hedge. Typically, the increase in real estate property values surpasses the rise in inflation. For this reason, investing in a multifamily syndication is a wise hedge against inflation.


Cons for Investors (Limited Partners, Passive Investors)


  • Lack of Control. Aside from having your money tied up in a large investment project, you lack any control over the investment. All of the decisions regarding this investment are made by the sponsor, such as whether to renovate or refinance and when to sell the property. As part of your due diligence, you must examine the sponsor’s past record of success before investing.


  • Sensitivity to Market Cycles. Every type of real estate investment is subject to market cycles. For this reason, if the market heads downward, your profits will decrease.


Concluding Thoughts


Considering all of its important aspects, multifamily syndication investing is one of the wisest and safest types of investing today. This is due mainly to the constant high demand for multifamily rental housing. In addition, this type of property investing offers attractive potential for passive income for investors.


As a potential multifamily syndication investor, be sure to perform thorough due diligence to determine the rate of prior success of your investment sponsor. Then consider the pros and cons of this type of REI involvement to decide if this is your ideal path forward for highly profitable real estate investing.