I often get asked “So what exactly is Multifamily Syndication?”. Well, I am not surprised because it was just a few years ago that I had the same question. I admit, back then in my vocabulary the term ‘syndication’ had more to do with media than with real estate. The dictionary still has two meanings for the word syndication (/ˌsindəˈkāSH(ə)n/)
- the sale or licensing of material for publication or broadcasting by a number of television stations, periodicals, etc.
- the transfer of something for control or management by a group of individuals or organizations.
The phrase Multifamily Syndication stems from that second definition. Sort of.
Another reason Multifamily Syndication isn’t a household term is that till recently real estate syndications were regulated by SEC in a way that they were not accessible to everyone. That has changed since.
Syndication can be for any Real Estate asset class but I would limit this to Multifamily (aka Apartment) Syndication for now.
So what exactly is Multifamily Syndication?
Simply put, Multifamily Syndication is a group investment. An alliance where people pool their resources to purchase larger assets (apartments buildings) that would be otherwise hard to acquire individually. This partnership also allows the syndicators to share the returns and risks for the investment.
How does Multifamily Syndication work?
The key players in this partnership are the General Partners also referred to as GPs and Limited Partners or LPs (aka the investors).
The General Partners put the deal together and are responsible for managing the show. Typically it is a group of people who contribute on different aspects of the syndication from finding the perfect deals, underwriting it, secure financing, gathering and forming a relationship with the investors, negotiating with the seller, performing due diligence. Basically they do everything that’s needed to run the syndication.
On the other hand, Limited Partners are passive investors who invest their money in return for equity in the deal. Typically they will receive a cash flow from share of the profits every quarter. They also receive monthly and quarterly reports about the performance of the asset.
The Property Management Group is also vital part of the syndication but may or may not be part of the GP team. They manage the day-to-day operations of the property along with any onsite staff and remain responsible for the execution of the syndicator’s business plan.
Once the deal is under contract, the property management group will go in and will help the general partner with the due diligence process. From inspecting the property to creating the due diligence report, the property management group will help throughout the process. This also involves other due diligence experts to evaluate the property structure and any environmental issues.
Why invest in a Multifamily Syndication?
Investing in real estate can be very expensive. Multifamily Syndication gives you the opportunity to invest your money in large assets like an apartment buildings that provide economies of scale and are professionally managed. Here’s what’s in it for you when you invest your money in a multifamily syndication as a passive investor.
Cash Flow
Syndications allows you to earn an income without putting any time in managing the property (think purely passive). With the general partners doing all the work, from due diligence to property management, you won’t have to worry about a thing. Passive income is the ultimate way to financial freedom.
Tax Advantages
I am not a CPA or Tax attorney so I am not qualified to give you tax advise but I’d urge you to look into how real estate has advantages over nearly every other investment. Multifamily investors are allowed to write off 1/27 of the value of the building each year as an expense. Additionally, you can perform a cost segregation analysis, which results in a depreciation of 90% of the apartment building’s value over seven years. Again, please contact your CPA to see how this investments fits with your tax strategy.
Risks
Even though you are a partner in a multi million dollar asset, being a Limited Partner shields you from any loan liability or any other legal issues that may come up with the property.
OPS
You’ve heard of OPM (Other People’s Money) but being a passive investor allows you to benefit for OPS (Other People’s Skills). You just have to do your homework in vetting the syndication team and the deal before you decide to invest.
So what role does Smart Capital play?
If you are new to Multifamily Syndication, the journey can be a bit overwhelming as every deal is very unique and requires proper attention to detail. As a General Partner, Smart Capital’s role is to ensure –
- Investors’ interest (preserving and growing capital) are kept ahead of the general partners
- The deal is structured keeping our investors in mind first
- The underwriting in conservative and has multiple exit strategies
- Capital needed to acquire the property and doing the renovations is raised within the SEC guidelines
- Timely investor relations is maintained with absolute transparency
Smart Capital is like a trusted concierge and a tour guide throughout your syndication journey. Like any other investments, investing in a multifamily syndicate can be risky and you could lose your everything you invested. Smart Capital provides the necessary education and guidance, enabling passive investors to make ‘smart’ investing decisions when it comes to Multifamily Syndication.
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