What is multifamily real estate syndication?
A multifamily real estate syndication, simply put, is crowdfunding for investors to purchase an apartment building. Syndication is the pooling of funds from several passive investors to purchase otherwise unattainable assets. These assets can range from large multifamily apartment buildings to mobile home parks, self-storage units, and land. The idea is that a group of investors come together to share both the assumed risks and the potential returns on a large investment project without doing the heavy lifting.
Syndications are researched, vetted, executed, and managed by a General Partner or GP. The GP is responsible for finding the property, negotiating the price, building a business plan, working with the property management team, and handling investor relations. The other contributors to the syndication are known as passive investors or Limited Partners. These individuals want to invest their money in real estate but do not have the time or resources to lead an entire project. Passive investors contribute their capital to the deal and reap the rewards without assuming any of the GP's responsibilities and with very limited risk.
Benefits of passive investing through syndications
As with any investing strategy, multifamily syndications are not risk-free but come with many potential benefits. The most notable benefit of passive investing is in the name - the opportunity to earn passive income. Once the investor is committed to the deal, they go back to their regular lives and continue to earn money while they sleep through quarterly income distributions. The GP, or active investor, runs the rest of the show. Passive investing offers individuals the opportunity to invest in recession-resilient assets, receive consistent cash flow, without the need to deal with tenants or toilets.
In addition to the hassle-free quarterly distributions, passive investors also gain a return on investment upon the sale of the property. While the syndicator is managing the property, they typically are adding value and forcing the appreciation. The syndicator eventually sells the property when the time is right, and each passive investor earns an equity return.
Passive investors also open the door to tax benefits by owning a piece of the real estate. As far as the government is concerned, real estate investors are business creators and are, therefore, invaluable to the economy. Tax benefits for limited partners typically come from long term capital gains, depreciation recapture, depreciation, property taxes, interest on mortgage and other operational expenditures on tax Form K-1.
Most of all, passive investing is a great way for investors to diversify their portfolios, reap the benefits of economies of scale, and reach different markets. Even active syndicators often choose to passively invest in cities outside of their immediate area of expertise as a means of growing their portfolios.
Who can invest?
Passive investors are typically busy professionals or retirees who want to place their extra money into income-generating assets, without the hassles of actively managing it. To participate in multifamily syndication, you must either be classified as an accredited investor or sophisticated investor with a prior personal relationship with the syndicator.
So what’s the difference?
Currently, SEC rules state that accredited investors must have an annual income of at least $200,000 (individual) or $300,000 (married) OR have a net worth that exceeds $1,000,0000 (excluding the value of your primary residence). Some syndications are limited to only accredited investors and fall under the umbrella of a 506(C).
Many syndications are also available to non-accredited, sophisticated investors under a 506(B). A sophisticated investor must meet specific knowledge requirements about investing and be able to accurately analyze the prospective deal. The investor must also have a prior personal relationship with the syndicator. Under the guidelines of a 506(B), a syndication can include up to 35 non-accredited passive investors.
At Diamond Point Homes, we manage both 506(C) and 506(B) assets.
How to get started in multifamily syndication
Getting started in multifamily syndication requires a different type of due diligence than traditional real estate investing. As mentioned above, the lead syndicator does the heavy lifting when it comes to finding a property, negotiating pricing, and executing a business plan.
As a passive investor, your job is to identify a syndicator that you trust to handle your money. You will want to interview and vet potential partners before jumping into a deal with them. At Diamond Point Homes, it is important for us to spend time getting to know you and your investment goals first before investing together. You get to know us, we get to know you, and together we can decide if we are a good fit for each other. We want what is best for you.
When researching potential syndicators, consider the following questions:
Does the syndicator have a proven track record of deals?
How long will your money be tied up in the deal?
What is their back up plan?
How (and how often) do they plan to communicate with you?
Do your values align?
Have they sold any properties yet? How did it go? What was the ROI?
Essentially, your goal is to build a mutual trust that lasts. A multifamily syndication project can typically last two to five years before the property is sold. Therefore, it is essential to choose a GP that you feel comfortable investing with for the long-run.
If you are ready to explore the possibilities with Diamond Point Homes, simply fill out this form to start receiving information about upcoming deals. From there, schedule a 30-minute phone call with our team to explore the possibilities of working together.
Have questions? Email us at info@diamondpointhomes.com.