In our modern age of information, we are bombarded with misinformation and disinformation so let’s begin with Myth Busting.
Myth 1: To invest in real estate, you have to individually own and manage your property.
Myth 2: You have to be a millionaire to invest in real estate apartment syndication.
Myth number one is a common misunderstanding, and many active investors do own and manage properties. Some do so successfully and ultimately make it a full-time endeavor. Many more tried and decided that individual ownership of property is just not worth the time and effort. I can relate as I’ve been down that road.
There is a better way
We can invest in real estate and never see or set foot on the property. An investment in a real estate syndication opens the doors to lower risk and higher return investment opportunities. These are significant advantages, and the good news for busy professionals is that real estate syndication investing can be one of the more passive avenues to invest in real estate.
Myth number two unnecessarily puts off many would-be investors who could otherwise be making substantially significant strides toward financial wellbeing.
As a passive investor in multi-family syndication, you need some money, but not as much as the myth tells us. Though most real estate syndication investment deals require a minimum investment of $50,000, there are opportunities for as little as $10,000. Many also require that the investor be accredited, but one can find numerous syndication investments where this is not required.
You Have More Money to Invest than You Think You Have
Many people are surprised to learn that they already have the money to be successful passive real estate investors.
They just don’t know what they don’t know. For example, retirement funds are an excellent source of investment capital that millions of people overlook. For many more ideas on finding your hidden sources of money, see the article, How to Get Started with Passive Real Estate Investing.
What is Multi-Family Real Estate?
Multi-family real estate is real property with more than one single-family unit.
In the broadest sense of the term, a duplex to a 1000 plus unit apartment complex is defined as multi-family real estate.
There is a distinction between two to four multi-family real estate and five or more unit complexes in terms of lending. Two to four multi-family can be financed with traditional conventional single-family home loans. If you want to be actively involved in property management and want to start out small, this is a viable strategy.
Complexes with five-plus units qualify for commercial financing. Complexes from five units to twenty provide entry-level opportunities for small investors who either want to go it alone or join in with a joint venture (JV). We don’t often see real estate syndication for complexes less than twenty-five units because the cost of forming real estate syndications requires a larger scale.
With smaller complexes, JVs are commonplace and do provide opportunities for passive investors. Small complexes can be fertile ground for non-accredited passive investors who have limited capital to partner with an active investor working in this sub-class.
Single-family vs. Multi-family Investing
A single-family home is a residence designed for one family unit. One single-family home owned by one individual and rented to another is a rental real estate investment. This rental property provides the owner with all of the investment perks that come with owning thousands of units.
Many real estate gurus specialize in educating investors on how to invest in single-family real estate. There are sound reasons for this, and probably the most common is the familiarity that many people already have from owning their own single-family home.
The familiarity makes it appear to be an easy step from owning your own home to owning a rental property.
If, however, you are a busy professional though familiar, this is not the investment avenue that will work to your best advantage. Though familiar, even one single-family rental property will take time. Add three, four, or five to the mix, and had you get the point, this segment of real estate investing is not passive. Furthermore, the time and energy demands of single-family investing limit scalability.
Like me, many of the investors I’ve interviewed on Creek Side Chats with Successful Real Estate Investor have been down the single-family investment route.
This isn’t the wrong route to take if you have the time. Nevertheless, we all agree that multi-family investing is preferable.
For investors looking for the most passive route into real estate investing, multi-family investing is the best option. This seems counterintuitive, but it is a truth, barriers to entry into multi-family investing are no more significant than single-family investing. With the proper knowledge and a connection to the right multi-family syndicator, entry into passive multi-family real estate investing is more straightforward than single-family real estate investing.
The general partner will have done the preliminary work before sharing the offer with the passive investor. They will have every step defined and laid out for the passive investor. All the moving parts have been secured, so the passive investor needs only to give the authorization to send the funds. Single-family investing is much more challenging for the active investor because the closing and management processes must be repeated endlessly with every single unit.
Pros and Cons of Multi-Family Investing
With any investment, some pros and cons must be considered. Through the years, I have invested in single-family, multi-family, and mobile home parks. Except for one development project, my strategy has tended towards buy-and-hold.
Even when ignorantly flying blind, I’ve made money on every investment except the one development project. As a result, I am comfortable with real estate investing. Not everyone has that same level of comfort.
For those who do not have the same comfort levels, the prospect of investing in real estate will raise concerns. There is no rush. Get educated and understand what multi-family real estate investing requires, what the rewards are, and the cons.
Schedule a Free call. We can talk about whatever you like, and there is no obligation to take any action. I’ll encourage you to do what feels right for you. You may decide that real estate investing is not for you. On the other hand, you may find that, indeed, real estate syndication investing in cash-flowing investment properties is the investment for you. You’ve nothing to lose by talking, so schedule a FREE call.
Review the chart below to consider some of the pros and cons.
Most profitable way to add a non-correlating asset to an investment portfolio
No direct control over the property
Share the equity with other members
Access to bigger deals for scalability of an investment portfolio
Relying on the sponsor to manage the property effectively
No tenants, toilets, trash, or other landlord management headaches
Non liquid asset – capital is usually tied up for several years
Managed by an experienced multifamily asset manager
Generally there are limited options for selling individual shares of the investment
All five IDEAL components: Income from rent, tax depreciation, equity, appreciation, and leverage
Private securities are not as easily traded as publicly traded securities
Why Invest in Multi-Family Syndication?
According to Forbes, multifamily syndication can be a powerful vehicle for wealth creation. More millionaires have made their fortunes through multi-family real estate investing than any other investment asset class. A 150-year study conducted by the Federal Reserve Bank of San Francisco found that real estate investment provided the best returns more consistently than any other investment class.
There are many ways to invest in real estate, but multi-family syndication is the most advantageous for passive investors. A good multi-family syndication deal provides cash flow, tax advantages, equity that grows with appreciation. The majority of the purchase price of multi-family rental property investment is financed through loan debt, which provides leverage. For example, 80% of the property leverage through a loan, the investment is only 20% of the value of the property, but the profits and tax write-offs are generated on 100% of the value.
These advantages together make multi-family syndication investing the IDEAL investment (Income, Depreciation, Equity, Appreciation, Leverage).
Things to Avoid While Investing in Multi-family real estate Investing?
When making your passive multi-unit real estate investment, avoid unscrupulous fly-by-night syndicators. Put your time and effort into finding a general partner who is moral, ethical, and trustworthy. Apartment syndication investing is non-liquid. Your investment will be tied up with the syndication for anywhere from three to five or more years. It is like a marriage. Know the general partner before you invest.
A competent syndicator can turn a lousy operation into a profit-generating real estate investment. An unscrupulous general partner will spin the best of investment properties into a nightmare.
How to Get Started with Syndicated Multi-family Real Estate Investing?
The best way to start passive investing in real estate syndication is to find a syndicator that you can trust. Begin by tuning in to real estate investing podcasts. Many of the podcasting hosts will be active real estate investors. Find a few that you enjoy and with whom you can identify. Check out their websites. Subscribe to their lists. Read their educational materials.
Once you’ve checked them out and if you like what you’ve found, make direct contact. Schedule a call or a teleconference. If a syndicator is in your area invite them for coffee. Share your goals. Ask questions.
With the relationship established, the syndicator will bring syndication deals to you that meet your investment goals and criteria. If they are a general partner on the deal, they’ll walk you through each step of the investment process.
Multifamily Syndication Structure
Most often, syndications are created as limited liability companies (LLC). These legal entities are structured to protect both the general partners (active investor) and the limited partners (passive investor). Real Estate syndications are governed by the Securities and Exchange Commission (SEC) under rule 506(c) or (b). For more detailed information on multifamily syndication structures, Operating Agreements, and Private Placement Memorandums that form the basis of LLCs, see the article, How to Get Started with Passive Real Estate Investing.
Fees in Multifamily Syndication
Fees vary from one syndication deal to another. The fees will be defined in the Operating Agreement. Common fees:
- Acquisition fees run from 1% to 5% and are paid to the general partner (GP) at closing.
- Generally, asset management fees are 3% paid to the GP throughout the syndication operation for managing the syndication.
- Refinance fees are paid to the GP for the work and effort to refinancing if refinancing occurs.
- Guaranty fee is generally around 2% and is paid to a loan guarantor at closing for their role in guaranteeing the financing.
- Organization fees range from 3% to 10% of the money raised. They are paid in advance to the GP for their organizational efforts.
- Disposition fees are paid to the GP when the property is sold, and the syndication ends.
How do Syndicated Real Estate Investments help Build Passive Income?
Investment in real estate syndication builds passive income in two ways. One is through cash flow generated by rental income. The other is from profits from the refinance or the sale of the property.
Cash flow and sales profit distributions will be defined in the Operating Agreement. The most straightforward form of distribution is a straight split. These are some common examples:
- 10% General Partner (GP), 90% Limited Partner (LP)
- 20% GP, 80% LP
- 30% GP, 70% LP
- 40% GP, 60% LP
The most common split is 30/70.
Many syndications are structured with a preferred return. A preferred return provides a safety net for the passive investor while building trust and holding the GP accountable for performance standards. The LP is guaranteed a certain percentage that must be met with a preferred return before the GP receives any return.
Preferred returns run in the range of 6% to 8%. The preferred return accrues, which means that if the GP did not produce the preferred return in year one, it must be made up in year two.
For example, A syndication produces only enough cash flow to pay 6% of an 8% preferred in year one. In year two, 8% preferred is owed plus the 2% accrued from the first year shortfall.
Frequently Asked Questions
How do you form a syndicate for purchasing multi-family real estate?
Passive investors do not need to concern themselves with the technicalities of forming syndications. In short, though, an LLC holds the syndication. For more information, see the article: How to Get Started with Passive Real Estate Investing.
How to Find Real Estate Deals for multi-family investing?
The way to find the best passive multi-family investing deals is to find a trusted active real estate syndicator. As a busy, professional you do not need to spend your valuable time searching for the best multi-family investment properties. Let the professionals do the job. As a passive investor, spend your time finding a trusted sponsor. See the article, Finding the Real Estate Investments that Will Accumulate Wealth.
How to find a partner for real estate deals?
Real estate investing is a team sport. There are numerous ways to find partners. As mentioned, tuning into real estate investment podcasts such as Creek Side Chats with Successful Real Estate Investors is an excellent place to start. Further information for finding the right partners can be found in the article, Here’s How You Build a Winning Real Estate Investing Team.
How to build a real estate multi-family acquisition model?
It is not advisable to build an acquisition model as there are plenty of models in use by successful real estate syndication investors. Using pre-built, tried-and-tested models will reduce the risk and reliably deliver the expected return on investment.
The best place to begin developing your model is with yourself. For further information and examples, see the article, The Best Wealth-Building Property Investments.
What does a day look like as a multi-family real estate investor?
A day in the life of a passive multi-family real estate investor looks like whatever the investor wants. Passive investing in multi-family syndication allows busy professionals to invest and at the same time follow their calling without interruption. Multi-unit rental property syndication provides the busy professional the IDEAL investment that delivers time-freedom to live the life style of your choosing.
How do multi-family homes make money?
Multi-family homes make money from tenants that pay rent to live in the apartment. That is a simple explanation. Though rent is the revenue source, many factors determine the profitability of a real estate syndication project.
A significant factor is the purchase price. As experienced syndication investors will tell you. You make your money when your purchase the property. You collect your profits when you sell.
Buying and selling appropriately are significant factors, but to make money investing in multi-family homes, the property must also be managed effectively. The property management team can make a bad deal profitable. An ineffective property manager can make a good deal go bad very quickly.
Buy, manage, and sell right, and you’ll make money investing in multi-family homes.
Is multi-family real estate a good investment?
Multi-family real estate investing is one of the best wealth-building investments. Multi-family investing weather the recession storms of 2007 and 2008 better than any other investment class.
Multi-family investing is responsible for making more millionaires than any other investment option. Read the stories of ordinary people who have made extraordinary lives through real estate syndication investing in the article, Is Real Estate Syndication Suitable for a Passive Investor?
How do you value multi-family real estate?
Multi-family real estate is classified as commercial real estate. The value of the commercial real estate is determined by the revenue the property generates. There are several variables that an investor considers, but the primary starting factor is the Capitalization Rate divided by Net Operating Income.
Cap Rate/Net operating Income = Current Market Value
Can I buy a multi-family property with no money?
It takes money to purchase multi-family property, but it doesn’t have to be your money.
There are four avenues in which to break into multi-family investing.
One is to bring the properties to the syndication deal. This is a very active pursuit. It takes connections, lots of time, and persistence to find sellers interested in selling their apartment complex.
A second option is to bring organizational development and management expertise. With this skill set, you can become the GP that puts the syndication together.
The third avenue is to bring investors. This requires relationship skills and a database full of passive investors ready to invest passively in real estate multi-family investments.
The first three require lots of time, effort, and energy and are not ideal for the passive investor.
The fourth avenue is to bring your own money to the syndication deal and is the best option for the passive investor.
Syndicated Multi-family Real Estate Investing is a tried-and-tested investment vehicle. Multi-family Real Estate was one of the best performing real estate sectors through the 2007/2010 recession. This sector consistently performs well in good times and bad.
Multi-family properties provide cash flow for steady passive income and provide above-average returns on investments.
For the passive investor, apartment investing provides the IDEAL investment.
In the world of private placements trust is a huge concern when considering which syndicator to invest with. Do not invest until you’ve established a trusting relationship. Schedule a FREE – NO OBLICATION – NO STRINGS ATTACHED phone call to begin the process of building a relationship built on trust. Or email me with your questions and thoughts at allen@SteedTalker.com. I’ll help you sort it all out, and you’ll soon be on your way to prosperous investing to live more abundantly in all areas of life.
About the Author — Dr. Allen Lomax
With careers in academia, podcasting, and real estate investing, Dr. Allen Lomax inspires us to break open our minds’ secrets to discover individual and universal well-being. Through passive real estate investments, he helps enlightened investors create time freedom to live abundantly in all life’s areas.