Multifamily Syndication Investing: When examining the different types of investment options available, many potential investors often consider multifamily real estate. In this category of investment, there is the syndication deal. Whether you choose this kind of investment to be your main focus or one of many paths to diversify your portfolio, there are important things to consider.
Syndication deals often involve general partners, or a syndication group, which is a group of passive investors, or limited partners that help you purchase a property or asset that is more expensive than you might be able to afford on your own. Every group plays its own part in the deal.
For instance, a deal surrounding a multifamily apartment complex will leave the LPs investing in the asset but not doing any of the management or operational work for it, and the GPs will handle not just the operation but the search for deals in the first place as well as negotiations when closing the deal.
General partners usually are incentivized to be a part of it by sharing management fees or profits. Limited partners are incentivized by the chance to own tangible assets and strengthen their portfolios.
Without considering these things, you may run into roadblocks or realize too late that perhaps multifamily real estate investing was not the right choice for you after all.
1. What are your goals when investing, and do they line up with the interests of the deal sponsor?
A lot of people who want to invest hope to support their retirement or give themselves income before retirement age. It’s important to set a retirement goal and think about how much you might need to comfortably live both in retirement and in the present.
When setting this goal, think about the number of years you have left before retirement, and if you want more cash flow upfront, a higher payout after exiting the deal, or some combination of the two.
Before making any such choices, get familiar with the kind of investment you are thinking about. Research by reading books and listening to podcasts on passive investing to get a better idea about the risks that come with this kind of investment.
When you pick a sponsor, give them a call and ask them questions to get to know any potential partners. After you have decided on one, you can usually get this process started by submitting information on their website.
2. Vet the syndication team or the deal sponsor.
When you are playing a part in a syndicated deal, you will likely need to establish a good relationship to follow all of the guidelines set forth by the SEC before any offer can be given by the sponsor group.
This means that you will want to ensure you do thorough research on the team or individual you will be working alongside to make sure they are trustworthy. If you are investing in bigger multifamily syndication deals, you can expect to be dealing with a whole team to vet instead of one person.
Such a team includes but may not be limited to the following roles:
- Sponsor. The sponsor has enough liquidity and/or net worth to completely cover the loan.
- Acquisitions manager. A person in this role has experience when it comes to underwriting deals and also has plenty of experience with acquisitions that are as big as or bigger than the one you are thinking about investing in.
- Asset manager. This person has plenty of experience when it comes to managing property, as well as the contractors that you may need for renovating. These individuals will also usually be available to step in if their help is needed during management changes or the acquisition process.
- Investor Relations. This is usually the director of investor relations. They are a team member that talks to the investors throughout the whole process and will usually go through a group of virtual assistants or an office manager who will then take care of data entry.
3. Determine when you need your capital back.
In a multifamily syndication deal, you’ll usually invest for a minimum of five years, though in some cases your exit could happen faster. It is good to remember that it is an illiquid investment, which is different from the stock market.
There are other investments in real estate such as REITs and notes that you might explore, and each of them has its benefits and drawbacks. Investing in a crowdfunding site is also an option and could diversify your portfolio but might not produce the high returns you want.
4. Think about diversification.
You have the potential to invest in different deals but bear in mind that the minimum entry point will usually run about $50,000. Furthermore, if accreditation is necessary for a deal, you may be required to invest up to $100,000.
Investing in multiple deals lets you invest in several asset classes, such as Classes A, B, and C mobile home parks, multifamily apartments, and commercial retail and storage facilities. You even have the chance to invest in funds that will invest in such assets instead of directly investing with a sponsor group.
5. Use your knowledge to your advantage.
Once you are ready to invest in a syndication deal, you will begin a process that starts with a PPM, or the private placement memorandum. This is a document that details the deal as well as all of the returns and risks that are associated with the investment.
If you have decided to diversify your portfolio through investing, try to have fun with the process and go along for the ride while learning as much as you can. When researching, remember that knowledge and understanding can take you a long way in making the best decisions for yourself now and in the future.
Approaching multifamily real estate deals armed with as much preparation and knowledge as possible is sure to help achieve the best results and leave you satisfied with your decision.