Introduction To Multifamily Syndication

Investing in Real Estate has been considered a relatively safe investment as Real Property usually goes up (lately it has appreciated like no other time in history!), and if a recession hits the economy you will still have a tangible asset that you can hold until the recession is over (usually 1-3 years) and then continue to benefit from the returns or sell at a profit.

There are multiple ways to passively invest and Real Estate Syndication in Multifamily Apartments is a great way to do it. Syndication simply means pooling money together from investors (called limited partners) and sponsors (General Partners) to buy a large apartment complex. Usually the equity is split 70-30 (70% goes to the Limited Partners and 30% goes to the General Partners).

The benefits of this structure is that by pulling large amounts of capital, a larger project can be acquired which allows for economies of scale (savings in costs by creating efficiencies led by larger production) and by achieving these efficiencies the project can offer larger returns (rents and appreciation) as compared to smaller projects.

Multifamily apartments can be purchased as a value add (the physical property or its day to day operations have areas for improvement which can lead to force the appreciation of the asset when improved), turn key (project already generating acceptable cash flow), or a hybrid between the two. The life of these type of projects is usually 5-6 years (asset is sold at this time) and sometimes there is a refinance in the middle of the project (2-3 years).

Multifamily apartments 5 units or more are valued based on the local market's cap rate (valuation percentage used to compare different Real Estate investments), and the net operating income that the property is getting (revenue after operating expenses, this does not account for the debt service, only operating expenses). The formula to get the value of a property is dividing the NOI (net operating income) by the cap rate. For example if a property has an NOI of $1,000,000 a year and the cap rate of the area where it is located is 5%, then this particular property has a value if $20,000,000.

By improving a property and its daily operations, the rent and other income (parking, pet fee, laundry, utilities) can be increased, and the expenses may be lowered. This will increase the NOI of the property which in turn will increase its value. For example if you were able to increase the NOI by 300,000 on the example above, then $1,300,000 divided by the area's cap rate of 5%, the new property value is $26,000,000.

Investing passively in a Real Estate Multifamily Syndication allows investors to get the monthly cash flow from the rents (typically paid every 3 months) and also get the appreciation at the sale (paid at the end with the return of capital initially invested). There are also significant tax benefits that I will cover in future blog posts which allow you to get bonus depreciation from multifamily investments.

The cons on investing in syndications is the length of the project (your capital is invested until the project is refinanced and sold), the day to day operating decisions will be made by the General Partners, and there are risks involved as in any other investment.

If you would like to participate in a truly passive investment, all you have to do is choose the project, invest, and enjoy the checks paid to you until the project is sold at a profit. While this business model is not for everyone, if you are able to invest time to research the right projects and sponsors (General Partners), you will find this experience to be extraordinary.