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Introduction To Multifamily Syndication

Updated: Apr 28, 2023

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 (which means there are areas for improvement that can lead to the appreciation of the asset when improved, also called forced appreciation), 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).

The value of multifamily apartments that have five or more units is determined by the local market's cap rate, which is the percentage used to compare different real estate investments, and the net operating income (NOI) that the property generates. NOI refers to the revenue after operating expenses, but does not include debt service, only operating expenses. To calculate the value of a property, you need to divide the NOI by the cap rate. For instance, if a property generates an NOI of $1,000,000 a year and the cap rate in the area where it is located is 5%, then the property's value is $20,000,000. Improving a property and its daily operations can lead to an increase in rent and other sources of income, such as parking fees, pet fees, laundry, and utilities. This can also result in a decrease in expenses, which can increase the NOI of the property, and ultimately increase its value. For example, if you were able to increase the NOI by $300,000 in the above scenario ($1,300,000 divided by the area's cap rate of 5%), then the new property value would be $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, sometimes after the property is stabilized) 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.

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