Multifamily Syndication

Multifamily Syndication

Multifamily Syndication is how real estate investors can purchase huge multifamily deals, with little or none of their own money. If you can afford to buy a $3 million apartment complex, you may still want to read this article. Multifamily syndication can help even a beginner investor to own multifamily properties.

Put simply, multifamily syndication is a group investment. It allows sponsors to invest in properties that they otherwise would not be able to afford. The sponsor is responsible for researching and evaluating the property and raising the funds to purchase the property. Finding multiple investors to help fund a deal is essential in multifamily syndication. These syndicators share the risks and returns on the Multifamily Investment.

The roles in multifamily syndication are important ones–General Partners (GPs) structure and manage the deal. This is usually several people who focus on different parts of the syndication—such as: finding deals, underwriting, networking/relationships with investors, financing research, negotiation, and due diligence. Limited Partners are passive investors who only invest money to receive equity from the deal.

Usually, multifamily syndications are legally formed as LLCs (Limited Liability Companies) or LPs (Limited Partnerships). LLC or LP agreement terms for the syndication include rights to distributions, GP’s rights for fees for managing the deal, and voting rights for both sponsors and investors.

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Money for Multifamily Syndications

The two types of debt for multifamily syndications are recourse loans and non-recourse loans. The difference between these two loans is who is responsible in the event of foreclosure. The most popular choice is the non-recourse loan—which ensures that the sponsors are personally responsible for the amount borrowed. Although a much better choice for investors, non-recourse loans can come with higher interest rates and are only given to given to individuals with strong credit scores and financial history.

Along with debt, there are two types of financing that are generally used for apartment syndication deals: bridge loans or permanent agency loans. Joe Fairless explains that bridge loans are an interest-only short-term loan that is used until a borrower (the GPs) can secure long-term financing. These are usually non-recourse and close quickly but can be risky if the syndicator cannot secure a refinance when the end of the loan term arrives.

Permanent Agency loans are from Fannie Mae or Freddie Mac and can be longer-term. Compared to bridge loans, terms are 5, 7, or 10 years. At the end of the terms, the sponsor will have to choose to pay off the remaining balance, refinance, or sell. These are also generally non-recourse, but renovation costs cannot be included in the loan. Additionally, because these loans are government-backed, a property may not qualify if it is physically and operationally distressed.

Multifamily Syndication Benefits

Lowers Risk [but does not remove it]

Because you’re a passive investor, and are pooling money with other investors, you benefit by only being liable for losses that are equivalent to what you invested. Contributing to syndication means that you don’t have to bear the load of all the losses! However, you may lose some or all of your investment. The investment being backed by an asset does not protect your investment.

Occupancy

The larger the property, the less vacancy will take its toll on your pockets. Larger multifamily properties with multiple units have lower vacancy ratios and one move out has less negative affect on the NOI. Making it possible to still cash-flow even there are several vacant units.

Time

Multifamily syndication can be much less time-consuming than other investments. If you’re a limited partner. The GP or general partner has to do all of the legal arrangements which adds to their tasks but is part of the process for raising the necessary money to make it happen.

Property Management

On larger properties, a full-time property management company can be acquired. This takes the pressure and responsibility off you to manage many tenants. (Known as the economies of scale) They will have familiarity with the area, the tenancy, and the suppliers for all of the building and tenant on-going needs. (Generally, over 70 units but as low as 40 units)

The Details

Get to know the sponsor and the details of the syndication. Don’t just throw your money at anyone. Research who you’re investing with and get referrals from fellow (trusted) investors.

For the partner agreement, make sure you read through everything. Comb through it and have an attorney read over it as well. You don’t want to be caught up in a deal that is filled with caveats and snares you into future financial obligations you weren’t expected or cannot afford. Consulting an attorney professional will help and is highly recommended.

By having the ability to invest passively, multifamily syndication can be a great way to build your real estate portfolio. It may also help you build your confidence in real estate investing seeing how things work from the inside. *always run everything by you attorney.

If you’re interested in getting more information about investing passively just head over to www.MultifamilyRealEstate.com and complete the form on the front page of the website. The publisher with forward your information to registered sponsors who are working on deals who will then contact you back.