Multifamily real estate syndications are one of the high-potential choices available to investors wanting to grow their net worth with a diversified portfolio. It is always wise to not put all your eggs in one basket. Putting all your capital in a single type of property is not worth it. Instead diversifying it protects your investment when there is a slowdown in the market. Investment in a multifamily real estate syndication deal lets you keep your capital safe and diversified in various ways. After all, it is not volatile like stocks, crypto, forex, or any such instruments and your investment is backed by a physical asset that is in fact a basic human need i.e. housing.
Anyone, wanting to grow and have strong hold of real estate market and at the same time are not wanting to actively participate in responsibilities as an investor, needs to understand the process and structure of multifamily real estate syndications. Before investing in any multifamily syndication deal it is imperative that the investor is able to find a reliable source to syndicate. Getting to know the structure will impart all the information a beginner investor needs to have to pick a reliable deal.
What is Multifamily Syndication?
Multifamily syndication investing is a process by which multiple investors pool their money together to purchase a property. This type of investment allows for more people to invest collectively. In order to form a multifamily syndication, there must be an investment manager who brings the investors together and manages the deal as well as the property in overall.
The structure of multifamily syndication investing can be broken down into three main parts: the manager, the investors, and the property. The defined multifamily syndication structure dictates the entire process of how manager, who is a sponsor, manages to have a number of investors, who are limited partners in the syndication, to invest in the multifamily real estate deal. The structure defines the process of distributing the process as well, which is defined while the investor is entering the deal.
The Sponsor
He is the person who works towards locating the right deal on the basis of pre-set goals of the syndication. After finding the syndication deal, his motive is to find investors to facilitate transaction. Along with it comes setting the norms of including types of investors, structure of the syndication, which includes disbursal of profits amongst limited partners and sponsors (general partners and managers).
Responsibility and profits for sponsors
Once the limited partners join in and multifamily property has been acquired, sponsors are responsible for managing the property. This involves lots of work, knowledge and skillsets on part of sponsors and managers. Limited partners have limited responsibility i.e., to contribute for the equity. Other than this, all the operations are executed by managers. With this comes the opportunity of higher returns on the investment for sponsors. Some times there is equal ownership of property between sponsors and limited partners, but at times the ownership can be on higher side for sponsors as compared to limited partners, owing to their active participation in deal management.
There can be two ways sponsors or general partners earn from the syndication. They can either charge acquisition fee as they are responsible for finding the deal and working on it till the end, or they can charge the asset management fee. Acquisition fee can range from 1 to 5% of the total investment on the syndication deal. Asset management fee can be standard rate of 2% of income or it can be fixed as a cost per unit.
If the sponsors have higher contribution ratio in equity, they have equivalent percent ownership in profits as well.
The Investors
Investors can be either accredited or non-accredited. There are a few regulations by SEC that fulfil the requirements of getting the status of an accredited investor. These requirements are pertaining to one’s annual income, net worth, investing experience as well as the reasonable assurance of having steady income equal to mentioned annual income, as an individual or collectively with the spouse. The deals specifically for accredited investors define 506(C) in documents.
Multifamily syndication deals define the criteria of accredited and non-accredited investors. Some of the deals allow non-accredited members without limit while some put the limit. The limit is also defined in terms of number of investors besides accredited and non-accredited status. The higher is the limit the lower is the risk, but it decreases the financial return as well for each investor. At the same time, there are syndications where there is no limit put to the number of investors. There are those syndications as well that are specifically for novices with initial requirement of investment ranging around $500 to $1000.
Disbursal of profits among investors and general partners
The norms for disbursal of profits are depending on the type of syndication. These norms are clearly defined for investors before making the investment. This enables investors to have clarity about the returns expected. There are no standard norms for disbursal for syndications. Rules can vary from deal to deal depending on type of real estate, involvement of two types of investors i.e., accredited, non-accredited in various ways, number or investors, goals of the deal, so on and so forth.
Syndication structures can be categorized as:
Straight Splits-
Straight split structure allows investors to take maximum returns. It can be designed with either 70/30, 60/40 or 80/20 ratio or even 90/10 ratio, giving maximum benefits to investors. That is, percentage ranging from 60 to 90 of the profit, as the deal defines, is distributed to investors and the remaining lower percent is distributed to sponsor/s or manager/s.
Preferred Returns-
Preferred Returns Structure is all about preference to investors over general partners or sponsors. A fixed percentage of profit is committed to passive investors, which is to be paid before making any disbursal to general partners or sponsors. In case a higher percentage is paid in the second year as compared to the first, the difference percentage is also to be paid in the second year.
Waterfall Structure-
Waterfall syndication structure brings in the principle of cause and effect. As and when a part of criteria is fulfilled the syndication can be directed towards fulfilment of other. The structure can have as many layers of cause and effect, as agreed by syndicators and investors.
Also read: Multifamily Frequently Asked Questions (FAQs) Answered!
What are the benefits of multifamily syndication for the Limited Partner?
Once you determine to grow your portfolio and to invest in multifamily real estate syndications it is important that you also understand your financial priorities and goals. Many a times investors are aware about their priorities but understand the preferences when they get to know the advantages and disadvantages of investing in syndication deals on passive mode. Investors need to understand how advantages are aligning with their financial goals and priorities.
So here are the advantages of investing in multifamily syndication deals:
- It enables investors to invest their capital in larger property deals. It is not always possible for an investor to dole out huge amount of capital for a single real estate deal of larger size. Contributing as a limited partner limits the amount of capital as well as the risk.
- It enables investor to diversify his investor portfolio. An investor can invest in a number of real estate syndication deals and diversify the risk as well as the rate of returns on his investment due to the element of limited capital investment.
- Investors get the tax advantage. Rental income from multifamily syndication properties is taxable at a significantly lower rate as compared to other investment options.
- Investors are at the benefit as sponsors or managers are bearing high setup costs. Every multifamily syndication deal needs lot of initial set up, while sponsors are responsible to do that, limited partners can enjoy all the benefits without experiencing the initial setup challenges.
- Investors are leveraging the sponsors’ skillsets and knowledge to earn passive income from huge syndications. Whether an accredited or non-accredited, a pro or a beginner, an investor can benefit by earning the passive income, which does not require his own skillset but the experience and knowledge of the sponsor. This calls for investors’ due diligence before picking the sponsor and the syndication deal as they will not be having any control as a passive participant.
- Investors are in no-responsibility zone except than investing limited capital amount. This is the most preferred benefit and the reason why many investors like to put capital amount in multifamily syndications.
- Investors utilize wise hedging option against inflation. The appreciation in multifamily real estate surpasses the inflation rate that lets them hedge against inflation.
Considering advantages and disadvantages of multifamily syndication investments, their financial priorities, preferences and goals, investors can determine if multifamily syndication is the right option for them.
Multifamily real estate investment has been gaining popularity for quite a long time now. Considering the current profession and full-time engagement in various other projects investors prefer to go for options that need their minimal participation and still provide competitive returns on their investments. Multifamily real estate investment is known for not just providing freedom from responsibility but continuous cash flow as well. However, investors can make it stress-free passive income stream only if they choose the right syndicator and are informed about their own needs in growing their financial portfolio.
Why invest with Fair Winds Capital?
It is not just the structure one needs to understand but their overall approach as a limited partner regarding their participation in the syndication deal. Fair Winds Capital provides its investors and potential investors the opportunity to understand the specifications of the deal even before signing up as the limited liability partner. The transparency in our system lets investors gauge the earning potential for them and systemize their investment decisions appropriately.