Growing your money through multifamily real estate syndication can be quite beneficial.
At some point, many investors who invest in single-family homes move on to multifamily properties eventually. Although a logical next step, buying an apartment building requires much more money than buying a townhouse.
A common method of achieving this is by pooling resources for a single deal. This is known as multifamily real estate syndication. Hence, this article will explain how to evaluate good multifamily syndication opportunities.
Table of Contents
It is vital to define your investment objectives before investing in any deal. In general, you will need to ask yourself a number of questions in order to make this decision. While there are no right answers to these questions, asking them will help you decide if multifamily syndication fits into your broader financial plan:
In such a case, investing in a real estate syndication might be a good idea. Investments in real estate are usually illiquid, meaning you cannot convert equity into cash quickly. Nevertheless, you may not be concerned about the lack of liquidity if you plan to grow your wealth over a longer period of time.
It's important to closely examine syndication's projected cash flows if you intend to consider it as a fixed-income investment. To put it another way, can the cash-on-cash returns provide you with enough reliable distributions to make it worthwhile to tie up your cash for a long time?
In most cases, investors in syndication deals receive passive income and losses. Because depreciation is a cashless expense, a carefully planned syndication will generate positive cash flow while creating taxable losses. It can be beneficial to use these deals if you have other investments that you’d like to offset with syndication losses.
It has been noted above that real estate investments do not offer liquidity. Before committing money to syndication, determine whether or not you will need the funds soon. If so, you may want to avoid investing in syndications or look for those with a shorter time horizon.
As soon as you've defined your own goals, you'll want to assess the sponsor personally. This role’s performance is crucial to the success of a deal, which is why evaluating sponsors is a crucial part of due diligence.
Are there any similar multifamily deals the sponsor has done in the past? Thus, you should ask whether the sponsor has experience analyzing properties, overseeing general contractors, and driving rent increases. A sponsor will likely perform poorly if they lack expertise.
Apart from deal experience, a sponsor should have market awareness.
In what location is this apartment building located? How much experience does the sponsor have in construction/renovation and leasing there? Are they familiar with local cap rate dynamics and valuation concerns?
The prices, supply, and demand of each area are influenced by various factors. Municipal zoning requirements and demographics differ by location. Most successful syndications involve a deal market professional as the sponsor.
Last but not least, there is no denying the importance of a sponsor's character. Taking on a deal involves trusting these individuals with a significant amount of money. Can you rely on them?
There should be major red flags raised if the potential sponsor has a criminal record, a bankruptcy history, or previous failed deals.
Last but not least, you need to analyze the multifamily deal on its own. Here are some things you need to look for:
The majority of underwriting templates rely on spreadsheets to convert inputs, e.g., rents, expenses, repairs, etc.—into outputs, e.g., valuations, cash flows, ROI, etc. There is a risk of a minor technical error in one of these models causing dramatic output differences, potentially making an otherwise non-viable deal look good.
After confirming the technical accuracy of a deal's underwriting, you should closely look at the underlying assumptions. Can the projected rents and operating expenses be justified, given the property type and location? Does the assumption of interest rates reflect the current market situation?
As with any analysis, it's better to make conservative assumptions than aggressive—and potentially unrealistic—ones.
An operating agreement specifies the terms of a multifamily syndication structure. In this regard, you should consult an expert to ensure that these documents provide you with certain protections.
Can you clearly see that your minimum required return takes priority over the syndicator's returns? When a deal collapses, how are liquidation proceeds distributed to deal members? Overall, this document should provide investors with significant protection.
Multifamily syndication is an investment strategy that enables investors to aggregate their funds and acquire multifamily properties like apartment complexes, townhomes, and condominiums. This investment opportunity offers several benefits to investors, including the potential for passive income, tax advantages, and portfolio diversification.
One of the key advantages of multifamily syndication is the ability to generate regular cash flow through rental income. Additionally, investors can take advantage of tax benefits such as depreciation deductions to reduce their tax liability. By investing in multifamily properties, investors can also diversify their portfolios and reduce their overall investment risk.
However, it is important for investors to carefully evaluate potential syndication opportunities and work with experienced syndicators who have a track record of success in the industry. By doing their due diligence and working with knowledgeable professionals, investors can maximize their potential returns and minimize their risk in multifamily syndication opportunities.
Investing in multifamily units may be an excellent way to build wealth and earn passive income over time. The process of investing in multifamily properties can be approached in a number of different ways. However, syndicating a property is still the most cost-effective and passive method.
For assistance in getting involved with multifamily real estate syndication, schedule a free consultation with our team today. From marketing to closing, we provide an all-inclusive service to meet your needs.
You can reach our team by emailing firstname.lastname@example.org or calling us at 949-881-7128 at Saint Investment Group today!
Multiple investors combine their resources to acquire a multifamily property such as an apartment complex or condominium complex through multifamily real estate syndication. In exchange for their investment, investors obtain an ownership stake in the property from the main syndicator.
The benefits of Multifamily real estate syndication include potential cash flow from rental income, tax benefits such as depreciation deductions, the ability to diversify investment portfolios, and the potential for long-term appreciation in the value of the property.
The risks associated with Multifamily real estate syndication include the potential for vacancies or rent defaults, fluctuations in the real estate market, unexpected expenses such as repairs or maintenance, and the potential for changes in tax laws or regulations that could impact the profitability of the investment.
Investors should evaluate Multifamily real estate syndication opportunities by reviewing the syndicator's track record and experience, the location and condition of the property, the terms and structure of the investment, and the potential risks and returns of the opportunity.
Multifamily real estate syndication investments typically have a holding period of 3-7 years, although the exact length of the investment can vary depending on the specific property and investment opportunity.
A master in Investment, Marketing, and Capital Raising.
Nic has honed his focus on the Real Estate and debt markets with Saint Investment Group and pursues large-scale Distressed Asset purchases with his partners and syndications.