Real estate syndication is a partnership between several investors. They combine their skills, resources, and capital to purchase the co-ownership of an undervalued property they otherwise couldn’t afford on their own with no risk or involvement in management; this allows them all profit if it increases significantly in value! There’s three major components in any real estate syndication – the general partnership, the limited partnership, and the investment opportunity itself.
There are usually two types of partners in syndication: the general partners and limited partners.
The general partners find, research, qualify and close on real estate deals themselves using their own capital, and directly execute a business plan to realize returns on their investments. They develop extensive networks of team members that are critical to a successful multifamily real estate investment. Typically, they are investing with their own money as well as carefully managing the invested capital of several passive investors. ‘General partner’ is synonymous with ‘apartment syndicator’ for the purpose of this article.
The limited partners entrust their capital to a syndicate that is managed by a General Partner or Sponsor who handles all the work of executing an investment. They collect returns on their investment over and above what they initially contributed. Most passive investors do not get involved at all in the decision-making process during an investment, but general partners will occasionally solicit input from a team’s investors about specific decisions that need to be made. ‘Limited partner’ is synonymous with ‘passive investor’ for the purpose of this article.
The General Partner
There is an immense amount of work that goes into syndicating a multifamily deal. A lot of calories are spent before even getting to the closing table.
For every property that’s under contract, the syndicator has looked at 100+ properties. In today’s competitive, low-interest-rate environment, the syndicator is looking at closer to 200 properties before closing on one.
Finding deals is a numbers game. A syndicator cannot afford to take risks or overextend themselves. The syndicator should ensure that investors will receive an excellent return for the provided risk of the multifamily syndication.
After finding a deal that provides returns for investors, the syndicator is responsible for sourcing equity, arranging the financing, and streamlining the transaction process until the deal closes.
After closing on the deal, syndicators will also be required to handle all the back-office operations relating to the multifamily syndication, including interfacing with the property management team often to guarantee the project is on track with their investment strategy. Generally speaking, this resembles increasing income, cash flow, and profitability for all investors involved.
The Limited Partner
The passive investor’s role is to bring equity. Once the multifamily property has been acquired, the passive investors will regularly receive passive income (from the property’s ongoing cash flow) and receive a return upon the sale of the asset.
The Structure
The sky’s the limit when it comes to terms of a syndication agreement. You can have as many terms, rates, splits, as you want in a syndication’s private partnership memorandum(PPM). To keep things simple, the general and limited partners want to align on incentives, splits, and structures. There should be an incentive to close, manage, and sell deals in a way that the investor’s returns are maximized.
You can seek guidance from an experienced real estate attorney who will help you put together a contract that protects everyone involved, but make sure they have plenty of experience with these types of deals!
In Conclusion
As with all investments, ensure you are doing your own due diligence on the team and the deal. Entrusting capital conveys an immense amount of trust, and no general partner should take that responsibility lightly.
General partnerships are registering the purchases with the Securities Exchange Commission(SEC), and there are notable restrictions and regulations in these types of arrangements. Anyone sponsoring and participating in these deals should be knowledgeable and comfortable with the law. Work with your attorney.
Syndications are a great way to invest in multifamily real estate to provide cash flow, equity appreciation, and tax benefits.
Check out this article to evaluate real estate investment opportunities.