By now, the term multi-family real estate investment is not new; in investment circles, it is a collective term as it is a proven wealth creation vehicle. Foremost billionaires and many high-ranking individuals made a bulk of their fortune through investment in multi-family properties. Although this was not possible without these concerned individuals having top-notch knowledge about what they were delving into. They continuously do research and update themselves coupled with the association with some of the best minds in the real estate mind. Knowledge is indispensable to crucial decisions and that is what this medium is trying to achieve by continually providing you with tips on how to successfully invest in multi-family real estate. With this topic; multi-family syndication. Syndication on its own is said to mean the pooling of resources together to achieve a unifying objective. The pooling together of resources can be in the form of time, money, expertise, etc. it is done as mentioned earlier to achieve an objective that is otherwise impossible to achieve alone or might take time. Then in plain terms, multi-family or apartment syndication is said to refer to the coming together of multiple parties to jointly acquire and own a venture to make money together. Real estate experts often see apartment syndication as a faster way of getting returns on investments that might otherwise take time to profit on.
Multi-family syndication is often seen as a way of raising money from passive investors and buying high valued apartment buildings. Over time, some creative ideas have been fashioned out as the ideal ways for you to get your foot in the door with multi-family apartment syndication. You do not want to be a newbie just walking around in uncharted territory. Below is a list of ways to start in apartment syndication.
To correctly state, multi-family syndication is a form of a group investment. In this type of real estate arrangement, individuals known as syndicators are allowed to share all the profits and losses regarding the investment. For multi-family syndication, here is how it works; the key players in the partnership are referred to as general partners and limited partners. The limited partners are also referred to as investors. General partners are mainly responsible for putting together the whole arrangement. They are like the brains behind the entire set-up. They bring passive investors to the negotiating table regarding the venture to be embarked upon. General partners typically refer to a group of registered syndicators who are specialized in the different aspects of multi-family syndication. They contribute to finding the right deals, underwriting it, they secure finance, and they gather and form relationships with investors for lasting profitable dealings.
While the limited partners, on the other hand, are passive investors, as mentioned earlier. They invest money and expect returns that are equity in the deal. For the money invested, they are entitled to cash flow from the profits the investment generates. They also receive either monthly or quarterly reports on the performance of the asset. Not to forget, there is also a vital part of the syndication arrangement that has not been mentioned. This is the property management group. They help to manage the day to day operations of the property along with any other employed onsite staff, and they are also responsible for the execution of the syndicator’s business plan. The role of the property management group mainly becomes active when a contract is in place already. During the time which they go in and help the general partner with the due diligence process. They evaluate the property structure and any aligning issues or environmental matters that have not been previously considered. Other factors crucial to a successful syndication arrangement include:
What is any viable investment opportunity without a market? The very first step in a long-lasting value-adding apartment syndication strategy is to choose an active market. Optimum markets are mostly those with high growth metropolitan statistical areas with more than an average population coupled with job growth and employer diversification. Another vital factor to consider in terms of market structure is the rate at which the market rent is growing. Without any renovation or value-added service to the existing structure.
After identifying a stable market, another thing to consider is the ideal property. The most common practice is to find stable properties with conservative underwriting that will also bring about the much-needed profits. There is a need for the property to be stabilized as a property that is already performing, but not up to its full potential provides only little risk. The identified property should add value as mentioned earlier, as the gold spot is to find a property that will be strong enough to withstand renovations and rebranding that will improve its value. The property should not also be too old to cause money loss due to failing systems. There is also a need for due diligence to be performed on the property, random checks coupled with a thorough financial audit to discover any undisclosed liability.
After the property to be invested in has been locked down, the partners together with the property management group, start the implementation of the value-adding plan. This is simply a means of increasing the net operating income. Renovations, both interior and exterior and other forms of rebranding are done to increase the value of the overall structure. Other assured ways of increasing the net operating income are to find ways of improving revenue-generating facilities in the acquired structure, such as the laundry area or by tightening operational leakages.
This follows after a long-lasting, and any adverse policy tight business plan has been implemented. It is now decided that it is time to either hold or exit. This crucial step is dependent on the principal investor’s strategy. How long the business plan holds depends entirely on market conditions and its stability.
We saved the best for last; money makes the world go around, and it is crucial to the success of any business plan or future projections made. In an excellent multi-family apartment syndication deal, everyone wins; both the buyer, the seller, the investors, the property management, and the real estate broker. The sponsor’s share of the profit is the split from the limited partners, and a second form of the revenue for the sponsor comes in two forms; the acquisition fee and the asset management fee. Limited partners who are the passive investors and significant stakeholders in the business arrangement receive a large percentage of the profits from the operations and sale of the asset depending on the proportion of their percentage ownership. At this point, it is advisable to note that the splitting of the profit is not uniform, and they differ from structure to structure and will also vary by sponsor. The property management company for the random checks and the daily run of the business earns their share of the profit in two forms; from the construction management and the property management fee.
Acting as a passive investor and plugging funds into a real estate venture involving a syndicator is one with fewer risks. Compared to single-family housing units, which are like investing all your money in only one pocket. In that instance, although you may own 100% of the deal with regards to profit, you are also exposed 100% to the risks surrounding the investment; and this is not the deal with multi-family syndication arrangement, where you also get to share the risks with other investors.
One primary reason for investor’s preference for multi-family concerns over single-family housing units is the value it creates over time. Unlike single-family housing units that solely rely on market fluctuations and neighboring home prices, as an investor in a multi-family syndication venture, the syndicator has ultimate control over the value of the property and from time to time only finds ways to increase the property’s net operating income. The appreciation of capital can be achieved slowly and gradually over time.
Multi-family investments, according to research, have an average of 93% occupancy. The larger the property, the insignificant few tenants leaving is. However, this is not the case in a single-family unit as when your tenant leaves, you are left vacant and have to cover expenses from your pocket which can be disastrous in the long run.
Passively investing in a business set up is usually less time consuming than active investments. Investing in a single-family unit is deemed time-consuming as you need to find the real deal, handle the loan, and carry out the due diligence tasks yourself. With a syndication deal, you have a qualified person handling all that for you. Syndicators are responsible for maintaining the property and profits also come to you through a syndicator.
The handling of single-family units can be demanding. Operating expenses required are on a larger scale especially if the single housing concerns are scattered all across. Syndication provides the property management group necessary to handle all the changing dynamics involved in managing a multi-family housing unit. The management of the tasks linked with the management of the property while also being under the direction of a qualified and assuring syndicator.
The main advantage of multi-family syndication is that it expressly allows investors to take the full benefit and experience of the main sponsor, as capital is expertly aggregated amongst investors. Collectively investors can acquire high valued multi-family properties that would be unobtainable using a single fund source. The risks are also equally dispersed amongst the investors, coupled with the reasonable adjustment of investments at a comfortable risk level.
After discussing the advantages of joint investments in multi-family housing units, it is only normal for us to briefly mention some of the risks involved and some of the issues to watch out for. Here are some mistakes you should not make. Even though syndication is mainly an avenue to get maximum returns on investment, there are some mistakes a potential real estate investor should not make in multi-family syndication ventures. One is to avoid legal troubles as much as possible. Real estate is a legitimate business and one should aim to make it remain as such, endeavor not to have issues with your paperwork, violate regulatory guidelines or intentionally or accidentally mislead your investors. Legal tussles burn one out, try to run as far as possible from it. Else you open yourself to liability.
Another issue to consider is the issue of funding difficulties. It can be hard to know if to start with finding the right deal or locating the investors. Funding should be lined up first before finding the right contractor. Rookies in the real estate industry often make this single mistake. There is also the factor of non-existent or inconsistent marketing and this is in line with the issue mentioned earlier. There is a significant need for a consistent approach to marketing real estate opportunities to catch the fancy of investors. So, you are ready whenever the opportunity comes knocking. If you are trying to syndicate in multi-family investments, you are also in marketing, and you should be in charge of building your pool of credible investors by the development of an intentional plan to be out there and attract potential investors while also keeping them engaged as you continue to search for good deals to keep them interested. We do hope all through this compilation, and you have learned the basics of multi-family apartment syndication, the major parties involved, the roles of each party and the benefits and risk associated with syndication strategies. Cheers!!
Charles Carillo is the founder and managing partner of Harborside Partners. He has extensive knowledge in renovating and repositioning multifamily and mixed-use commercial real estate. Prior to launching Harborside Partners, Charles founded an online payment processing company with partners and clients in 4 continents across the globe. Charles holds a BS from the Connecticut State University.