This one’s easy… Invest passively in a multifamily real estate syndication!
Historically, real estate investments have outperformed nearly every investment vehicle out there… and with considerably less volatility. Although real estate can take hits during an economic downturn, there is at least some predictability, some time to adjust; some control. And multifamily real estate, out of all real estate asset classes may just be the most controllable and predictable.
Why? Because multifamily real estate is valued like a business, where the higher the NOI; the higher the valuation. This offers a sense of control not seen in other common investment choices. And this is why so many people invest in multifamily. The bottom line is, people will always need a place to live.
Ok, so you believe in the power of investing in multifamily real estate, but don’t have enough money or the expertise to go out and buy an apartment building… Now what?
Invest passively in a multifamily syndication!
At a very basic level, a multifamily real estate syndication is simply the pooling of resources by a number of investors to purchase an apartment community. The majority of syndications require a minimum amount to invest, generally $50,000.
What type of returns can you expect?
To quote my friend Dave Seymour –
“commercial multifamily real estate investing has the risk exposure of the bond market, but return expectation of the stock market”
Ok, who is involved?
There are typically 2 parties involved in such a multifamily syndication deal – the general partners and the limited partners. I am a general partner, meaning I find, purchase, manage, and sell the property. You would invest in the deal as a limited partner, also known as an LP, or a passive investor.
Limited Partners
As a limited partner, you are limited in both liability and control. Meaning you are protected by the SEC if some sort of disaster should occur to only the amount of money you invested. You cannot lose anything else.
You are limited in control, in that you don’t manage the property and have limited voting rights in regards to operational decisions. And that’s a good thing; leave the decision-making to the pros.
General Partners
General partners, also known as deal sponsors, operators or (GPs), are the ones who control the deal. These are the professionals. It is their job to source/find the deals, negotiate and acquire the property, raise the money, sign on the loan, asset manage the project, communicate with investors, make distributions, coordinate any capital events, and a slew of other responsibilities.
As a general partner myself, I can tell you that it’s a very challenging position that is certainly not suited for everyone. The competition is fierce and deals are very hard to find, even for the most savvy investors and business-minded entrepreneurs. This is why I push for people to invest passively. Especially if they are beginning their journey in the multifamily investing space.
Start passively
Investing passively is the safest way to get involved in multifamily real estate. Your ultimate goal may perhaps be to run your own multifamily syndication one day. Or to invest in a multifamily deal with a few friends as a joint venture. But I ensure you, investing passively is the best way to get started. Why? Well if you find the right general partner that is willing to allow you to learn the process alongside them; this experience will provide you with an invaluable education.
This way, you can learn while you earn.
Let’s talk about the benefits
Investing in an apartment syndication affords you all the benefits of investing in real estate without the headaches.
- You get all the tax benefits of investing in real estate. Your investment earns passive income which is taxed at the lowest rate. You can take advantage of a cost segregation study as well as bonus depreciation and other tax strategies to help mitigate your tax liability in a given year.
- You can diversify your investments safely and easily. By investing passively in a real estate syndication, you don’t need to be an expert in all asset classes or all geographic markets. You can rely on the professionals who do this for a living. You can choose to invest with the same GP in different markets or choose different GPs. If you are really interested in a particular market, find an operator that specializes in that market, and get access to their offerings.
- You can leverage the expertise of the general partners. Think of it as an interview process. You get to vet a number of different deal sponsors and choose the one(s) you think will perform best and which ones fit your needs. And guess what? You can ask for their track record and past performance!
- You can force appreciation by increasing the NOI. An experienced general partner will be able to increase the value of a property even in an economic downturn through industry best practices.
- You do not manage the properties! This means no tenants, trash, or toilets.
If you are looking for more information about the benefits of multifamily investing check out this blog post.
So how do you actually go about investing in an apartment syndication?
Your first step will be to find general partners, vet them, and get access to their deals. Take your time getting to know different general partners, because investing with the right general partner can be more important than the deal itself.
Why?
The general partners are the ones responsible for executing the business plan, and performance matters. Especially when it comes to your hard-earned money. The good news is that it’s in the general partnership’s best interest to preserve and grow your capital so that they can in turn scale their business. This is why you must find the right person to invest with. Someone that you know, like, and trust.
If you are interested in learning more about how to vet a general partner, check out my passive investing cheat sheet.
Now don’t misunderstand what I am saying. I think it is very important to know the deal you are investing in. But I think what ultimately matters most is the person or team making the decisions and managing the deal. And once you have found a general partner you are confident in, it’s time to start looking at their deals by getting on their mailing list!
As a deal sponsor myself, the best deals don’t come around too often, maybe 2-3 a year in a good year. So it’s important for you, as a passive investor to be on the mailing list of your favorite deal sponsors so that you can have access to these deals as they come. Some deals can be oversubscribed very quickly, so it is imperative you act fast when presented with a deal.
When presented with a deal, you will be given a marketing package with some details of the investment opportunity. At this point, you will have to do some work to understand whether or not you like the deal and want to invest in it. If you want to learn some key items to look for when analyzing a deal, check out my passive investing cheat sheet. The majority of your “work” as a passive investor will take place at this stage.
Once invested, it’s hands-off, smooth sailing, mailbox money!
Most deal sponsors present a webinar to explain the investment opportunity in detail. I highly recommend you attend the webinar or listen to the recording to get their take and to learn their business plan. This will also be your opportunity to ask any questions you may have to the general partnership team. It will be very important and ask any questions you may have to the general partners. If you don’t know what to ask, check out my cheat sheet.
Summary
And that’s basically it! Once invested, it’s as passive as passive gets! You get money wired to you either quarterly or monthly for the life of the project. You will also get paid on any capital event such as a refinance or sale of the property. At the end of every year, you will also receive a K1 statement, which is a tax document to bring to your accountant. The tax benefits for investing in real estate are amazing, and as a passive investor, you get to enjoy these benefits!
If you are interested in learning more about the returns you can expect from investing in a real estate syndication, check out the passive investor cheat sheet.
One Love,
Nico
