Multifamily Syndication: The Beginner Real Estate Investor’s Guide
Multi-family real estate syndications have become a wildly popular option for investors who are looking for a way to increase their net-worth while diversifying their investment portfolios. A diverse portfolio is a must for anyone who is investing in anything, whether it be stocks, bonds, or real estate. If you have all of your money tied up in single-family homes, a crisis in real estate sales can leave your once healthy portfolio lying in shambles. Understanding how to find multi-family real estate syndications and the benefits of investing in them is vital for investors who want to solidify their position in the world of real estate investing.
What is Multi-Family Syndication?
To understand what a multi-family real estate syndication is, you only have to look at each part of the term individually. Multi-family homes are exactly what they sound like. The term can be used to refer to anything ranging from a duplex to a massive apartment complex that houses hundreds of people. Additionally, real estate syndications are investment vehicles that allow an investment manager (also referred to as a syndicator or sponsor) to obtain funding from any number of investors. The profits generated by the property will then be distributed between the sponsor and the investors in a pre-determined split.
Multi-Family Syndication Structures
Generally speaking, there are no experience requirements that you must meet in order to participate in a multi-family syndication. Additionally, there is no limit to the number of investors who can participate in a multi-family syndication. This makes them an excellent choice for first-time investors who may be more worried about gaining experience than they are about generating a massive return. If there are more investors, the profits will be spread across more people; however, the presence of more investors also helps to mitigate the risks associated with investing.
The only exception to this rule revolves around the syndication’s status as a 506(B) or a 506 ( C ). If the syndication is formed as a 506 ( C ), it will only be open to accredited investors. The SEC sets the requirements for accredited investors based on a person’s net-worth or annual income (personal or joint with a spouse), so you will need to understand your status before choosing a multi-family syndication.
Structures of Multi-Family Syndications
The way that a multi-family syndication is structured will depend on the syndicator. Each investor will be aware of the structure before they finalize their investment, which enables you to get a ballpark idea of how much of a return you should expect when you receive your dividends. Each of the structures provide different rates of returns, which means you will need to choose a syndication that aligns with your goals for your investment.
A straight split syndication is probably the easiest type of structure to understand. Many investors prefer this structure because they always benefit the investors more than the syndicators. Most straight split multi-family syndications operate under a 70/30 split or an 80/20 split. Let’s say that you invest in a multi-family syndication that offers an 80/20 straight split. That means that the investors will split 80% of the profits while the syndicator (or syndicators) will receive the remaining 20%.
In recent years, many multi-family syndications have started operating on a preferred return structure. This means that the passive investors are preferred over the general partners (syndicators) and receive a guaranteed percentage before the sponsors receive a penny. In most cases for multi-family investments, the preferred return percentage is somewhere between 6% and 8%. In the event that the property doesn’t generate an 8% return in year one, that guarantee is accrued. That means that if the property only generates a 6% return in year one but hits the 8% mark in year two, investors will receive 10%.
Waterfall structures operate on the principle of cause and effect. If one return criteria is met, the syndication can move on to the next. Syndicators can add as many layers as they want to the waterfall. For instance, the first return may be a 7% return. Once that criterion is met, the next return may be based on a 70/30 split between the investors and the syndicator. The third return may be an 80/20 return, but that is only received once the second layer of the waterfall has been achieved.
Multi-family investments are widely considered one of the safest options for investors because of the need for multi-family housing. When you combine that safety with the passive income possibilities associated with real estate syndication, it’s no wonder that people have been flocking to multi-family syndications.