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Multifamily Syndication: The Ultimate Guide

Multifamily syndication gives investors the opportunity to invest in large-scale apartment projects that might otherwise be inaccessible to them due to low capital or little desire to develop a property on their own. No landlord or handyman duties are required, and the investment can yield both monthly revenue and increased equity in the property itself. If this sounds like something you want to know more about, read on to learn about multifamily syndication.

Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More

What is Multifamily Syndication?

Real estate syndication is an investment process by which a group of individual investors pool their resources to invest in a real estate project. The project is identified and managed by an overarching sponsor, who collects the funds from investors and performs the legwork required to get the property profitable. Individual investors participating in the syndication receive equity and returns proportionate to their investment without having to perform any work on the property on their own.

Real estate syndication is considered a type of passive investment because the investors are not involved in the day-to-day decisions or operational responsibilities of the project. They simply provide the capital and wait for a return.

Multifamily syndication is a type of real estate syndication that specifically invests in multifamily housing, usually apartment buildings.

How Does it Work?

There are two main players in any multifamily syndication project: the syndicator and the investors. Here’s what you need to know:

Sponsor Duties

The syndicator, also known as the sponsor, is the party with the know-how to drive the deal. They handle all of the hands-on work involved in the project, including:

  • Finding the property
  • Navigating the financing process
  • Sourcing investors and collecting funding
  • Hiring a professional management company or managing the property themselves
  • Distributing payouts to investors based on the terms of the deal

Being a landlord sounds like—and is—a lot of hard work that can siphon extraordinary amounts of time. Many individuals simply don’t have the time, resources, or know-how to find, improve, and manage multifamily real estate properties. That’s why multifamily syndications are attractive to many passive investors. The sponsor handles all of those tasks, while investors can generate a passive income.

Investor Duties

The individual investors, or limited partners, are the people investing in the multifamily syndication. Passive investors provide all or some of the funding but are not responsible for any of the day-to-day management of the property. Instead, they receive regular returns as the property earns income according to the terms of their syndicate agreement.

The investors can also look forward to a growth in their equity throughout the life of the project. When that project terminates, usually in about 5 to 10 years, the investors receive proportionate shares of any equity growth.

Multifamily Syndication Project Timeline

When deciding whether or not to invest in a multifamily syndication, understanding the timeline of the investment can be helpful. You can expect the process to look something like this:

  1. The sponsor finds a property suitable for investment. Depending on the goal of the project, the sponsor may be looking for an already-successful property that provides a nice monthly cash flow in an area where the value of real estate is expected to steadily increase. This gives the investors the opportunity to also benefit from increased equity. Alternatively, some sponsors look for undervalued properties for which they can add value. This may include renovating or rebranding the building to increase rent or occupancy.

At Life Bridge Capital, our experienced investment team thoroughly evaluates properties to find assets that have vast potential but are currently devalued due to disengaged management. Once identified, we aggressively act on acquiring and improving the asset, with a proven property enhancement and management plan, resulting in exceptional returns for our investment partners. Learn more about Our Strategy.

  1. The sponsor creates a limited liability corporation or limited partnership. This company acts as a pass-through company. Multifamily syndication investors invest in the property itself, not the company.
  2. A memorandum is drafted detailing the structure of the partnership, fees, costs, risks, and the subscription agreement.
  3. SEC registration is filed, if required.
  4. The sponsor finds and applies for financing for the project. The investors are not personally responsible for this loan, and the investor funds act as a down payment for this loan.
  5. The sponsor finds and secures passive investors. Once enough investors are found, the deal is closed.
  6. The sponsor works to renovate the property. In many syndication projects, sponsors purchase undervalued properties and perform renovations to increase the value of the property and attract more renters.
  7. The sponsor either manages the property or arranges for a professional management company to deal with the operations of the property.
  8. Investors receive any cash flow per the agreed-upon terms.
  9. At some point, the property is sold. Ideally, the sale of the property is completed at profit, and participating investors get a share of that gain.

Benefits of Multifamily Syndication

There are many benefits of multifamily syndication for individual investors, including:

  • Multifamily syndication is a convenient, lower cost way to invest in the real estate market. Depending on the project’s capital needs, entry investment opportunities could be as low as $50,000. For the average American who cannot single-handedly purchase an apartment building, multifamily syndication provides a chance to realize some great opportunities in the rental market that would otherwise be inaccessible.
  • After the investment is made, the project requires no maintenance for the investor. The sponsor assumes all the challenges that come part and parcel with being the owner of an apartment building or other rental unit. Investors can keep their jobs, hobbies, and other priorities in place.
  • Multifamily investments are considered one of the most reliable forms of passive income. This likely makes sense to anyone who has ever lived in a built-up town or city of any size. Not everyone can afford to, or even wants to, own a home, so there is a need for rental housing. Multifamily units are the most affordable way for people to access housing, so multifamily properties fill a need that is unlikely to disappear.
  • Even when the building is not at its capacity, investors are still earning money in the form of equity growth. In addition to sharing in any profits from monthly revenues, multifamily syndication investors may see additional return when the project terminates and the property is sold. Of course, projects can catch the real estate market at a bad time or fall prey to uncontrollable neighborhood circumstances, so equity growth is not a guarantee.  
  • Tax laws favor real estate investment, and multifamily syndications are a way to take advantage of the many tax perks that real estate investment provides. When investing in a syndication, the syndication is a pass-through company that does not realize the real estate tax breaks. The investor gets to take advantage of their share of depreciation and other perks.

Cons of Multifamily Syndication

For all the benefits of multifamily syndications, there are also some drawbacks for some investors. For all that multifamily syndications are touted as reliable and “easy” investments, potential investors do need to be educated and informed of the possible risks, so they can decide if this is the right investment for them:

  • Some multifamily projects do fail. Apartments built in the wrong place at the wrong time may never realize the hoped-for intention. Sometimes, a sponsor puts together a syndication on information that they have regarding new business or upcoming changes to the community that ultimately fail to materialize. Not all multifamily housing projects generate profit. For this reason, it is always advisable to work with an experienced syndication company who can share a full portfolio of past projects.
  • The rental market can be uncertain and uncontrollable. Between low interest rates making home ownership more appealing than ever and eviction moratoriums keeping non-paying tenants in units, 2020 has been a rocky year to be dependent upon income from multifamily properties. Each community or metro area is its own real estate biosphere susceptible to changes much more local than a worldwide pandemic. Loss of industry, aging populations, and many, many more factors can all make the rental market far from a sure thing. Even so, real estate investing tends to be more stable than other investing avenues even in times of recession.
  • Investors split their profits with the sponsor. An investment in the form of 10 percent of the needed capital does not translate to a 10 percent cut in the profits. The investor splits their profits with the sponsor, with 80/20 splits being very common. When comparing investment opportunities, carefully evaluate the sponsor split.
  • It may be hard to get out of the syndication. Before investing, know that the syndication may place restrictions on how, or even whether, shares are transferred. Additionally, investors will likely have no control over project decisions or operations, and their money will be committed for several years. Investors working with funds that they may need to access before the project’s expected termination would be wise to carefully consider whether or not they can do without these funds for a period of time.

How to Evaluate Multifamily Syndications Before Investing

Not all multifamily syndications are created equal. As with most forms of passive investing, your work in this project will be front-heavy in the form of research and analysis on whether or not this deal is right for you. When you find a project that makes you consider jumping into the multifamily syndication world, pay special attention to a few of the following factors:

Low Break-Even Occupancy

Look for buildings that have a low break-even occupancy. The break-even occupancy is the number of units that must be rented for the building to meet its overhead costs. The lower the break-even occupancy, the more likely the building is to survive times when tenants are not paying rent or are hard to come by.

Preferred Returns

Syndications may be structured with a preferred return. This means that investors must receive a certain minimum return on their investment before the sponsor gets paid. Choosing a syndication with preferred returns can offer you a bit of safety in knowing that the sponsor needs the building to generate revenue for the investors first before they can get paid themselves.

Fees

Sponsors often charge fees to the investors, and that is normal. What investors need to consider in the syndication memorandum is whether the fee structures are such that there is the potential for fees to erode all chance of profit.

Equity Split

Just as sponsors take a portion of monthly profits, they may also take a portion of the net proceeds when the property is sold. Projects may offer very low monthly splits but a high equity split, or vice versa.

Financing and Loan Options

Be aware of the loan and financing types declared in the syndication memorandum. The most common type of loan for multifamily syndications is a non-recourse loan, meaning that the sponsor or sponsors are solely responsible if there is a default. This type of loan comes with both high interest and high loanability requirements for the sponsors, but it provides protection to the investors.

Also consider whether the project is utilizing a permanent or a bridge loan. Bridge loans are short-term loans that allow for interest-only payments until the sponsors find long-term financing. There are certainly times when bridge loans are appropriate, like if they let the project scoop up a deal unlikely to stay on the market. But, they can be risky if the sponsors are unable to find permanent financing.

Have any questions about our processes at Life Bridge Capital? Contact us today, and we’ll be happy to assist you.

Tips for Investing in Multifamily Syndications

If all of this sounds appealing, here are some tips to get started with investing in multifamily syndications:

  • Carefully evaluate the sponsor. Investors entrust significant amounts of money with the sponsor’s project. Investors are relying on the sponsor’s knowledge and expertise regarding the potential success of the project as well as the sponsor’s ability to follow through with the project goals. An unreliable or unethical sponsor can eliminate profit potential and decimate equity. An inexperienced sponsor can wreak as much havoc, as failure to properly manage the property can lead to declining rents and property value.
  • Consult an attorney if the project memorandum is confusing. The memorandum will likely be very lengthy, but it’s important for investors to understand. The memorandum addresses important terms regarding preferred returns, the split between the investor and sponsor, the termination plan, and more.
  • Consider value-add properties. Multifamily syndications focusing on undervalued properties that need renovation can be especially profitable when successful. These types of properties can see great increases in both monthly income as rent increases as well as in equity when the building is sold.
  • Finding opportunities. Find multifamily syndication opportunities through equity crowdfunding sites or through private real estate investment companies.

Start Investing in Multifamily Syndications Today

Multifamily syndication investments can be a crucial step in the journey to financial freedom via passive investing. If you’re interested in multifamily syndication, contact Life Bridge Capital today to learn more about our process and current investment opportunities.

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