Real estate investing can be a great way to increase your revenue sources and gain passive income. One of the popular methods of real estate investing today is apartment syndication.
If you’re like most people, you may have come across apartment syndication while researching for investment opportunities. But not everyone truly understands the term and exactly how it works.
This article will help you understand everything you need to know about apartment real estate syndication.
What is Apartment Syndication?
Apartment syndication is a real estate investment bringing together individuals to pool their intellectual or financial resources to acquire and maintain apartment complexes.
They combine their expertise in various areas, such as leasing, construction, and marketing. Of course, it also involves financial support.
This process ensures that no individual or entity owns the apartment complex within the syndication. Instead, all parties split the profit and ownership based on individual contributions.
Investors can receive two types of returns from multifamily syndication. The first is about 40 to 60% profit returns once the property is sold. The second type of return is a 7 to 8% quarterly cash flow distribution, also known as preferred returns.
In a syndication deal, syndicate members buy a property in a particular market and sell it when the price is at the highest profit yield guarantee. The resources that will increase the property’s value are used for renovations to ensure the final sale price is more than the original purchase price.
Increases in value are distributed to investors after the property sells, giving each party in the syndicate a yearly return rate of about 16 to 25%. In the meantime, individual members can enjoy monthly profits by increasing rental costs and reducing expenses.
The Timeline of Returns in a Syndication
The most important thing for apartment real estate syndication is that the returns are not for those that want a fast-money investment opportunity.
Generally, apartment syndications have a hold time of 3 to 7 years. That means whatever resources and money contributed to a particular complex or apartment building within the syndication are unavailable until the syndication has run its course.
For example, if you put $50,000 into apartment syndication, the amount is not a liquid asset. In other words, you shouldn’t invest any money into apartment syndication unless you can afford to do without the money for the entire duration of the hold time.
That’s because you are less likely to see any significant profit or return on investment until the syndicated property has been sold.
Nevertheless, syndicated investors can receive regular cash flow distributions through a preferred return while waiting for the expiration of the hold time. The preferred return is typically within the range of 7 to 8% of the investment and is paid quarterly.
How Does Apartment Syndication Work?
Now that you understand what apartment syndication is and how it differs from other real estate investments, it is important to break down the entire process. After that, we’ll see the major roles of the parties involved.
The entire process involved in apartment syndication investment is as follows:
- Determining the target niche or area
- Building a team of property management, legal resources, and limited partners
- Finding a viable apartment complex, rental property, or building
- Placing an offer on the property, all the while securing investor capital, financing, and investments
- Closing on the property
- Running the apartment syndication for the prescribed duration of time
- Selling off the property and distributing profits
It is important to note that the above is an oversimplification of this type of multifamily investing. However, this is what any potential investor in apartment syndication should expect.
The Core Roles Within Apartment Syndication
Before choosing apartment syndication as an investment strategy, it is crucial to understand the various roles that come with it to help you understand your role as part of the syndicate. It also enables you to make an informed decision on which party to join.
Generally, the roles are broadly categorized into two, namely:
- The limited partners or passive investing role
- The sponsor team or general partners
The third role in apartment syndication is the property management team. This team plays an integral role in the daily running of the apartment syndication to ensure it is successful. The individuals in this team are typically thoroughly interviewed and vetted by the general partners.
There may be other groups involved in apartment syndication, like real estate attorneys or commercial real estate brokers. However, they are typically resources hired using the syndication funds rather than the parties invested in the syndication.
The Property Management Team
This team consists of individuals responsible for maintaining the properties within the syndication.
While a general partner maintains the building by making important decisions concerning how the building is run and its upkeep, the property management team is responsible for the daily operations of the building. In addition to this, the property management team ensures that tenants in the syndicated apartment are satisfied.
In apartment syndication, these individuals receive compensation through construction fees, equity ownership, and management fees where applicable.
Limited partners are individuals that contribute financially to the apartment syndication. This group of individuals typically consists of various private investors that fund the buying and overall maintenance of the properties.
There are two types of limited partners in apartment syndications. This includes sophisticated investors and accredited investors.
To become an accredited investor, a prospective investor must:
- Have a net worth of at least $1 million not including the value of their primary home residence
- Make $200,000 annually as an individual or $300,000 jointly with a spouse
On the other hand, sophisticated investors also need to be high net worth investors that can join the apartment syndication on a limited number. As a result of their financial contributions, the individuals get part ownership of all the apartments within the syndication. That’s in addition to not having to worry about managing the apartments daily or even looking for properties.
And while they do have a bit of say in the decisions about specific properties, limited partners can invest as much as they want, so long as the amount is up to the minimum requirement. After this, all they need to do is simply wait until the property is sold to get their returns.
General partners in apartment syndication are responsible for finding, funding, maintaining, and managing the apartments within the syndication.
Considering the greater role they have to play, general partners have the most influence when it comes to the decision-making process.
Generally, individuals in this role are responsible for the following:
- Sourcing prospective properties
- Searching for viable properties in the marketplace
- Acquiring the funding
- Repairing or developing the property before it can be rented out
- Managing and maintaining the property throughout the ownership
A general partner’s role is not one to take lightly, which is why a first-time real estate investor should choose the simpler option of being limited partners.
Is Apartment Syndication the Same Thing as a REIT?
Considering the description of apartment syndication, most people begin to draw parallels with REIT. But is apartment syndication the same thing as a REIT?
The short answer is no!
While there are similarities between REITs and apartment syndication (primarily because they are both types of real estate investments), they have very different functions.
When you choose to invest in apartment syndication, you own a part of the income-producing real estate in question. That means you are responsible for the legal benefits of that title.
In a REIT, individuals do not invest in the property. Instead, they invest in the specific investment or company. Due to this distinction, they do not have any legal claim on the properties involved in the investment.
Investors typically prefer apartment syndications because they enable them to cut the middle man out of the investment and invest directly into the apartment property for immediate profits.
For a potential investor looking for real estate investment opportunities, apartment syndication can be a great way to start. It is a fantastic option if you want to invest as a passive investor or limited partner. Choosing this role allows you to invest in a rental property in a hands-off capacity.
However, it is important to remember apartment syndication is a long-term investment, where you can only get your returns once the property is sold. Your capital will be illiquid for the duration of the syndication, which is something to think about before you venture into this type of real estate investment.