There are many moving pieces to a multifamily syndication. The sponsor has numerous responsibilities that often need to be completed in a small window of time and the limited partners need to wisely choose who to trust with their hard-earned capital. Do you want to be calling the shots day in and day out or do you want to hire professionals to deal with the headaches of being a landlord? Multifamily syndications can be consistently profitable but the limited partners need to understand the risks involved in giving up control and working with experienced professionals. In this episode, Aaron explains the in-depth description of how a multifamily syndication works.
00:00 What is Multifamily Syndication?
02:32 Limited partners
03:28 pros and cons of multifamily syndication
07:37 Qualified investors
09:04 The risks of investing in multifamily syndications
Aaron Fragnito: Apartment buildings are very management intensive, and even working with a management company has its headaches and its challenges. We found that most management companies don’t treat your asset the way you want it to be treated so we developed our own management company years ago, and that allows us to have stronger control over our multifamily properties so that our limited partners can earn stronger, more consistent returns and sleep better at night, knowing that they’re invested with a good group of operators, a good group of sponsors here that have in-house property management. That gives us one more level of control over our assets so we could produce more consistent returns to our limited partner.
Ladies and gentlemen, thanks for joining another episode of the Passive Cashflow Podcast. Our topic today is, What is a Multifamily Syndication? I’m going to really break it out here. I’m going to break into what exactly a syndication is, and what’s our responsibility as sponsors; that’s me and our passive investors. That’s people who are bringing the capital to the investment. What does a sponsor do? What do the investors do? What are the risks? What are the rewards? What do limited partners do? The pros and cons of a multifamily syndication here on the Passive Cashflow Podcast.
The first part of a multifamily syndication is the sponsor. This is the individual finding the opportunity, locating the property, negotiating the price, getting the mortgage, finding the passive investors to bring the capital to the table, and raising the capital to get to the closing table. Also, employing a professional management company, making sure you’re hiring the right service providers, managing the property as well and the management company itself.
Then distributing the dividends and the passive cash flow and the positive cash flow out to the investors once the property is owned and operated and maybe completing a refinance or a sale of the property down the road as well, and overseeing the construction and renovation of a property as well. A sponsor’s going to do all that. Generally, they’re not bringing in capital, sometimes they do, but generally, a sponsor’s getting sweat equity in the deal, meaning they have ownership of the LLC that owns the property.
The limited partners are the ones who are bringing in the capital and they’re non-voting members bringing in the capital that allows the building to be bought. We have our sponsor doing the operations and we have our limited partners bringing in the capital. Limited partners are non-voting members of the LLC. Generally, they’re not doing any day-to-day operations, they’re not experienced real estate investors, but they’re looking to own real estate and get the benefits of owning real estate and they want it done right. They also want to get into big buildings that they might not have access to investing on their own.
By pulling capital together into a multifamily syndication, it allows those limited partners to own a large multifamily property where normally they may not be able to own a multifamily property with only $30,000 or $50,000. By pooling it together, working with good sponsors, professionals who are experienced and have their infrastructure in place to find and manage real estate properly, these limited partners can do very well investing in real estate without the headaches of being a landlord. Here’s the pros and cons of a multifamily syndication.
Well, the pros obviously is passive income. Not having to get up and manage a property every day, real estate is very management intensive, and allowing professionals to do the operations of that property management and making sure that their investment is being managed the right way, that produces passive income. Of course, equity. Owning a property that’s professionally managed allows for equity growth.
We’ve bought properties in Downtown Newark years, and now they’re worth multiple times. We paid for them and we refinanced and we harvest that equity over time. Equity is really how people make their money in real estate. Cash flow’s nice and all, but equity growth is really how we make our returns, especially in North Jersey real estate over time. Equity is how high-level investors really earn their returns. It also has a lot of tax benefits, right? Real estate produces tax depreciation.
By investing in a real estate syndicate especially a multifamily syndicate allows equity growth over time, tax benefits, cash flow, and leverage. We’re leveraging that capital that our investors bring to the table. That means our private investors, our limited partners, they bring the down payment and the construction costs and the funds required to close on the property to cover the closing costs as well.
That capital is leveraged by the sponsors getting a mortgage, and that allows the passive investors, the limited partners to limit their risk, but it also allows them to leverage their investment and by the sponsors getting a mortgage and leveraging that down payment from the limited partners, it allows for better cash flow, better returns overall, better tax benefits as well. Real estate is all about a good, smart, safe leverage, and using low-cost debt to buy a bigger property, produce more cash flow for your investor group, and in turn, create a lot more wealth for everyone.
The cons of a multifamily real estate syndication is a lack of control over the investment. If you’re a hands-on type of person you like figuring out, it’s calling the shots day by day, exactly what the color the rooms are going to be painted, the tenants you’re going to be choosing, who you’re going to be selling to, when to refinance, all these decisions are very important, some more important than others, but you really want professionals to be making these decisions. If you are an experienced real estate operator and you know exactly what you’re doing, then you might not want to have a lack of control over your investment opportunity.
I’m not a stock investor so when I go to invest in the stock market, I like to invest with professionals. I don’t really care what they’re doing with my capital, as long as it’s the right thing. I don’t really care if I’m shorting Tesla or this or that. To me, it doesn’t matter as long as the bottom line is what I’m told it’s going to be or better. When I’m investing with professionals in an asset class that I don’t understand, the stock market is a good example there, I hire the professionals and the lack of control over the investment doesn’t bother me.
In fact, I’m looking for that lack of control. I don’t want to have to make day-by-day stock investment decisions, nor am I qualified to do that. I like to hire the professionals. Lack of control doesn’t bother me, but if that’s something that you want to maintain with your investment capital in your real estate, then a real estate syndication may not be a fit for your goals. Also, they’re ill-liquid in nature. That means you can’t pull your capital out tomorrow.
Generally, if you’re investing in a multifamily syndication, you’re looking at a 3-5-year minimum investment. That means you really cannot be using capital that if you lose your job or something happens, you’ll need that money back. That’s not really how it works. If you’re looking for very liquid real estate investments, you might want to look at a real estate investment trust, a REIT, a publicly-traded REITs or mutual funds that hold REITs are great ways to dip your tone in the water with real estate investments. We have other podcast episodes that compare real estate investment trust to real estate syndications and the benefits of both there and the challenges with both as well.
You also have to be a qualified investor to invest in a multifamily syndication. Now, at Peoples Capital Group, we accept accredited investors and non-accredited investors also known as sophisticated investors. Those are people that understand the investment opportunity, have some experience in that asset class. Maybe they bought an income property before, own their own home. They have excess funds that don’t need to live on the returns to the investment or need the investment back anytime soon.
They would qualify likely as a sophisticated investor or accredited investor, which is someone that has a net worth of $1,000,000, not including their primary residents or household income of $300,000 or greater or individual income of $250,000 or greater. If you don’t quite make that cut financially as an accredited investor, which essentially is a millionaire, then you may qualify as sophisticated investor, which will allow you to become a passive investor with Peoples Capital Group and allow you to qualify to invest in a real estate syndication.
That is one of the bigger challenges there. If you’re not accredited or sophisticated investor or you don’t have the minimum investment amount of $25,000 or $30,000, then you’re likely not going to qualify to invest in a multifamily syndication. If you have a smaller investment amount, you might want to look into a REIT, which allows you to get invested for a lesser amount but doesn’t necessarily hold the benefits of a multifamily syndication or the types of returns that multifamily syndicates offer.
Of course, what are real estate syndication risks here when investing in a multifamily syndication? You have equity splits. You want to understand who’s getting how much equity. Are you getting a fair amount of equity for your investment capital? Is the sponsor getting a fair amount of equity for what they’re doing? Are they managing a three-year construction project, or is it more of a turnkey property?
You want to understand, what are they getting equity for? How much do they get and is it a fair amount? Are you getting a fair amount as well? Then, of course, fees. You want to recognize what are the fees that the operators are charging, the sponsors are charging. Are they outlandish fees that take away from your bottom line or are they industry standard that are fair fees that create a win-win scenario so that when sponsors do well, they get paid, and when the asset produces, everyone earns as well? You want to understand what are the fees involved in the multifamily syndicate.
I have a whole podcast that goes over syndication fees. I also have another podcast that goes off over different ways to invest. Capital and real estate multifamily syndication is one of them because we feel that multifamily real estate is one of the best asset classes to be invested in, but listen, it’s a very management-intensive asset class. You can’t just go out and buy an apartment building and assume it’s going to perform as expected. Apartment buildings are very management intensive and even working with a management company has its headaches and its challenges.
We found that most management companies don’t treat your asset the way you want it to be treated. We developed our own management company years ago and that allows us to have stronger control over our multi-family properties so that our limited partners can earn stronger, more consistent returns and sleep better at night, knowing that they’re invested with a good group of operators, a good group of sponsors here that have in-house property management. That gives us one more level of control over our assets so we could produce more consistent returns to our limited partners.
That’s how a multifamily syndication operates. That’s the responsibilities of the limited partners and the responsibilities of the sponsors, the challenges involved, the pros and cons. If you want to learn more, go to peoplescapitalgroup.com. Maybe you’re on our website right now, listening to our podcasts, reading our articles, hopefully, you’re enjoying our content. We have webinars every month that are live. We also have new content coming out on a weekly basis. Go to peoplescapitalgroup.com, enjoy our free content and fill out a qualification form when you’re ready to get qualified to become a passive multifamily investor here at Peoples Capital Group. Enjoy your day.