Multifamily syndication has over the years grown in popularity because of its safe and lucrative abilities. It is a type of real estate investment that is desirable to investors who don’t want to experience the stress and headaches of being a landlord. If the idea of having to worry about assets constantly turns you off, then multifamily syndication is the best option to grow your wealth.
In this article, we delve into what multifamily syndication is, the unique structures, why invest in it, and the effects of the COVID-19 pandemic on multifamily syndication.
What is multifamily syndication?
Multifamily Syndication is when a group of investors pools resources and equity together to purchase an asset. There are two parties involved: the general partner/ the deal sponsor and the passive investors.
General partner
General partners have a very active role in multifamily syndication. They locate the deal, coordinate all the transactions, and manage investment once the deal has been closed. General partners are important in the property acquisition stage and property management. Some common roles include:
- Arrange financing
- Locating and underwriting the deal
- Locating investors
- Ensuring due diligence
- Working with the property management team
- Communicating with investors
- Overseeing property renovations
Passive investors
Just as the name suggests, passive investors have a more passive role in syndication. Their major role is to provide equity. Once the assets have been purchased, they mostly collect passive income and receive a return on the sale of the asset. Passive investors have the chance to invest in stable and growing assets without having to put in the work needed to manage the properties.
Different multifamily syndication deal structures
One of the key components you should review when considering multifamily syndication is the deal structure as they determine returns you can expect as a passive investor. They include:
Straight split
Probably the simplest structure to understand, straight split uses the same percentage split to divide returns and profits between general investors and passive investors. For example, if the straight split is 80/20, the passive investors get 80% of all the returns while the general investor gets 20%. It doesn’t matter whether the returns are $100,000 or 10,000,000 in value; it uses the percentage across the board. 80/20 and 70/30 are the most common straight splits in multifamily syndication. One benefit of the straight split is that it provides a win-win situation for both parties. If a property performs well, both parties stand to benefit.
Preferred return
For the preferred return structure, there has to be a certain percentage paid to the passive investors before the general investors receive payments. For example, if the preferred return is 8%, it means that the first 8% of cash flow and profits go to the passive investors. General partners will only get returns if they are above 8%.
One benefit is that the percentage accrues if it was not met the previous year. For example, if the preferred percentage was 8% and the investors received 7% the previous year, it entitles them to 8% the following year plus 1% accrued returns. Depending on your multifamily offering, after the preferred return, the syndication breaks into a split.
Waterfall structure
The structure involves a preferred percentage that must be met to move to the next stage. Waterfalls vary in terms of complexities depending on the offering you choose. The most common waterfall structure in multifamily syndication is 6-8% “pref”, then 70/30 split. Here is an example of a waterfall structure with multiple layers:
- 8% preferred return
- 80/20 splits until passive investors receive 11% return on investment (IRR)
- 70/30 splits until passive investors receive 12.5% IRR
- 50/50 split of the remaining profits
Reasons to invest in multifamily syndication
Putting your money into a savings account will only work for you in one way. However, investing in multifamily syndication allows your money to work in different ways. Here are the reasons to invest in multifamily syndication:
Passive income
Investing in multifamily syndication allows you to enjoy streams of passive income. One advantage as a passive investor is that you do not have to deal with managing the estate but still get cash flow from properties. Creating a stream of passive income is one way to financial freedom that everyone desires.
Tax advantages
The benefit of investing in multifamily syndication is the ability to show accelerated depreciation when filing returns. This helps to decrease your tax burden as you enjoy the cash flow.
Leverage
When you invest in multifamily syndication, you are not only leveraging on other passive investors’ capital but also the general partners’ expertise on managing the syndication. This type of investment allows you to get into an investment you would have not if you were to go in alone.
Multifamily syndication overview after the COVID-19 pandemic
No sector has been left unscathed in the real estate industry as far as the ripple effects of COVID-19 are concerned. Multifamily syndication has had to deal with the unusual, unfamiliar landscape directly. The early effects of the pandemic saw many people losing their jobs and governments coming to rescue to provide temporary help. Other effects include:
- Loan defaults
- Increased unemployment rates
- Increased real estate owned properties because of loan default by owners
- Foreclosures
- Discounted properties
The pandemic has seen many multifamily syndication managements changing the way they operate. For example, for maintenance, most of them instilled new safety precautions. They paid more attention to tenant requests. The syndicators also came up with virtual tours to help with leasing. They suspended additional capital expenses for some time to help maximize operating income.
How does the future look?
The plight of the pandemic has seen a lot of speculation with different opinions of what multifamily syndication will look like in the future. One thing that is safe to say is that everyone is looking for diamonds in the rough. Finding the right piece and the right elements is the key to creating opportunities.
In terms of debt, a lot of lenders are still sitting on the fence. However, some of them have given loans with higher reserves than before. In terms of equity, a lot of high net-worth individuals are still speculating since some of them have lost a lot in the stock market. However, institutional investors are waiting for opportunities to present themselves so they can invest. This shows a higher potential for multifamily syndication, as we expect property pricing to rise to exceed pre-COVID-19 levels.
