What is a Multifamily Syndication?
A multifamily syndication is an operator who raises funds from a group of investors to purchase a property. Syndications are completely passive for investors and require no management or maintenance from them.
How does syndication work?
The General Partner, also known as the Sponsor, is the firm responsible for raising the capital required for the purchase of a property. The GP plays a crucial role in identifying and evaluating potential properties, negotiating the deal, and ensuring that the property is well-maintained.
In a syndication deal, investors can earn cash flow through rent, refinances, and property sale. Additionally, they can enjoy tax advantages with little to no risk beyond their initial investment.
Multifamily Syndication Outlook for 2024: What investors should know.
Gearing up for investments in 2024, investors should be aware of some changes from the Federal Reserve, and trends that will likely impact the outlook for the foreseeable future.
The FED Announces Reduced Interest Rates:
Lower interest rates can result in better financing conditions. When interest rates are lower, borrowing costs decrease, making it more affordable for investors to fund new purchases or refinance existing properties. This can lead to increased cash flow and better debt service coverage ratios. It can be particularly beneficial for those who have high-leverage loans or floating-rate debts.
As interest rates decrease, the economy tends to be stimulated as borrowing becomes easier. This can increase the demand for housing. Especially for Class B properties that are more accessible to a broader range of tenants.
New Development Oversaturating the Market
It is expected that 2024 will see a significant increase in the number of newly developed apartments. This can be attributed to many development deals initiated years ago and are now nearing completion. This may pose a challenge for Class A assets that will have to compete with new builds. On the other hand, Class B apartments will be comparatively more affordable, as they won’t face direct competition from new developments.
Rent Growth Cooling:
With the rise in housing supply, even against a backdrop of steady job growth and strong housing demand, rent prices are expected to stabilize into 2024. Predictions for the upcoming year, including a 1.2% increase by CBRE and 1.5% by Yardi Matrix, suggest a further moderation in rent growth, a stark contrast to the sharp increases in prior years.
Affordability is Still a Pressing Issue:
Despite this stabilization, the issue of affordability continues to burden many tenants. Particularly, the ‘renters by necessity’ group is allocating around 32% of their income towards rent on average, a financial strain that has been aggravated since the pandemic due to the prolonged period of significant rent hikes.
But it’s not that simple: Contrary to the assumption that renting is only for those who can’t afford to buy, RealPage housing economist Jay Parsons says recent studies reveal a dramatic increase in high-income renters. The number of renters earning above $100,000 has grown by 61% over the past five years. This shift indicates a growing trend of ‘renters by choice’ – individuals who could afford to buy but opt to rent for various lifestyle reasons.
Debt:
Since 2021, Multifamily debt has hit historical highs year over year and 2024 is no different. With over $100 Billion of multifamily debt maturing in the next 24 months. When a Multifamily property is purchased there is a hold period often 3-5 years. If you look at what has happened in the last three years, two crucial factors influenced the Multifamily market; historically low interest rates and the onset of the Covid pandemic, which sent interest rates even lower for a prolonged period. The effect of this was tons of new debt taken out and refinancing for existing loans for better interest terms. This means these loans are maturing between now and 2027, but in today’s current economic environment, neither refinancing nor repaying the loan is an attractive option.
The result; many sponsors will be forced to take less favorable terms or force a sale that could lead to opportunity on the debt and equity sides. It’s important to remain cautious in due diligence and strategic using reserved underwriting as the financing market will remain shaky and will require patience, along with lower LTVs, higher DSCR, and higher rates.
Preferred Equity
Amidst the prospect of troubled loans, preferred equity emerges as a viable investment alternative. Previously, fixed-rate debt in the 3-4% range was the norm during more favorable times, making the transition from variable to fixed-rate debt a lucrative strategy. However, the current reality reflects loan rates ranging from 7-8%, significantly impacting the cost of capital. This disparity poses challenges to business plans for many other sponsors. Some properties are now valued lower than the outstanding debt, rendering refinancing impractical without substantial new capital infusion from investors. As a result, a shift in strategy may be necessary to adapt to the altered market dynamics.
Further, given the current dynamics of the market, one of the other most compelling attributes of pref equity lies in the downside protection. Although not devoid of risks, integrating preferred equity into your portfolio can introduce valuable diversification.
Five Advantages of Multifamily Syndication in 2024
Passive Income
As busy professionals, many people don’t have extra time to dedicate to making a secondary income. This is why Multifamily syndications are so beneficial. After the initial investment, no time is needed to create the passive income. Your money does the work for you.
Low-Risk Investment
Multifamily properties are considered a relatively “safe” investment compared to other types of real estate assets. This is because people will always need a place to live, even during an economic downturn. In fact, during a recession, many individuals are forced to sell their homes and move into rental housing. Additionally, it takes time for people to rebuild their credit after an economic downturn. Thus creating a prolonged demand for multifamily properties.
Equity And Appreciation
Investing in real estate syndication is a great way to build equity in a historically valuable asset. Real estate assets tend to appreciate over time, which is why a long-term horizon is beneficial for investors. When the property is sold, investors receive a payout that can be a significant figure due to the appreciation of the investment.
Tax Benefits
Investing in multifamily real estate comes with tax-saving benefits, with depreciation and accelerated depreciation being the most prominent ones. However, expert syndicators like Viking Capital can design investment deals that provide increased tax offsetting. This way, you can reduce your tax payments while earning passive income. It’s a win-win situation for you as an investor.
Inflation Proof
Real estate syndication offers a significant advantage in terms of its resilience to inflation. During periods of high inflation, the demand for rental property increases as more people opt for rentals rather than buying property. Additionally, the cost of raw materials increases which reduces the number of new properties, further boosting the demand for rental properties.
Conclusion
2024 looks to be a promising year for Multifamily syndication. With interest rates dropping and the potential for easier borrowing, investors have a much brighter outlook than the flat market of 2023. The decrease in interest rates presents more investment opportunities, but it also requires cautious risk management. Investors should be mindful of over-leveraging in a low-interest-rate environment. Additionally, take into account the potential for future rate increases, which can impact the market. The effect of interest rate reductions will differ from region to region. When considering an investment, investors should consider the local market environment.
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