Real estate investing has long been considered a lucrative and stable asset for individuals looking to grow their wealth. Among the various avenues of real estate investment, multi-family real estate stands out as a promising opportunity, as these types of properties offer a variety of benefits for those looking to build and grow their real estate portfolio through passive investing, while still reaping all the benefits of a traditional single-family investment.
What is Multifamily Real Estate Investing?
Multi-family real estate refers to any property which contains units for multiple households within one complex or building. While commonly referred to as apartment buildings, multi-family real estate can refer to duplexes, triplexes, townhomes, or condominiums.
According to the National Association of Realtors, the demand for multi-family real estate is also at record highs. Although multi-family unit construction has increased by 50% from pre-pandemic levels, demand continues to outpace supply. As occupancy rates and home prices remain high in U.S. cities, many individuals living in multi-family units renew their leases instead of buying. These factors make investing in multi-family real estate a wise investment for these times.
While investing in multi-family real estate can be lucrative, many people may need to learn how to do so wisely. Joining a real estate syndication is one surefire way that investors can get into this industry and start growing wealth.
Understanding Real Estate Syndication
Real estate syndication allows individuals needing more knowledge, time, or capital to enter the real estate market by pooling resources and expertise with a team who handles the day-to-day property management operations.
If you are wondering how real estate syndication works, there are two different roles one can play as part of a syndicate.
Sponsors or General Partners
General partners have the skills and know-how to navigate the real estate market successfully. Sponsors take an active role in the syndication by handling all research, legal, and financial decision-making in the real estate syndicate, including:
- Choosing properties;
- Handling all legal and financial paperwork related to the investment, including leases, rent increases, acquisition fees, and contracts;
- Managing day-to-day property management, including upkeep and complex renovations; ● Maintaining relationships with investors and tenants.
Investors or Limited Partners
Investors support the real estate syndication by providing the necessary capital for purchasing and maintaining the property, which is a passive role. While general partners may contribute capital, investors are the main financial supporters of the operation.
Investors must be accredited to participate in real estate syndications, as they must show that they have financial resources to contribute. Real estate syndications often have a minimum amount that an investor must contribute; however, this amount is much, much lower than the amount you would have to contribute if you invested in real estate entirely by yourself.
Common Real Estate Syndication Models
There are three types of real estate syndication models, each with its partnership structure, tax implications, and financial benefits.
- General partnership syndication: The simplest syndication structure type: a signed agreement between all parties. In general, these types of syndications can be created and dissolved at any time. All assets, profits, and liabilities are shared in this agreement.
- Limited partnership syndication: Similar to a general partnership, different liabilities are assigned to the general and limited partners in a limited partnership. General partners take on a more significant amount of legal liability in exchange for playing a more active role. At the same time, passive investors have less legal liability. Often, but not always, active roles in this type of syndication receive greater financial compensation for the work that they do.
- Limited liability company (LLC) syndication: This structure creates an LLC, a distinct entity separate from the general partners or passive investors. In real estate syndications, the LLC will own the properties outright. As a result, the partners’ and investors’ personal assets are protected if the company faces legal trouble.
Considering these types of structures is essential as you search for a real estate syndication to join.
Steps to Get Started with Real Estate Syndication
Doing your research is the key to joining a real estate syndication that is right for you. You need to set specific investment goals before joining syndication and determine what you are comfortable investing in. Setting investment goals includes the dollar amount you are willing to contribute and the level of risk you are ready to assume. Having clear-cut ideas about this is essential before committing to a syndicate.
Even once you have found a syndicate that meets your needs, do your due diligence by thoroughly researching the sponsors, the terms of the syndicate itself, the syndicate structure, and any properties that the syndicate currently owns or is looking to buy. Being thorough at this stage can save you plenty of headaches.
If you are looking for syndication opportunities, the most significant step that you can take is building your professional network and connecting with others in your local or regional real estate spaces. You will need to go beyond just a Google search — take as much time as you need to meet up with and thoroughly vet the syndication opportunities you come across. Vetting opportunities are especially important as different syndicates specialize in different areas of the country and various types of properties, including multi-family real estate investments.
Advantages of Multi-Family Real Estate Investing
Multi-family real estate investing offers several distinct advantages compared to similar commitments in the single-family home market. For one thing, multi-family homes benefit from economies of scale, which refers to the savings and profits that result when a business becomes more efficient.
Since each unit in a multi-family dwelling contains several households, investors can collect rent from many people instead of just one family. In addition, if the building needs maintenance, the associated costs are applied to multiple units rather than just one. As a result, multi-family homes tend to have a greater return on investment than single-family properties. Multi-family units can also make diversifying your portfolio across multiple property types and locations easier, especially if participating in syndication.
Risks and Mitigation Strategies in Real Estate Syndication
While real estate is considered a low-risk and high-return investment, this industry has specific risks. In a large-scale sense, real estate is subject to market and economic risks, including interest rate fluctuations, the overall health of the economy, government policies and subsidies, and the preferences of generations renting and buying homes.
There are also specific risks tied to the properties that syndication may choose to invest in, which include:
- Location: Some locations may be desirable for people now, but later individuals may be less interested in living there. Some sites may also pose environmental risks, such as being in a floodplain or an area prone to wildfires.
- Structural risks: The quality of the property itself, such as problems with the foundation, electrical wiring, roof, or general age, can result in unexpected costs and renovations sooner rather than later.
- Tenant risks: Tenants can cause damage to the property, which can result in unseen losses.
Finally, there are inherent risks to participating in a real estate syndication, including the loss of money and loss of your passive investor status. These risks are why you need to understand the terms and conditions you must abide by when taking part in a real estate syndication.
This is why Viking Capital has made it our mission to have expertise in syndication with a team of seasoned real estate experts and financial gurus. When prospecting an investment opportunity Viking Capital leaves no stone unturned in its pursuit of outstanding returns. Our investment strategy is anchored on identifying low-risk opportunities that offer significant value-add potential, enabling us to preserve our investors’ capital while maximizing their long-term growth potential.
Financial Considerations to Take in Real Estate Syndication
As a potential investor, your financial resources are on the line when participating in a real estate syndication. As an investor, you are also taking a passive role in the relationship, meaning you only provide capital.
Remember that any other type of contribution to the syndication that would put you into an active role opens you up to additional legal risks. Thus, you must be completely comfortable when handing the decision-making power to the general partners.
This is why it’s important to fully understand the capital structure and investment process when you sign onto a syndicate, including what types of financial returns are expected and what you, as an investor, are expected to contribute. Doing so allows you to maximize your returns, including the tax benefits available to passive investors.
Critical Factors for Successful Real Estate Syndication
When participating as a passive investor in a real estate syndication, the key is to research, research, research. You must have a clear indication of how the syndication runs and operates. After all, it is your investment money. You want to ensure that your interests, especially the type of risks you are willing to take with your money, align with that of the general partners and the syndication’s approach to investing.
As mentioned above, when participating in a real estate syndication as a passive investor, you hand over the decision-making reins to the general partners. This hands-off approach is a significant benefit because it means you can reap the financial rewards of investing without spending much time and energy managing the properties yourself.
But it also means that you must be comfortable communicating with and have full knowledge of the syndication’s operations. This way, the general partners can make informed decisions based on all syndicate members’ needs and wishes.
In short, do your due diligence upfront and ensure you find the ideal match for your investing goals and needs.
Resources and Tools for Real Estate Syndication
Once you’ve decided that you’re ready to take part in a real estate syndication, there are various tools that you can use to find your ideal match and increase your knowledge. First, you want to ensure that you have a clear understanding of the ins and outs of managing real estate. Even if you aren’t making decisions like an active investor, you want to know how the business works. Some leading books and publications to start with include:
- Best Ever Apartment Syndication Book by Joe Fairless;
- Principles of Real Estate Syndication by Samuel Freshman
- The Definitive Guide to Underwriting MultiFamily Acquisitions by Robert Beardsley
- {free} Passive Investing Course by Viking Capital
You can begin looking for syndications to join once you have plenty of background knowledge on real estate syndication. A good first option is to lean on the connections you have made at live events or while doing research for your industry. You can also visit online platforms to look at potential syndications. Popular options include FundRise, CrowdStreet, or RealtyMogul. Sooner than later, you’ll be on your way to earning investment returns.
Conclusion
Navigating the real estate business — from determining which properties to purchase to tenant management, upkeep, and general maintenance — can be difficult, especially for newcomers. Joining a real estate syndicate can allow you to break into the real estate industry and generate a passive income with minimal hassle. Multi-family units, in particular, can be an excellent option for those looking to invest in a market with considerable potential for years.
By doing thorough research, having clear expectations for what you are looking for, and knowing the ins and outs of the business, you can select a real estate syndication that accomplishes your unique financial goals. Multi-family real estate syndication is an excellent option for beginners in this industry, and by investing the smart way, you will generate wealth for years to come.
