“Most investors can expect anywhere from 10% to 18%+ annual returns on their investment with a total project return of 100%+ ”
Real estate syndication is a way for investors to aggregate their intellectual and financial resources to acquire and manage assets much bigger than the individual investors could afford to purchase on their own. In the past, real estate was typically the domain of ultra-rich moguls who could afford to invest multiple millions of dollars in projects across the country. The emergence of syndications has opened the door for many more investors to unlock the benefits of real estate investing and achieve massive wealth generation without having to invest millions and millions of their own dollars.
THE BASICS
In its simplest form, a real estate syndication is a transaction between a Sponsors and a group of Passive Investors. As the manager and operator of the deal, the Sponsors (General Partners) leverage their experience and expertise to acquire, raise capital, develop the business plan, and manage operations of the asset. The passive investors, or Limited Partners, invest in the deal without much, if any, investment of their time or energy thereafter. Passive investors are typically busy professionals who understand and appreciate the merits of multifamily investing, but may not have the time, resources, or experience to pursue an active role. The General Partners should always have skin in the game and typically bring between 5% and 20% of the total capital required to purchase the asset and the Limited Partners invest the remaining 80% to 95%.
SYNDICATION STRUCTURE
Syndications are usually structured as a Limited Liability Company with the General Partners acting as the management and the Limited Partners acting as passive members of the LLC. This is a similar set up to other private funds like venture capital or private equity with the legal structure in place to protect both the General and Limited Partner’s interests in the deal.
DISTRIBUTION OF PROFITS
An equitable split of profits between the General Partners and Limited Partners is agreed upon and placed into the entity documents, also known as the Private Placement Memorandum or PPM. Multifamily real estate syndications make money via cash flow, appreciation, and principal pay down and these profits are typically split 70/30 or 80/20 (LP/GP) meaning the Limited Partners keep 70% to 80% of the profits with the remainder going to the General Partners. Many syndications will offer a “Preferred Return” or “Pref” of 7% to 9% which guarantees a return to investors before the General Partners even get paid on a deal. Usually cash flow profits are distributed via quarterly payments with a lump sum payment upon sale of the asset. With the multifamily syndications I have been involved with, most investors can expect anywhere from 10% to 18%+ annual returns on their investment with a total project return of 100%+ over a 5 to 7-year hold period.
HOW TO PARTICIPATE
Well over 100,000 people participated in syndications in 2018 alone, so there is an abundance of Sponsor groups and syndications from which to choose. However; not all General Partnerships or syndication teams are created equal and some should be downright avoided. Through various networking and referrals, I have found several groups which share the same investment criteria and objectives as myself and have vetted these teams thoroughly before investing with them. These are experienced teams (5000+ units under management, decades of experience) investing in stable but growing cash flow markets in the Southeast United States. Feel free to schedule a call with me and I’d be happy to discuss my selection criteria and the data to support my selections.
