Multifamily Syndication: A Complete Guide

multifamily syndication

The best investments are those that limit your risks, reduce your exposure to market volatility, and lowers overheads & operating costs, all while protecting your core assets, and multifamily syndication offers just that! 

Multifamily syndications offer an opportunity for you to grow your wealth by investing in larger real estate deals along with a group of other investors. As an active investor in such a real estate deal, you gain an opportunity to strengthen your investment portfolio while reducing your risk exposure.

In comparison, investing in single-family real estate offers reduced profits and has a higher percentage of associated risk. At the same time, it can attract a lot of paperwork which is time-consuming.  

In this guide, we will discuss how this multifamily syndication works and what its benefits are, and how it can strengthen your portfolio.

What is Syndication in Real Estate?

Multifamily Syndication is a real estate investment strategy where a group of investors collectively park in real estate properties by pooling their resources, knowledge, and expertise. 

For example, if there is a property worth $5,000,000 but you have only $500,000 to invest. You can still purchase the property with other investors. In this way, you can easily invest your capital in big properties and expect decent returns. Once you purchase the property, the rental income and other profits will be shared among all investors.

Usually, there are two groups of people involved in multifamily syndication investing – the General Partners and the Passive Partners. 

General Partners (GPs)

They are referred to as the sponsors (syndicators) and are responsible for all major tasks in the syndication process. Here is the list of the tasks and responsibilities:

  1. Underwriting the deals,
  2. Negotiating with sellers
  3. Finding investors,
  4. Educating investors 
  5. Property management
  6. Transparent communication with investors. 

Limited Partners (LPs)

Limited partners (also known as passive investors) fund their capital in multifamily projects to get the perks of this syndication investment. So, being a passive investor, you just need to sit back and enjoy the cash flow. For any action required in the deal or property management, syndicators are there to invest their time and effort on behalf of LPs.

Benefits of Investing in Multifamily Real Estate Syndication

Multifamily syndication offers a wide range of benefits, like reduced taxable amounts, high rental income, low-risk financing, and much more. Here are some of the key advantages of this syndication:

1. Passive Income

Multifamily properties can serve good rental income to investors without any stress of managing the property. LPs just need to provide the capital, and there will be a regular cash flow of rental income. The additional profit (if any) also gets split among the syndicators and the investors.

2. Tax Benefits

Investing in multifamily syndication helps in tax saving. By showing the accelerated depreciation deductions, the investors can reduce the taxable amount and earn profit.

3. Diversification

When you park your funds in a single type of investment, it can become risky. So, it becomes important to invest small amounts in different types of properties. With this strategy, investors can have long-term profits with reduced risk.

4. Leverage

In multifamily syndication investment, leverage comes in many forms. One is leverage through lending money for purchasing the property. Also, investors are leveraging the capital of other investors as well as the skills and expertise of the GPs, resulting in better investment options.

How does Multifamily Syndication Work?

Multifamily syndication works when a group of passive investors collectively invest in a multifamily property under the guidance of sponsors (syndicators). The working process of the syndication is explained below:

1. Property Analysis

This syndication process begins when a sponsor finds a multifamily property with good potential for cash flow. For in-depth property analysis, consider the factors such as location, demand in the market, basic expenses, and cash flow potential.

2. Forming the Syndication Entity 

For initiating the legal process syndicator creates a legal entity as LLC (Limited Liability Company) or LP (Limited Partnership). This entity defines an ownership structure where passive partners (investors) become the members of an LLC/LP.

3. Deal Structuring 

The syndicator presents investment terms and business plans to investors. It includes the total capital required for purchasing this multifamily property, cash flow projection, and profit-sharing among general partners and passive partners. 

4. Capital Raising

The general partner(syndicators) looks for potential investors who wish to invest in this multifamily property. Passive partners can be individuals, families, offices, institutions, or anyone meeting certain financial criteria set by the Securities and Exchange Commission (SEC). These investors invest their funds or capital in exchange for equity in LLC.

5. Acquisition and management 

Once the required capital for syndication is raised, all funds and finances are combined to purchase the multifamily property. General partners are then responsible for managing the property. Responsibilities may include tenant management, maintenance of property, rent collection, expense management, and implementing strategies to maximize cash flow.

6. Equity and appreciation 

As the property starts generating good rental income and appreciates over time, the equity of investors also grows. Equity buildup contributes to the return of individual investors. 

7. Exit strategy 

The exit strategy is a part of syndication’s business plan, which has details about how and when the multifamily property will be sold. This usually happens when the predetermined hold period comes to an end. After this, investors have their profits which they can potentially use for other investments.

8. Dissolution of syndication 

When the multifamily property is sold or refinanced, including the settlement of all its financial obligations, the syndication is dissolved. LLC is then terminated, and investors receive their profit share along with the return on capital, finally completing the investment cycle.

The real estate syndicators lead this investment process by investing their time and expertise, whereas passive investors only provide capital for investment.

Important Factors to Consider During Multifamily Syndication

In a multifamily syndication structure, investors completely rely on sponsors for the deal. So, it becomes important for investors to consider the following before finalizing the deal:

1. The Syndicator: 

Choosing the right and trustworthy syndicator is important for any multifamily syndication deal. For this, it is best to check the syndicator’s past performance, transparency in communication, and interest in the investment deal.

2. Mitigate risks: 

To avoid risks in multifamily syndication investment, you should ideally conduct a deep market analysis to understand the market trend. Also, property evaluation and investment underwriting are important to understand before making the deal.

3. Exit strategy: 

Hold strategy and refinancing come under the exit plan. It is important to know whether the syndicator is planning a long-term investment or has a strategy to sell the property after completing a successful investment cycle.

Beach Front Property Management Inc.: Your Partner in Multifamily Syndication Investment

Expert property managers at BFPM monitor changing market trends to offer you the best multifamily properties. Our goal at BFPM is to find the property options for you that are worth investing in with maximum cash flow. You can share your requirements with our property managers and get the best investment options for your multifamily property investment. Our financial advisors will analyze your priorities along with the market trends and available multifamily properties.

Once you find a good multifamily property for investment, BFPM will help you initiate the investment deal. Furthermore, BFPM will be responsible for providing you the updates about the property details and helping you get maximum cash flow. 

You can reach us for hassle-free property management and investments. We, as your trusted property partners, are here to guide you through the whole process of multifamily syndication investment. 

Trevor Henson

Trevor Henson is an experienced entrepreneur (10+ highly-successful start-ups) and property investor with a demonstrated history of building and leading teams in investment property management environments, maximizing returns for property owners, and optimizing properties through construction management and re-positioning. He…
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Frequently Asked Questions(FAQs)

A typical multifamily syndication structure comprises a GPs (sponsor) who leads the deal and LPs (limited partners) collectively invest in a multifamily property. A legal entity is then formed to facilitate the property deal. Syndicator has a crucial role in identifying the best property, analyzing market trends, and managing the property, whereas passive investors provide the required capital and sit back. The investment agreement defines the equity, hold-time, expenses, and potential cash flow.

Benefits of multifamily syndication include:

  • Investors have the opportunity to invest their capital in multiple properties without relying on a single property for returns.
  • Multifamily properties have a good potential for regular cash flow.
  • General partners (syndicators) use their expertise for the regular management of property.
  • By investing in real estate, tax benefits can be availed, reducing taxable income.
  • The funding risk is very low in comparison to stock markets.

The average return for multifamily syndication ranges between 7-10% in rental properties and is called a “cash-on-cash” return. This cash flow is distributed among the passive investors on a monthly or yearly basis.

Syndication charges an average of 1-3% of the acquisition cost of the multifamily property. This fee is the compensation for identifying and securing the property for investment purposes. Also, there is a share in the profit split once LPs have received preferred returns, and there is an additional profit.

  • Acquisition fee: This fee is a one-time payment calculated on the basis of the total purchase price of the multifamily property.
  • Asset Management fee: This fee is compensated for the day-to-day management of the purchased property.
  • Profit split: Multifamily syndicators receive a profit split when there is additional profit on the preferred return or cash flow.
  • Disposition fee: Syndicator gets this fee when they successfully execute the exit strategy of the property by selling it.
The compensation structure varies from one syndicator to another. Transparent communication about the compensation structures always ensures the trust and success of the syndication.