As an investor, it is important to stay up to date on multiple types of investing strategies. Apartments can be one of the best investments when the right strategy is involved. But how do you invest in a $10 million apartment complex without $10 million?

This is where syndication comes into play. Apartment syndication is the process of bringing together investors and managers to purchase a property. This type of strategy is also used in some other types of investments, but for today we are focusing on apartments. So let's dive into syndication and learn more about it and how it works.

Common Terms Used in Apartment Syndication

Before we dive in, let's learn some of the key terms used in the industry. This will help investors understand the terminology as they progress through the journey to a seasoned investor.

• General Partner: A General Partner, also known as a GP or an "operator" is someone who oversees the syndication process. GPs are involved in finding a new deal that meets their criteria, performing underwriting, finding investors, managing the asset, and more. In a large apartment deal, there may be several GPs involved who all have different skill sets.

• Limited Partner: A Limited Partner, also known as an LP or "investor" is someone who brings money to a deal. LPs are considered passive investors and do not have any control over the management of a property. The benefit for LPs is they are able to grow their investment while maintaining a limited liability - if a tenant sues the property owner - LPs have no liability for that lawsuit. Additionally, LPs can grow their wealth through multiple deals to spread out their funds and mitigate risk associated with a single deal.

• Sponsor: A sponsor is also known as a GP, but the sponsor of a deal has specific requirements they must meet in order to qualify. Sponsors must have a certain level of net worth and experience managing similar deals in order to qualify to sponsor each deal. Sponsors also personally guarantee the loan on a given property.

• Accredited Investor: An Accredited Investor is a legal term that applies to someone with specific qualifications. These include:

  • More than $200,000 (or $300,000 if married) in annual income for 2 years or more, and an expectation to earn the same or more this year.

  • More than $1,000,000 in assets (not counting primary residence)

  • Specific qualifications or certifications in the financial industry which can qualify you.

• Sophisticated Investor: A Sophisticated Investor is someone who does not qualify as an Accredited Investor but has some knowledge about investing.

• Private Placement Memorandum: A PPM is a packet that contains all of the details of a potential investment opportunity. Information contained includes the name and location of the property, information about the market, the current and projected financials, and more. The PPM is your source of information to understand each potential investment.

• Offering Memorandum: An OM is a packet containing information about a property that is available for purchase. The OM and PPM may contain a lot of similar information but serve different purposes. The OM is a packet a sponsor or GP might analyze to determine if a property is a good deal and worth pursuing further.

• Single Purpose Entity: Typically an SPE is an LLC that is established for the sole purpose of holding the apartment investment. The LLC is set up to ensure the GPs have management authority and the LPs receive the appropriate share of the profit generated. Typically this is a 30/70 split in favor of LPs but the specific percentage may be different depending on the deal.

How Apartment Syndications Work: Step-by-Step

Ever wondered how the magic of apartment syndications unfolds? Let's dive in and explore the process, step-by-step!

Step 1: The Sponsor and the Deal

It all begins with a GP who identifies a promising investment opportunity, typically an underperforming apartment complex that can be transformed into a money-making machine. When enough analysis has been performed, the GP (also known as the underwriter in this step) takes the deal to a Sponsor and the rest of the GP team. Depending on the team involved and the level of experience, the sponsor and the GP who found the deal may or may not be the same person. Oftentimes, teams split up work and may have multiple underwriters involved, and not all of them will qualify as a sponsor.

Step 2: Due Diligence

Once the sponsor has a property in their sights, they carry out due diligence – a thorough investigation of the property's financials, legal standing, and physical condition to ensure it's a viable investment. Due diligence is similar to the due diligence performed when purchasing a home, except it is a much more thorough process that can take 60-90 days. As an investor, you may be contacted during this phase for a "soft commit" which means you have an interest but will need more details.

Step 3: Assembling the Syndicate

With due diligence done, the sponsor sets out to pool together capital from investors, forming a syndicate. This is typically done through a private placement memorandum (PPM), which outlines the deal's structure and terms. Depending on the type of deal, and how much funding is required, the GP team may or may not be able to advertise a deal. At this step in the deal, there is typically a contractual obligation to gather the necessary funds and close the deal within a certain time window. So it is important as an investor to make an efficient decision as to whether you will invest in a given deal.

Step 4: Acquiring the Property

Upon raising the required capital the, sponsor acquires the property on behalf of the syndicate. This is often done through a single-purpose entity (SPE) created specifically for the deal. The process of closing an apartment deal is very complex and involves a lot of moving parts. However, just like a home, upon closing - the deal is now owned by the SPE and the GPs will start executing the business plan.

Step 5: Improving and Managing the Asset

With the property in hand, the GPs start implementing their business plan. This may involve renovations, leasing strategies, and professional property management to boost the asset's value and generate returns for investors. While the strategies used industry-wide are similar, there will always be differences in each and every deal. How well this phase of the deal is executed will determine how successful the investment is, and how much profit is generated for the investors.

Step 6: Distribution of Profits

As the property generates income, profits are distributed to investors based on their ownership stakes. This typically happens on a quarterly basis, but the schedule and terms can vary depending on the syndication agreement. Some deals may involve higher and more frequent cash flow, while others may have little or no cash flow, but higher overall returns. Understanding your investment goals is the key to understanding which types of deals are better for you.

Step 7: Exit Strategy

Finally, the GPs will execute an exit strategy, usually by selling the property or refinancing it. This allows investors to realize their gains and potentially move on to the next syndication opportunity. Typical exits are executed about 3-5 years after the acquisition of a property. Your GP team should be able to inform you before investing the length of the hold period for each deal. However, it is not uncommon for a GP team not to have decided between selling or refinancing a property to exit investors, sometimes these decisions are made closer to the intended exit.

And there you have it! A fascinating journey from spotting an opportunity to reaping the rewards of successful apartment syndication. Next, let's dive into how investors should evaluate a deal.

Finding the Right Apartment Syndication to Invest In

Choosing the right apartment syndication for your investment portfolio can be a daunting task. With countless options available, it's essential to know the factors that will lead you to a successful investment. In this section, we'll dive into some critical aspects to consider when selecting the perfect investment for you.

1. Sponsor Experience and Track Record

When evaluating any deal - don't start with the deal, start with the team. A GP team and sponsor with a strong history of successful syndications will instill confidence in your investment. Make sure to research their past deals, exit strategies, and overall performance.

Also, make sure the GP team is open and honest - they should be easy to communicate with and quick to respond. It's fine if they don't have an immediate answer to a question - but they should be able to get back to you with a solid answer and not try to dodge questions. They may not have answers that you want to hear, but they should still present the answers and understand if this opportunity is not a fit for you.

2. Property Location and Market

When it comes to market for an apartment, you have to think more granularly than state or city. Markets can vary significantly in just a few miles, sometimes even from street to street a market can be completely different. Ideally, you are looking for a market with a growing population and job growth. Look for "Opportunity Zones" or areas where the local government is investing in revitalizing and bringing in new jobs. If your investment is in an area where several large companies are building regional facilities over the next 2-3 years, chances are good your investment will perform very well.

3. Property Condition and Value-Add Potential

Evaluating the property's condition and the potential for value-add improvements is crucial. Look for properties that offer opportunities for upgrades and renovations, leading to increased rental income and property value. You're looking for a property that is still in decent shape but needs some work. Ideally a facelift to the kitchen, some paint, and maybe one or two major items like a pool that's not working. You're probably not looking for a property missing several walls and needing a ton of work to fix it up.

4. Investment Terms and Structure

Understand the investment terms and structure, including preferred returns, profit splits, and hold periods. Ensure the deal aligns with your investment goals and risk tolerance to make an informed decision. Have an idea of what you're looking to get out of the investment before investing. If you want cash flow, then you're probably not going to want to look at new build opportunities. If you want short-term quick growth, maybe a new build is right for you.

5. Exit Strategy

An effective exit strategy is essential for maximizing returns on your investment. Understand what the projected hold time is for the property - and get an idea of the exit strategy. Most deals will present one of two strategies: selling the property or refinancing and cashing out investors. If selling the property is the exit strategy, understand how the team plans to sell and what happens if they are unable to sell in a given time period.

The Risks and Rewards of Apartment Syndication

Like any investment, there are risks and rewards to consider. Let's dive into the world of apartment syndication and explore what you could gain – or lose – in this exciting venture.

Rewards 

• Economies of scale: By pooling resources with other investors, you can acquire larger properties that would be difficult or impossible to purchase individually. This can lead to better financing terms, more negotiating power, and more revenue potential.

• Passive income: As a limited partner, you can receive a share of the cash flow from the property without having to deal with the day-to-day management or maintenance.

• Tax benefits: Real estate investments often come with various tax benefits, such as depreciation and mortgage interest deductions, which can help offset income from other sources.

• Asset appreciation: If the property increases in value over time, your investment could grow as well. This appreciation can be a significant source of wealth creation.

• Professional management: A skilled and experienced GP will oversee property management, making sure it runs smoothly and efficiently. This can lead to better decision-making and higher returns.

Risks & Mitigation 

• Loss of capital: As with any investment, there's no guarantee that you'll make a profit. If the property doesn't perform well, you could lose some or all of your investment. This risk is mitigated by selecting appropriately experienced GPs who have a track record of success. Validating that the market the property is in is a growing one and that the plan for the property is sound can mitigate the risk of a downturn. But of course, disasters happen and damage can occur, so ensuring the property is not in a high-risk area, or that it has good insurance mitigates the risk of environmental loss.

• Lack of control: As a limited partner, you have a limited say in the property's management and decision-making. While this is not necessarily a risk, it is something to be aware of as an investor. If your preference is to be hands-on, you should seek out partners and learn more about sourcing deals.

• Illiquidity: Real estate investments are typically long-term commitments, and it's not always easy to sell your shares or cash out if you need to access your capital quickly. If this is a concern with your investment, ask your GP team if they have a solution before you invest. Make sure to get a firm answer, even if the answer is there is no option for an early exit. A good GP team will not try to dodge this question, they will answer it head-on, even if the answer is not what you want.

• Market risks: Factors such as economic downturns, changes in local real estate markets, and regulatory shifts can impact the property's performance and your potential returns. Market forces are impossible to control, but with apartment syndication, the value of a property is based on the revenue generated. So as long as the apartment is managed well, and in a growing market, this risk can be mitigated. However, every investor knows markets can change and they can be unpredictable so this is no guarantee of performance.

• Syndicator risk: The success of the investment often depends on the experience, skill, and integrity of the syndicator. It's essential to do your due diligence and select a reputable general partner. Vetting the GP team should be your first step when evaluating any investment deal. A good GP team can make or break a deal, even in a not-so-good market. But a great property in a great market can be a bad investment if the GP team lacks experience or trust.

In conclusion, apartment syndication offers an array of rewards for investors seeking to diversify their portfolios and generate passive income. However, it's not without its risks. Carefully evaluating the potential rewards and risks, as well as the syndicator's track record, can help you make an informed decision about whether this type of investment is right for you.

Frequently Asked Questions

How do investors find apartment syndication deals?

The short answer is; get yourself on some mailing lists for syndicators. Syndicators often join forces with other teams so it is common to hear about deals sourced from a variety of places from being on a single list.

But it also is a benefit as an investor to find multiple syndicators and get on each of their lists. Many syndicators are doing a handful of deals per year so you're not likely to be inundated with emails. By getting on multiple lists, you increase the likelihood that you will find a deal that is right for you.

Remember - syndicators themselves are usually also passive investors in other deals. Ask the investor relations team for any lists you are already on - chances are they will be able to recommend other syndicators who target deals you might be interested in.

What is apartment building syndication? 

Apartment syndication is a real estate investment strategy where multiple investors pool their funds to purchase, manage, and eventually sell a large-scale, multifamily property. This allows individuals to participate in larger, higher-yielding investments that they may not have been able to afford on their own.

How much can you make from apartment syndication?

Investor returns typically depend on the performance of the property and the overall market. Syndicators often aim for an annualized cash-on-cash return of 7-10%, with a total return on investment (ROI) ranging from 15-20% over the life of the investment, usually 3-5 years.

As an example: Suppose an investor puts $100,000 into an apartment syndication that is projected to return 7% cash on cash per year for 3 years, with a 20% ROI. In this scenario, you might expect to earn about $7,000/yr for 3 years, and when exiting the deal after 3 years, receive a total of $172,800. The breakdown being:

• Return of initial $100,000 investment

• 7k/yr * 3yrs = $21,000 in cash flow.

• Appreciation in property value: $51,800

• For a total of $72,800 in profit earned over the lifetime of the deal (20% ROI).

This is of course highly dependent on the performance of the property over that period. Every deal is different, and specific numbers for a deal will be found in the PPM for the investment offering.

How does a syndication work?

Imagine a group of friends pooling their resources to purchase a swanky apartment. That's essentially what a syndication is but on a much larger scale. It's a collaborative investment strategy where multiple investors come together to acquire and manage a property, often a multi-family residential complex or commercial building.

So, how does this process unfold? First, a "sponsor" or lead investor identifies an attractive property and conducts thorough research to determine its viability. The sponsor then establishes the syndication structure, which includes the legal framework and investment terms.

Once the legalities are sorted, the sponsor invites potential investors to join the syndication. These investors, also known as "limited partners," contribute capital in exchange for equity in the property. The sponsor, acting as the general partner, takes on the responsibility of managing the property, handling day-to-day operations, and making crucial decisions.

Upon successful acquisition, the property undergoes improvements to increase its value and generate higher rental income. The rental income is typically distributed among investors according to their ownership share. Eventually, the property may be sold, and the profits are shared among the syndication members.

What does it mean to syndicate a property?

Essentially, property syndication is the coming together of multiple investors to pool their resources and jointly acquire a property. It's like assembling your own real estate Avengers, where each investor brings their unique financial superpowers to the table. The result? A team that's able to purchase and manage a property that would be otherwise unattainable for individual investors.

But wait, there's more! Syndicating a property not only allows investors to access larger, more lucrative deals, it also helps to spread the risk. By allocating shares to each investor, the responsibility for the property's success is divided amongst the team. So, if the market takes a nosedive, your financial superhero squad has got your back!

What are the benefits of apartment syndication?

Investing in apartment syndications offers several benefits, such as diversification, passive income, tax advantages, and the potential for strong returns. Additionally, the day-to-day management of the property is handled by experienced professionals, allowing investors to focus on other aspects of their lives or businesses. 

How do I get started in apartment syndication? 

Start by educating yourself about the process, networking with experienced syndicators, and conducting thorough research on potential investments. It's essential to build a team of knowledgeable professionals, such as a syndication attorney, accountant, and property management company, to ensure a smooth and successful investment. 

What are the risks involved in apartment syndications? 

Like any investment, apartment syndications come with risks such as economic downturns, fluctuating vacancy rates, and unexpected maintenance costs. However, a well-researched investment strategy and a strong team can help to mitigate these risks and enhance the overall stability of the investment. 

What are the roles of a general partner (GP) and limited partner (LP) in apartment syndications? 

The general partner (GP), also known as the sponsor, is responsible for managing the property, making decisions, and overseeing the investment's operation. In contrast, limited partners (LPs) are passive investors who contribute capital and receive returns but have limited liability and involvement in the property's day-to-day management. 

How are returns distributed among investors? 

Returns are typically distributed through a waterfall structure, where investors receive a predetermined preferred return before the general partner receives any profits. Once the preferred return is met, the remaining profits are split between the general partner and limited partners based on an agreed-upon percentage. 

How to make $50,000 a year passive income?

It is possible to make $50,000 a year passive income using real estate syndication. To understand how, you'll need to figure out the cash-on-cash return of a property. Cash-on-cash return is the approximate percentage expected to be returned to the investor per year.

For example, let's assume you are evaluating a deal that has a 10% cash-on-cash return. Given this scenario, you would need to invest $500,000 in order to have a return of $50,000 per year in passive income.

What are the pitfalls of real estate syndication?

As with any investment, it's essential to be aware of the potential pitfalls before diving in. Let's take a closer look at some of the challenges that investors may face with syndications.

1. Lack of control: In a syndication, investors rely on the expertise of the syndicator or operator to manage the property. This means that you'll have limited control over the day-to-day operations, and you must trust the operator to make the right decisions for the investment.

2. Illiquidity: Real estate syndication investments are typically illiquid, meaning they cannot be easily converted into cash. It may be challenging to sell your share in the syndicate, especially if the property isn't performing well or if market conditions are unfavorable.

3. Market risk: Like any real estate investment, syndications are subject to market fluctuations. Economic downturns, changes in local demographics, or shifts in demand for rental properties can impact the property's performance and potentially reduce returns for investors.

4. Legal and regulatory risks: Syndications are subject to various federal and state regulations, which can change over time. Investors should be aware of the potential legal and regulatory risks, including the potential for disputes between syndicate members or issues with securities laws.

5. Operator risk: The success of a syndication largely depends on the operator's experience and expertise. If the operator fails to manage the property effectively or encounters financial difficulties, the syndication may underperform, leading to lower returns or even losses for investors.

Can you lose money with real estate syndication?

The short answer is yes, of course, it is possible to lose money. BUT: while it is possible to lose money, it's not really that common in syndications to lose money. You are more likely to run into situations where the syndication does not perform as well as predicted also known as underperforming.

A number of factors can lead to underperforming syndications, but chief among them is a bad GP team or a bad market. If the GP team does not have much experience managing apartments, they may make costly mistakes that lead to problems. So vet your GP team before investing in any syndication deal.

Who owns the property in a syndication?

Property ownership is divided between the general partners (GPs) and the limited partners (LPs). The GPs typically comprise the syndication team, while the LPs consist of individual investors who contribute capital to the deal. 

• General Partners (GPs): These are the people who manage the property, make decisions, and assume the most risk. They are responsible for finding, acquiring, and managing the investment property. GPs usually contribute a smaller portion of the capital but receive a share of the profits as compensation for their active role in the project.

• Limited Partners (LPs): Also known as passive investors, LPs provide the majority of the capital needed for the acquisition and development of the property. They have limited liability and are not involved in the day-to-day management of the investment. In return for their financial contribution, they receive a share of the profits.

The ownership structure of a syndication is often represented as percentages, with the GPs and LPs each owning a specific portion of the property. This is referred to as the equity split. The split can vary depending on the agreement, but it's common to see a 70-30 or 80-20 split, with the LPs owning the larger share. 

What is the typical investment timeframe for apartment syndications?

Investment timeframes can vary, but most apartment syndications have a hold period of 3-5 years. This allows time for the property to appreciate in value, generate income, and implement any value-add strategies before being sold for a profit.