What is the Average Return on a Syndication?

The average return on a syndication can vary significantly depending on the type of syndication and the specific investment opportunity.

There are many ways real estate investment deals can measure profit or return on investment (ROI). While certain metrics can be used to calculate ROI for a specific year, syndications are typically calculated over the deal’s lifespan. [1]

Common metrics used to calculate syndication returns include internal rate of return (IRR), cash-on-cash return, and equity multiple.

With IRR, an investment’s profitability is measured using TVM or time value of money, which is expressed in the form of a percentage. This can be compared to ARR or annual percentage yield of a bond or bank account because it involves compounding into the calculation process. IRR can determine the percentage rate earned on each dollar invested for each period it is invested. [1]

Cash-on-cash return is an annual metric that means comparing the amount of cash invested with the amount of cash you earn after the deal.

Finally, equity multiple refers to the total cash distributed to investors from an investment divided by the equity invested.

In a syndication deal, LPs may be paid via monthly or quarterly distributions based on the property’s rental income, provided that the investment property is earning money. Additionally, depending on the deal structure, limited partners may also get a share of the lump-sum distribution once the property is sold. [1]

Compared to other real estate investments, multifamily syndication has the potential for some very strong returns. Apartment complexes are known for their strong and consistent cash flow because people always need a place to live. Multifamily properties are also relatively unaffected by vacancies. Even if one or two units become vacant, the remaining units can still produce monthly cash flow while the syndicator looks for new tenants. This is unlike single family properties that completely stop generating cash once the lone tenant moves out.

We can also compare multifamily syndication with real estate investment trusts (REITs), which is also a passive investment in real estate. REITs typically own income-producing real estate properties across various properties and sectors. [2]

The difference is that investors put money into the REIT itself, which is a company that invests in real estate, instead of directly investing in a real estate property. As such, investors cannot choose which real estate property the REIT actually invests in, unlike with syndication where investors get to choose a syndication deal based on the investment property they believe in.

Profit Structures Used When You Invest in Real Estate Syndication

Just as there are multiple ways to calculate potential ROI in multifamily syndication, there are also multiple profit structures used in these deals.

Profits can be split in various ways such as with preferred returns, with a waterfall structure, or with a straight split.

Preferred returns are the most widely used profit structure in multifamily syndication deals. This structure gives investors reassurance that they will receive their initial investment along with a specific return before the GPs are paid. Preferred returns may range from 6 to 8%, making it ideal for real estate investors who are more risk-averse. This is because even if the deal does not work out, investors can still get a small profit. [1]

Of course, this approach means that the sponsor can end up losing their initial investment if the syndication isn’t profitable.

Another approach is the waterfall structure, which can give GPs a higher portion of the profits if certain profit hurdles are met. With a waterfall structure, the syndicator and the passive investors get the same return up until the deal reaches a certain profit criterion. This criterion will be stated ahead of time. For example, if an IRR of 8% is reached, then the additional profits will be split 70/30, with the 70% going to the general partners. [1]

Keep in mind that syndication deals may have an unlimited number of waterfalls.

Finally, a straight split is a type of deal structure that uses one percentage rule to split the profits between the sponsor and the investors. This could mean a typical 70/30 split or an 80/20 split, with the larger percentage going to the LPs. [1]

Fees for Multifamily Syndication

Syndicators are compensated for their work putting the deal together, creating and executing a business plan, and even managing the property once the deal is in place. Passive investors may be charged with various percentage-based fees including: acquisition fee, asset management fees, financing fee, disposition fee, sponsorship fee, and in some cases, an entrance and exit fee.

The acquisition fee is used to compensate the GPs for working on acquiring the investment property. This is typically a one-time fee of 1 to 2% of the property’s acquisition price. [1]

The asset management fee compensates the syndicator for managing the property and handling its day-to-day operations, so that investors do not have to play the role of landlord. They will take on responsibilities like collecting rent, handling tenant concerns, and dealing with emergencies. If the syndicator hires a property management team or a third party company, they will still work on monitoring the property. Asset management fees are usually collected as an annual fee of 1 to 2% of the AUM or assets under management. AUM refers to the property’s current fair market value.

The financing fee is a one-time fee of 1 to 2% of the total loan amount and compensates the GPs for arranging the property’s financing.

The disposition fee compensates the sponsor for selling the property at the end of the deal, which can be just as work-intensive as acquiring a property in the first place. This is typically a one-time charge of 1 to 2% the sales proceeds. [1]

The sponsorship fee is collected when there is a third-party real estate sponsor who co-signs the loan on the real estate property. This sponsor is usually a high net worth individual (HNWI). In some cases, this sponsorship fee (1 to 2% of the total loan amount) comes from the syndicator’s profits instead of being charged to the investors.

Finally, some GPs will charge LPs with an entrance and exit fee for investing in the multifamily syndication deal. In most cases, when this is charged to investors, they are no longer asked to pay for the acquisition or disposition fees.

Remember that the profit structure will be detailed in the syndication deal so that investors can review it before choosing to participate in the syndication.

Tax Benefits of Multifamily Syndication

Syndication deals offer a variety of tax benefits for passive investors. For example, syndication deals can benefit from depreciation deductions. Similar to how investors can benefit from depreciation deductions by owning a multifamily property, passive investors in multifamily syndication can enjoy the same.

Depreciation is when the IRS allows you to deduct the cost of business items based on its “shelf life”—in this case, the apartment building itself. While this may sound simple, depreciation is one of the most powerful tax benefits of owning a real estate property. [3]

Because real estate properties break down over time, investors are allowed to write off the income-producing property based on wear and tear.

There’s also capital gains tax. These are the profits from selling an asset. As such, it is counted as income and will be taxed. However, the tax rate is different than the rate for traditional income.

Capital gains are generally taxed at either short-term or long-term capital gains rates, depending on how long the investment is held. When held for over a year, real estate income is treated as long-term capital gains. Long-term capital gains are typically taxed at a lower rate than short-term gains. Over time, this becomes more significant. Investing in real estate, specifically multifamily syndication which involves holding on to a property for several years, is far more tax efficient. [3]

Some syndication deals may involve a cash-out refinance during the holding period. If the cash is given to the investors, it may be considered a loan rather than a gain. [1]

With a refinance, you can essentially borrow against the appreciation and increased equity of a property tax-free.

Additionally, investors can deduct the mortgage interest paid on the multifamily property, which can significantly reduce taxable income. When tax season rolls around, mortgage interest deduction may come in handy. In the early part of a loan, payments mostly go toward the interest. These payments can be deducted. [3]

If an investor wants to sell their multifamily property and acquire another, they can use a 1031 exchange to defer capital gains taxes. This allows them to roll over the proceeds from the sale into a new property without triggering immediate taxation. In some cases, this may also apply to multifamily syndications.

With all the tax benefits of multifamily syndication, on top of all the natural benefits of owning an apartment complex, syndication is an incredible tool for accredited investors looking to get into real estate investing.

A passive investor can use syndication to grow their wealth and easily diversify their investment portfolio. With that said, the multifamily syndication process can be complex, so you still need to do your due diligence before participating in a syndication deal.

Is Multifamily Syndication Right for You?

Determining whether or not multifamily syndication is right for you will depend on your financial goals. Multifamily syndication is the perfect investment strategy for investors looking for a passive source of income, particularly those who do not want to be actively involved in the day-to-day responsibilities of running an apartment complex or condominium. [2]

Because investment opportunities like this require you to spend a large capital that cannot be accessed for a long time, you need to be comfortable with a certain degree of illiquidity.

This is also the reason why syndication deals are generally limited by the SEC to accredited investors. You need to have certain financial and intellectual resources in order to participate in real estate syndications.

Take note that like all forms of investing, multifamily syndication has its risks. Engage in each deal carefully and assess the investment property as well as the syndicator before getting involved. As always, you must weigh the pros and cons before you commit to an investment.

Work With BAM Capital for the Best Multifamily Real Estate Syndication Deals

Because the syndicator will handle everything involved in the syndication deal, it is absolutely necessary to find a trustworthy syndicator—ideally one that is an industry leader and has a track record of excellence.

The syndicator is responsible for choosing the investment property, developing the investment strategy, and running the multifamily property once the deal is done. Look for referrals from other investors or check online platforms before working with a syndicator. The real estate syndicator should have an understanding of real estate market cycles and other important factors that may influence the investment.

Some syndicators specialize in particular types of investments like commercial real estate and multifamily real estate assets. Look for one that suits your investment goals.

Because of the exclusivity of these syndication deals, you may have to rely on word of mouth to find available syndications.

When choosing a syndicator, take a look at their track record, their reputation, their assets under management (AUM), their realized gains, and their successful exits. Checking reviews and testimonials online can help you see what other investors are saying about them.

If you are looking for an industry leader with plenty of syndication experience and a team of experts working behind them, go for BAM Capital. BAM Capital is a vertically-integrated syndicator with a strong Midwest focus. It is an Indianapolis-based company that focuses on Class A, A-, and B++ properties with in-place cash flow and proven upside potential. [4]

Being vertically-integrated means that this syndicator can guide you every step of the way. They can handle every step of the syndication process, from acquiring high quality multifamily properties to managing them.

BAM Capital is trusted by accredited investors because of their track record and award-winning investment strategy that mitigates investor risk while creating forced appreciation. In fact, BAM Capital now has over $700 million AUM and 5,000+ units. [4]

No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.

For accredited investors who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, schedule a call with BAM Capital and invest today.