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Multifamily Syndication, Real Estate Investing For Accredited Investors.

Real estate syndication is a type of real estate investment in which multiple investors pool their financial resources together to purchase a single asset. A sponsor, also known as a syndicator, locates the deal and manages the investment once the deal has closed. This sponsor serves as the general partner (GP) who coordinates the transaction throughout the process. See, “Structure of a Syndication” to learn more. [1]

Although any kind of real estate property can be used for a syndication deal, multifamily syndication is the most popular type because it is a low-risk investment. Investors benefit from a consistent stream of income through rental payments.

Multifamily properties like apartment communities and condominiums have several units that can generate cash flow. Additionally, they are not heavily impacted by vacancies, unlike single family real estate properties. Investors can steadily build their wealth through multifamily syndication.

Passive investors provide most of the upfront capital required, in exchange for a share of the cash flow. Depending on the deal structure, they may also earn a share of the equity upon resale. [1]

Sponsors are individuals or companies who take charge of the syndication deal. Sponsors, like BAM Capital, look for a deal, acquire the property, and manage the real estate.

These syndicators have a ton of real estate experience. They have a deep understanding of due diligence for potential deals. It allows them to handle every step of the syndication process, making it a true passive investment for real estate investors.

How Does Multifamily Syndication Work? Structure of the Deal

General Partners (GP)| Sponsor | Syndicator

  • Role: Act as the syndicate’s manager.
    • Sponsors are responsible for the operational aspects of the syndication deal, including acquisition, financing, and property management (PM). Property management is often outsourced to a third party company unless the syndicator is a vertically-integrated real estate company, like BAM Capital. [2]
  • Tasks:
    • Include deal sourcing,
    • Securing loans
    • Negotiating purchase terms
    • Conducting due diligence
    • Managing renovations
    • Maintaining investor relations.

Limited Partners (LP) | Passive Investor

  • Role: Passive investors who provide capital with minimal involvement in the property’s day-to-day management. [2]
  • Experience: Enjoy the benefits of real estate investment such as income generation, tax benefits, diversification, and property appreciation–all without the operational complexities of managing a property yourself.

Syndication Fees & Structure

Acquisition

This one-time fee, typically ranging from 1-2% of the acquisition price, is charged for the GPs’ efforts in identifying, negotiating, and securing the property. It covers the extensive groundwork necessary to finalize the property purchase. [2]

Financing

Arranging financing for a property acquisition involves complex negotiations and financial structuring. For this service, GPs receive a financing fee, usually set at 1-2% of the total loan amount, acknowledging their critical role in securing favorable loan terms.

Asset Management

An annual fee, generally 1-2% of the assets under management (AUM)—typically the current market value of the property—this fee is for ongoing operations management. It covers tasks such as overseeing property management, handling corporate taxes for the syndication, addressing regulatory or legal issues, and managing investor disbursements. [2]

Sales/Disposition

 

Comparable to the acquisition process in terms of workload and complexity, the sale of a multifamily property incurs a disposition or sales fee. This fee, normally between 1-2% of the sale proceeds, rewards the GPs for their expertise in executing the sale of the property effectively. [2]

Sponsor

Occasionally, a multifamily deal may be co-sponsored by a third-party real estate sponsor, typically a high-net-worth individual (HNWI) who co-signs the property loan. The sponsorship fee, often 1-2% of the total loan amount, may be deducted from the GP’s profits rather than charged directly to the Limited Partners (LPs).

Entrance Fee and Exit Fee

In certain scenarios, GPs may implement an entrance fee for joining the investment and an exit fee upon final disbursement to LPs. These fees are typically an alternative to charging acquisition and disposition fees, aiming to keep the overall fee structure competitive and attractive to potential investors. [2]

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Multifamily Financing Options

Banks

Banks typically offer recourse loans for apartment financing, with Loan-to-Value (LTV) ratios up to 75% and loan terms ranging from 5 to 10 years. These loans have stringent credit and net worth criteria. Banks are also a viable source for construction loans, though these are reserved for highly qualified borrowers due to the increased risk associated with such investments. [2]

Commercial Mortgage Backed Security

Commercial Mortgage-Backed Securities (CMBS) loans, also known as conduit loans, provide low-cost, non-recourse financing options for multifamily properties. These loans offer up to 75% leverage with terms usually set between 5 to 10 years. CMBS loans are known for having more relaxed credit and net worth requirements compared to traditional bank financing, but the closing process can be complex and lengthy. Loan amounts typically start at $2 million.

Hard Money

Hard money or private money loans are characterized by high interest rates and fees but are notably flexible. They cater to borrowers facing credit challenges or legal complications or those interested in acquiring distressed properties or other high-risk investments. [2]

Fannie Mae and Freddie Mac

These government-sponsored enterprises provide low-cost, non-recourse multifamily loans with LTV ratios as high as 80% and loan terms extending from 5 to 25 years. The minimum loan amounts range from $750,000 to $1 million, aimed at borrowers with strong credit profiles and substantial net worth. [2]

Housing Urban Development (HUD)

Offered by the U.S. Department of Housing and Urban Development, HUD loans present the most favorable terms in the market: low rates, long durations, and non-recourse financing. The HUD 221(d)(4) program is specifically designed for new construction and significant rehabilitations, providing up to 90% LTV with a 40-year, fixed-rate term that includes a three-year, interest-only construction phase. [2]
The 223(f) program supports acquisitions and refinances under similarly attractive terms. These loans, however, require exceptional qualifications and patience; processing times can extend up to a year for new constructions.

How Much Money Do Syndication Investors Make?

IRR

Internal Rate of Return (IRR) is a financial metric used in real estate to evaluate the profitability of investments. It represents the annualized return rate that makes the net present value of all future cash flows from an investment equal to zero. Essentially, IRR is the percentage rate earned on each dollar invested over the period it is invested. [3]

Calculation: IRR is determined by finding the rate at which the present value of future cash inflows and outflows, including initial costs, ongoing income, and the sale value of the property, brings the net investment to zero.

Importance:

  • Comparative Tool: It allows investors to compare different investment opportunities fairly, regardless of size or duration. [3]
  • Performance Measure: Reflects the efficiency of an investment, taking the time value of money into account.
  • Decision Making: Helps investors assess whether a property meets their required return threshold, factoring in risk and opportunity cost.

Limitations:

  • Reinvestment Assumption: Assumes cash flows are reinvested at the IRR, which may not always be practical.
  • Complementary Metrics: Should be used with other indicators like cash-on-cash return and net present value for a well-rounded analysis.
In essence, IRR is crucial for assessing real estate investment returns, but it’s best utilized alongside other financial metrics.

Cash-On-Cash Return

Cash-on-cash return is a financial metric commonly used in real estate investment to measure the cash income earned on the cash invested in a property. This percentage reflects the annual return the investor makes relative to the amount of money initially put into the investment. [4]
Calculation: The cash-on-cash return is calculated by dividing the annual pre-tax cash flow by the total cash invested. The annual pre-tax cash flow is the net income the property generates after operating expenses but before taxes. The total cash invested typically includes the down payment, closing costs, and any renovation expenses paid out of pocket. [4]

Significance:

  • Performance Indicator: It shows how efficiently an investment is generating cash flow relative to the initial cash invested.
  • Investment Decision Tool: Helps investors evaluate the liquidity and immediate profitability of property investments, especially useful for comparing different property investments.
In summary, cash-on-cash return is a straightforward metric for assessing the profitability and cash flow efficiency of real estate investments based on the actual cash invested.

Equity Multiple

Equity multiple is a financial metric used in real estate investment to assess the total return on investment (ROI) over the life of the investment. It indicates how many times an investor will get their initial equity investment back at the end of the investment period. [5]
Calculation: Equity multiple is calculated by dividing the total cash distributions received from the investment by the total equity invested. This includes not just the regular cash flow distributions but also the final capital event, typically the proceeds from a property sale. [5]

Importance:

  • Total Return: Unlike IRR or cash-on-cash return, the equity multiple provides a simple snapshot of total financial return without time value adjustments
  • Investment Assessment: It helps investors quickly gauge the overall profitability of an investment, simplifying comparisons between opportunities.
The equity multiple is a valuable tool for real estate investors to understand the total return potential of their investments relative to the equity they have contributed.
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When Do LP’s Get Paid?

The answer to this question varies depending on the deal structure. Every syndication deal is different, and LPs should conduct their due diligence before participating. With that said, investors in a syndication deal typically get their share of the cash flow on a monthly or quarterly basis. [2]
A few deal structures come with preferred returns to investors. This means before the syndicator makes any money, the deal needs to hit a minimum return first. This adds an extra level of safety for the investors. BAM Capital’s Series A and Series B Units are an example of a structure with a preferred return.

What is an Accredited Investor?

Although there are multifamily syndication deals that anyone can invest in, there are also those that are exclusive for accredited investors.
An accredited investor is someone who is considered “financially sophisticated” enough to buy unregistered securities. Generally speaking, unregistered securities are riskier because they don’t have the normal disclosures that come with US Securities and Exchange Commission (SEC) registration. But since accredited investors tend to be more knowledgeable and financially secure, they are able to handle the risks of buying these unregistered securities. The SEC believes these accredited investors have a reduced need for the protection provided by regulatory disclosures. [6]
In order to be considered an accredited investor, a person needs to have an annual income of at least $200,000 for the previous two years or a net worth of at least $1 million. The minimum income increases to $300,000 for married couples. In 2024, the House amended the definition for who can qualify as an accredited investor. Read “2024 Accredited Investor Definition”, to learn more. [6]
Individuals and business entities alike may be considered accredited investors if they meet these requirements. Although there is no specific “accreditation” process, some companies ask investors to submit a questionnaire to determine if they meet the criteria.
The responsibility of determining whether or not someone is qualified to buy unregistered securities falls upon the companies that issue them. The reason these investors need to be “accredited” beforehand is because authorities want to make sure they are financially stable and knowledgeable enough about these more risky ventures. [6]

In 2020, the US Congress included registered brokers and investment advisors to the definition of accredited investors.

Why Accredited Investors Invest in a Multifamily Syndication

Leverage

Accredited investors often gravitate towards multifamily syndications due to the potential for leveraging their investments. Leveraging allows them to amplify their purchasing power by utilizing borrowed capital, typically in the form of a mortgage, to acquire larger and more lucrative properties than they could afford on their own.

In the context of multifamily syndications, this leveraging strategy enables investors to spread their capital across a portfolio of properties, diversifying their risk and potentially increasing their returns. By pooling resources with other investors in the syndication, accredited investors can access economies of scale, benefiting from professional management, operational efficiencies, and cost savings that may not be achievable with individual investments.

Forced Appreciation

Forced appreciation occurs when investors actively implement value-adding strategies to boost the property’s net operating income (NOI) and subsequently its value. This can include upgrading unit interiors, enhancing curb appeal, implementing cost-saving measures, and optimizing rental rates.

Unlike single-family properties, multifamily properties allow for economies of scale, enabling investors to increase the property value through strategic renovations and improved management. [7]

By actively participating in multifamily syndications, accredited investors not only gain access to diversified real estate assets but also the opportunity to leverage their expertise and resources to drive significant returns through forced appreciation.

Cash Flow

Multifamily syndications typically generate passive income through rental payments from tenants. Accredited investors seeking regular cash flow often find multifamily syndications attractive because they can receive consistent income distributions without actively managing the property. [7]

Unlike other investment avenues, such as stocks or bonds, multifamily properties can provide a relatively predictable stream of income over time, bolstered by rental demand and long-term lease agreements.

Tax Benefits

Multifamily syndication offers true passivity in your real estate investment. But on top of that, it also gives investors the same property tax advantages of being a full-time landlord. A syndication investment offers many tax benefits to real estate investors including depreciation, cash-out refinance, mortgage interest, 1031 exchange, etc.

Depreciation is one of the most significant tax benefits of multifamily real estate. This is because the IRS allows investors to depreciate the building and certain components of the property over time. This depreciation expense can be used to offset rental income, reducing taxable income. Syndication investors can benefit from this expense even if they didn’t personally buy the property. [7]

The IRS knows that properties tend to deteriorate due to wear and tear. This is why the building can be depreciated over 27.5 years for multifamily properties.

The cash flow generated by the multifamily property can also be partially sheltered from taxes through depreciation and other deductions, allowing investors to receive a portion of their returns in a tax-efficient manner.

Another tax benefit associated with multifamily syndication is cash-out refinance. This lets passive investors enjoy a large tax-free liquidity event. Refinancing involves using a new loan on the property to repay the old loan.

This cash is evenly distributed among passive investors if after paying off the old loan, there is a surplus of loan proceeds. This cash distribution is based on the interest that they own in the syndication deal.

Finally, the 1031 exchange is another powerful strategy available to real estate investors and syndications as it can defer their capital gain liability if all partners in the syndication agreed to 1031 out of the investment together when the property is sold.

For accredited investors looking for tax-advantaged investment opportunities, multifamily syndication is a great addition to the portfolio.

With all of this in mind, it is crucial to work closely with a tax professional or CPA who specializes in real estate syndications to fully understand and take advantage of these tax benefits. Seeking professional guidance is essential for optimizing your tax strategy in multifamily syndication.

Diversification

Accredited investors often turn to multifamily syndications as a means of diversifying their investment portfolios. Through multifamily syndication they gain access to an asset class that offers diversification benefits not typically available through traditional investment avenues. [7]

Multifamily syndications allow accredited investors to spread their investment risk across multiple properties and markets, reducing exposure to the volatility of any single investment. Additionally, the inherent stability of multifamily real estate, driven by consistent demand for rental housing, provides a steady income stream and potential for long-term appreciation.

Real Property

Additionally, HNWIs leverage real estate to diversify their investment portfolio, spreading risk across different asset classes while enjoying its tax advantages. Due to its tangible nature (real estate is considered real property) and income-generating potential, real estate represents a cornerstone of investment for the ultra-rich.

Regular investors need to pick up some of the strategies employed by HNW investors in order to build wealth and achieve financial freedom.

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How to Choose the Right Syndicator

Choosing the right syndicator for your multifamily syndication is necessary for the success of your investment. Here are some guidelines on how to evaluate potential syndicators:

Reputation & Testimonials

A syndicator’s reputation reflects their track record, integrity, and ability to deliver on promises. Look for syndicators with a proven history of successful deals, transparent communication, and ethical practices. [7]

Testimonials from previous investors offer valuable insights into the syndicator’s performance, professionalism, and reliability. Look for reviews online as well as feedback from those who have firsthand experience working with the syndicator. This will allow you to gauge their level of satisfaction.

Track Record

When selecting a syndicator for your multifamily investment, evaluating their track record is important. Work with syndicators who have a track record of success in similar ventures, as this demonstrates their ability to acquire, manage, and exit properties profitably. [7]
Consider the number of deals they’ve successfully closed, the performance of those deals in terms of returns to investors, and their ability to navigate various market conditions.
A strong track record instills confidence that the syndicator has the expertise and competence to effectively execute their investment strategy and deliver favorable outcomes.

Risk Tolerance

A syndicator’s risk appetite can significantly impact the investment strategy, which determines whether it will pursue conservative, moderate, or aggressive approaches. It’s crucial to align their risk tolerance with your own investment objectives and comfort level. [7]
A syndicator with a conservative risk tolerance may prioritize stable, lower-risk assets, focusing on steady cash flow and preservation of capital. On the other hand, one with a more aggressive stance might seek higher returns through value-add investments, albeit with increased volatility. [7]
Understanding a syndicator’s risk tolerance helps ensure your investment goals are in sync and minimizes the potential for conflicts down the line.
Selecting the right syndicator involves thorough due diligence and careful consideration of their reputation, track record, and risk management approach. By conducting comprehensive research and asking relevant questions, you can make an informed decision that aligns with your investment goals and risk tolerance.

Is Investing In a Multifamily Syndication Right For You?

Investing in a multifamily syndication can be an attractive option for accredited investors seeking passive income and diversification.
Syndications pool together funds from multiple investors. It’s a simple yet effective strategy that allows investors to access investment opportunities they might not be able to pursue individually. For example, while multifamily properties like apartments and condominiums may be associated with strong, reliable cash flow, they are also risky and difficult to acquire for the lone investor. This is a huge barrier to entry that prevents regular investors from adding multifamily real estate to their portfolio. [1]
But through multifamily syndication, these larger investments become more accessible and realistic. It also comes with the added benefit of being safer than traditional real estate investment. In a syndication deal, you only have to worry about your share of the capital rather than the entire property. Investors don’t even have to worry about the day-to-day operations of the apartment community since the syndicator will take care of it. [1]
That said, many of these deals are only accessible to accredited investors so whether or not this is a good fit for you may depend on your financial situation.
No matter what type of investment, investors should always consider their risk tolerance, investment goals, and liquidity needs before committing capital. This also applies to multifamily syndication. Perform your due diligence before participating in any type of investment.

Why Choose BAM Capital for a Multifamily Syndication Deal

We have discussed the importance of track record when choosing a syndicator to work with. Accredited investors who want to work with a syndicator with a reliable track record for excellence should work with BAM Capital.
The passive nature of multifamily syndication requires investors to partner with syndicators who are reliable and trustworthy. That is why accredited investors love working with BAM Capital.
BAM Capital is an Indianapolis-based syndicator with over $700 million AUM and 5,000+ units. Known as a leader in its industry, BAM Capital uses an award-winning investment strategy that mitigates investor risk while creating forced appreciation. [9]
BAM Capital prioritizes high-quality multifamily properties with in-place cash flow and proven upside potential, particularly those that are Class A, A-, and B++. [9]
As a vertically integrated company, BAM Capital can also handle every step of the syndication process, from acquiring the properties to renovating and managing them. They can guide you every step of the way.
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.

Sources:

[1]: https://www.investopedia.com/are-real-estate-syndicates-a-good-investment-8416965

[2]: https://www.multifamilyrefinance.com/apartment-investing-blog/multifamily-syndication#css

[3]: https://capital.thebamcompanies.com/irr-in-real-estate/

[4]: https://capital.thebamcompanies.com/multifamily-syndication-returns/

[5]: https://capital.thebamcompanies.com/equity-multiple-real-estate/

[6]: https://capital.thebamcompanies.com/accredited-investor-step-by-step/

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