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Real estate has long been recognized as a great investment for those who want strong cash flow and diversification. There are many ways to participate in real estate investing. Investors who are looking into the various investing options may have already come across the concept of real estate syndication.
Real estate syndication has become an increasingly popular avenue for investors looking to diversify their portfolios and tap into the potential of real estate. But what exactly is real estate syndication, specifically multifamily syndication?
Syndication deals are a good example of how real estate investments can offer flexibility when it comes to your level of involvement. While some investments in real estate require you to be actively involved, real estate syndication allows you to take a more passive role. [1]
You may be aware of the fact that this investment can be lucrative for accredited investors in multifamily syndication. But one of the most common questions is: do you have to be an accredited investor to get into multifamily syndication?
In this article, we’ll explore the world of multifamily syndication and answer the question of whether or not you need to be accredited to invest in it.
What is Multifamily Syndication?
Before we dive deeper into multifamily syndication and accredited investors, let us first define what this real estate investment strategy is and how it works.
Multifamily syndication is a real estate investment strategy where multiple investors pool their money together to purchase a large multifamily property. Take note that a real estate syndication deal can be done with almost any type of real estate. But because of the many benefits of owning multifamily properties like apartment communities, multifamily syndication is the most popular kind.
In a syndication deal there are two main parties involved: the general partners (GPs) and the limited partners (LPs). General partners are syndicators who put the deal together and make everything happen. They find the real estate property, create the business plan, and look for investors who will serve as the LPs. [1]
The syndicator sets everything up while the investors provide most of the capital needed to acquire the property. Their responsibility and liability is limited. However, they may pay an assortment of fees to help the syndicator run the real estate property once it is acquired. [1]
Once the deal is in place, the property is then managed by the syndicator, who will either hire a third party property management company or handle the day-to-day operations themselves. In any case, investors in a syndication do not have to worry about becoming a landlord. They don’t have to handle tenants, deal with emergencies, or stress about the other responsibilities that come with owning a property.
This is a rare example of a true passive investment in real estate, as other passive investments still require plenty of input from investors.
In exchange for their investment, passive investors receive a share of the profits and tax benefits without the responsibilities of property management. Income distributions from real estate syndications typically come in monthly or quarterly installments. Investors get a share of the property’s monthly cash flow, and depending on the deal structure, a share of the equity upon resale. [1]
Typically, sponsors receive a percentage of the profits as compensation for their expertise and effort. Investors should remember that every syndication deal is different. The profit split and other terms of the deal will be presented in the private placement memorandum (PPM) before investors agree to participate in the investment.
As with any other type of investment, it is recommended that real estate investors get educated and do their due diligence before joining any syndication deal. [1]
Benefits of Multifamily Syndication
One of the biggest advantages that multifamily properties have over single family properties is that it provides a stronger cash flow. Multiple units means there are multiple tenants providing rental income on a monthly basis. Multifamily real estate does not have to worry as much about vacancies either. When one unit becomes vacant, the rest of the apartment community continues to provide income. Meanwhile, single family properties stop generating income once they become vacant.
Not only are multifamily properties a good source of strong, predictable income, the syndication structure also allows investors to enjoy this income passively. Syndication allows investors to enjoy passive income generated by the property without the day-to-day responsibilities of property management. This makes it an attractive option for those seeking a more hands-off investment approach.
The profit structures of multifamily syndications may vary. The most common form of profit structure is called preferred returns. This ensures that the limited partners receive their initial investment along with a specific return before the sponsors are paid anything. Many deals with preferred returns go between 6 to 8%. This is ideal for more risk-averse passive investors as they can still earn a small profit even if the deal doesn’t work out. [2]
Some deals have a waterfall structure. This uses different profit hurdles that will give general partners a higher portion of the profits if various profit hurdles are met. For example, after a 12% IRR hurdle is reached, all additional profits may involve an 85/15 split, with the bigger percentage going to the syndicator. A deal can involve an unlimited number of waterfalls. [2]
Finally, a straight split uses one percentage rule to split the profits between the investors and the syndicator. This is commonly used in real estate syndication and may involve 70/30 splits or 80/20 splits, with 70 or 80% of the profits going to the investors. [2]
Pooling resources allows investors to collectively acquire larger and more lucrative properties than they might be able to afford individually. This provides access to economies of scale and potentially higher returns. Syndication makes a lot of real estate investments more accessible for lone investors.
Multifamily properties are generally more expensive, which is why they are difficult to acquire for individual investors. But multifamily syndication offers a way around that.
Investing in multiple units within a multifamily property also provides built-in diversification. If one unit or a few units are vacant or facing issues, the overall impact on the investment may be mitigated by the performance of the other units.
Another benefit that investors love is the fact that they don’t have to worry about property management. This is one of the biggest hurdles for real estate investors. If you do not have experience as a landlord, it could be tough managing an entire apartment community all on your own. But syndication deals come with professional management.
Other noteworthy benefits of multifamily investing are risk mitigation, tax benefits, and networking opportunities.
Syndication deals are ideal for risk-averse investors. Unlike other real estate investments, you do not have to take on all the risks on your own. With multiple investors sharing the financial burden, the risk is spread out. This can be especially beneficial in mitigating the impact of unforeseen expenses or economic downturns.
Multifamily properties also come with tax advantages, such as depreciation deductions. Syndicated investments may allow investors to benefit from these tax advantages without having to actively manage the property themselves.
Lastly, being part of a syndication opens up networking opportunities and valuable insights within the real estate industry.
Remember, while multifamily syndication offers various benefits, no investment is without risk. It is essential for investors to thoroughly research and understand the terms of the syndication, the track record of the syndicator, and the specifics of the investment before participating.
Who Are Accredited Investors?
A lot of multifamily syndication deals are exclusive to accredited investors. Accredited investors are individuals or entities that meet certain financial criteria, allowing them access to certain investment opportunities that are not available to the general public. These criteria are typically defined by the Securities and Exchange Commission (SEC).
For companies that are raising capital, accredited investors largely make up their pool of potential investors. This is because many offering exemptions under the federal securities laws limit participation to accredited investors. [3]
There is no specific accreditation process. The burden of proving that you qualify as an accredited investor lies on the company offering the investment opportunity. They may ask for financial statements and other documents to determine your eligibility. But if you meet the criteria defined by the SEC, then you are considered an accredited investor.
Individuals are considered accredited investors if they have a net worth over $1 million (excluding the value of their primary residence), individually or with spouse or partner. You are also considered accredited if you have an income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years. There must be a reasonable expectation that you will earn the same for the current year. [3]
Some people may also be considered accredited investors based on certain professional criteria.
Investment professionals in good standing holding certain licenses (Series 7, Series 65, or Series 82)) are considered accredited investors. Family offices, knowledgeable employees of a private fund, and GPs of the company selling the securities are all considered accredited as well. [3]
The idea behind these requirements is that accredited investors are presumed to have the financial sophistication and ability to bear the risks associated with certain types of investments, such as private placements, hedge funds, and multifamily syndication deals.
Do You Have to Be Accredited to Invest in Multifamily Syndication?
The short answer is no, you no longer have to be accredited to invest in multifamily syndication. Most deals may still be exclusive to accredited investors, but some may be more accessible to the general public.
The two most common types of syndication structures are equity offerings made under rule 506(c) or rule 506(b) of the SEC’s Regulation D. Both rules allow private funds to make private stock offerings without officially registering with the SEC. [2]
Multifamily syndication deals with the status of 506(c) will only be open to accredited investors. [2]
While the regulatory landscape is evolving, it’s crucial for investors to be aware of the risks and conduct due diligence before participating in any investment. Syndication deals, whether open to non-accredited investors or not, carry inherent risks associated with real estate, market conditions, and the performance of the syndicator.
Work With BAM Capital for the Best Multifamily Real Estate Syndication Deals
In a syndication deal, investors take a passive role in the investment, which means syndicators have to make all the decisions regarding the investment property and its management. This means it is essential to work with a trustworthy syndicator.
For accredited investors looking for high quality multifamily syndication deals in the Midwest, BAM Capital is an Indianapolis-based syndicator with a track record for excellence.
BAM Capital has a strong Midwest focus, prioritizing high quality multifamily real estate properties that are Class A, A-, and B++. This syndicator goes for multifamily properties with proven upside potential and in-place cash flow. They then use their award-winning investment strategy to create forced appreciation while mitigating investor risk. [4]
Accredited investors love working with BAM Capital. One of the reasons for this is the fact that it is a vertically-integrated company. This means the syndicator can handle every step of the syndication process, from locating the deal to managing and renovating the property. In fact, this syndicator 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.
