Is Property Syndication High Risk?
Table of Contents
Multi-family syndication is a real estate investment strategy where multiple investors pool their capital to purchase and manage multi-family properties, such as apartment complexes or multi-unit residential buildings.
A sponsor is responsible for locating the deal as well as coordinating the transaction, and even managing the investment once the syndication deal is in place. [1]
This form of real estate syndication allows individual investors to access larger, more lucrative investment opportunities that they might not be able to pursue on their own.
It’s worth noting that a syndication deal can be made with any sort of real estate investment. However, multifamily syndications are the most common because of the inherent benefits of owning a large real estate property. [1]
Real estate investors tend to gravitate towards investments that can offer them a steady and passive income. Because apartment complexes have multiple units, investors do not have to worry about vacancies affecting their cash flow. They can just sit back and enjoy their share of the rental income. This is why multifamily syndication is considered one of the safest forms of investments in real estate.
Real Estate Investing: How Does Real Estate Syndication Work?
Multifamily syndication deals involve multiple investors pooling their funds together to buy a single real estate property. This allows them to reap all the benefits of owning a real estate investment property such as steady cash flow, appreciation, and tax benefits—without all the headaches associated with being a landlord. This is the perfect investment opportunity for anyone who is interested in multifamily investing but doesn’t have the time or experience needed to run an entire apartment building. [2]
In a multifamily syndication, there are two key players: the syndicator or sponsor who acts as the general partner (GP), and the passive investors who act as limited partners (LPs). The GP structures and operates the syndication. They will underwrite the deal, handle the financing, negotiate with the seller, and then look for investors who will participate in the syndication. [2]
The syndicator also performs due diligence on the property, assessing market risk, calculating net operating income, and assessing real estate values to determine potential future worth of an investment property.
Passive investors help the syndicator raise capital for the transaction. They provide a portion of the capital so that the syndicator can acquire the property. In exchange, they receive a share of the monthly cash flow and, depending on the deal structure, a share of the equity upon resale. Keep in mind that every syndication deal is different. Investors receive monthly (or quarterly) passive income distributions for owning a piece of the real estate asset. [2]
The profit split should be detailed in the syndication agreement. The norms may vary depending on the type of syndication, but it should be clear from the start what kind of returns investors can expect before they even make an investment. Some deals use straight splits, which is a structure in which investors take maximum returns. It may be designed with a 70/30, 60/40, 80/20, or even a 90/10 ratio. [3]
There are other syndication deals that have preferred returns. Under this structure, a fixed percentage of the profit is committed to passive investors. The syndicator will not receive a share of profits until the investors have received their preferred return.
The syndication agreement will also outline the deal’s exit strategy. It should show investors when and how the property will be sold or refinanced.
Beyond the initial investment, however, the investors don’t need to do anything else. This means they can focus on their other investments and priorities while the GP handles property management, including rent collection, dealing with tenant needs, handling emergencies and repairs, etc. They will create and execute a business plan that aims to deliver strong returns to its investors.
Multifamily syndications are typically structured as limited liability companies (LLCs) or limited partnerships (LPs).
Accredited investors love multifamily syndication because it offers them a consistently strong source of income in real estate. And because multifamily properties like apartment buildings and condominiums have multiple units, investors do not have to worry about vacancies. Unlike single family properties that lose their cash flow when losing its tenant, multifamily properties can still produce cash flow even if one or two units become vacant. Real estate investors can just relax and enjoy their passive rental income.
Multifamily syndication is considered one of the safest forms of real estate investments, but with that said, no investment is without risk.
Is Real Estate Syndication High Risk?
Just like any other investment, there are some risks involved in a syndication. Understanding these risks can help you pursue a safer real estate syndication deal.
First we should note that losing money is a real possibility since every investment has that risk. However, with a syndication deal, this is unlikely. In fact it is more likely that the syndication will not earn the returns that were outlined in the private placement memorandum (PPM) by your syndicator. [4]
Some accredited investors get around this by investing in different syndication deals. In a recession, for instance, each market would be impacted in different ways. But by spreading your investments across several markets, the overall risks can be minimized.
Because syndicators do most of the work in a syndication deal, investors have to make sure they do their due diligence. It is important to choose a syndicator you trust, and also choose an investment property you believe in. Later on we will discuss what you should look for in a syndicator.
Analyze deals carefully and look for strong deals in real estate syndication. Do your research on the sponsors, the property, the market, and the terms of the syndication agreement. Make sure you understand the investment and the risks involved before committing your capital.
Another risk is for investors who want to take on a more active role in the syndication deal. In some cases, investors want to take an active role in managing the property. However, this exposes them to the risk of losing their passive investor status. [4]
As a passive investor, the law protects you from bearing any responsibility on managing the property. Only the syndicator is exposed to the risk of getting sued. By taking an active role in managing the asset, an investor may lose that protection.
Instead, let the syndicator handle their responsibilities. Investors should not get involved in putting the deal together. Instead, it is up to investors to choose a syndicator and deal they want to participate in where they can play a passive investor role.
Passive investors must feel comfortable with not controlling the deal. Syndicators will keep investors updated on the status of the syndication, so it is important that you participate in a deal that offers plenty of transparency. [4]
If you work with a syndicator who does not provide enough information, you won’t know if the investment property is doing well.
You should be comfortable with the type of communication that they offer, whether it’s in the form of monthly financial reports, or quarterly status updates.
Overall, real estate syndication can be a safe and profitable investment strategy, but like any investment, it carries its own set of risks and considerations.
Whether real estate syndication is safe for you depends on various factors, including your investment goals, risk tolerance, due diligence, and the specific syndication opportunity you’re considering.
It also pays to understand the syndication’s exit strategy. Knowing how and when you can expect to receive returns on your investment is important for assessing its safety.
Some syndications may also offer additional investor protections, such as preferred returns, equity participation, or voting rights. Review the terms to see if they align with your objectives and risk tolerance.
Consider consulting with a financial advisor or attorney who specializes in real estate investments to help you evaluate syndication opportunities and navigate potential risks. If approached with caution, real estate syndication is one of the safest, most lucrative real estate investments out there.
Keep in mind that these deals are typically exclusive for accredited investors. These are investors with enough net worth, annual income, and investing knowledge to properly assess investment opportunities and their risks. Accredited investors have the financial safety net necessary to participate in unregistered securities. They have a level of financial sophistication that allows them to make proper investment decisions based on their goals.
How to Choose a Company for Real Estate Syndications
The syndicator will handle everything involved in the multifamily syndication, so it is absolutely necessary to work with a syndication company you trust. The syndicator will choose the investment property, develop and execute the business plan, and even run the multifamily property’s daily operations.
Investors can find potential syndicators through online platforms and referrals from other investors. However, a lot of these deals are only available to accredited investors. You may have to attend real estate networking events and find out about available syndications through word of mouth.
When choosing a syndicator, you should look at their track record, their reputation, their assets under management (AUM), their realized gains, and their successful exits. You may check online reviews and testimonials to learn more about a certain syndicator based on what other investors are saying about them. [5]
You can even take it another level and assess the syndicator’s team and their expertise. Working with a well-rounded team of professionals who are experienced in acquisitions and property management can increase a syndication’s chances of success.
Next, perform due diligence on the properties they are offering. Investors may request financial statements, rent rolls, and info about past and projected returns. By verifying their claims, you can ensure a transparent investment process.
Why Accredited Investors Love Working With BAM Capital for Real Estate Syndication
BAM Capital is an industry leader in multifamily syndication, and for good reason. This Indianapolis-based syndicator is trusted by accredited investors for multifamily syndication because of their proven track record.
In fact, BAM Capital now has over $700 million AUM and 5,000+ units. [6]
This syndicator has a strong Midwest focus, prioritizing high quality multifamily real estate properties with in-place cash flow and proven upside potential. BAM Capital goes for properties that are Class A, A-, and B++. [6]
BAM Capital is also a vertically integrated company, meaning they can guide you through every step of the syndication. They can handle everything from finding high quality multifamily properties to renovating and managing them. BAM Capital’s trustworthy reputation comes from its award-winning strategy that mitigates investor risk while creating forced appreciation.
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.
