Multifamily Syndication: What Real Estate Strategy Makes the Most Money?
Table of Contents
Real estate investing has long been a popular way to generate wealth and passive income. But within the world of real estate investing, there are various strategies and approaches that investors can take.
Some investors go the “buy and hold” approach. They purchase a real estate property and then rent it out to generate income. Others flip houses by adding high-return fixes to real estate properties they acquired and then selling them. House flipping can be lucrative for investors who know how to find and fix up properties. [1]
Lately, Airbnb and vacation rentals are also becoming more popular as the demand is still increasing. Many travelers prefer this to staying in a hotel. Investors can earn income by renting out a house or a room on a short-term basis. This is especially lucrative if your property is located in or near a well-known tourist destination. [1]
However, a lot of these investment strategies require a lot of time and energy. If you are an investor who is looking for a passive source of income, then it may be worth looking into multifamily investing, specifically multifamily syndication. In this article, we will explore what multifamily syndication is, why it is a profitable real estate strategy, and how you can get started with it.
What is Multifamily Syndication?
Multifamily syndication is a real estate investment strategy where a group of investors pool their money together to purchase a large multifamily property.
Take note that a real estate syndication deal can be done with any type of real estate, but multifamily syndication is the most popular because of its strong and consistent cash flow.
This type of investment is typically led by a syndicator—a person or a company with expertise in real estate—who is responsible for identifying the investment opportunity, conducting due diligence, structuring the deal, and securing financing. Also known as the general partner (GP), the syndicator also looks for investors who will participate in the syndication deal. Once the deal is done, the syndicator will also handle property management.
The GP underwrites the deal, creates and executes the business plan, and even handles asset management. They handle everything from finding the property to operating the asset upon closing. [2]
On the other hand, investors take on a more passive role in the syndication deal. The investors, also known as limited partners, provide most of the capital needed for the investment in exchange for a share of the profits.
Syndication allows investors to access larger real estate deals they might not afford or manage on their own. Profits generated from rental income, property appreciation, or eventual sale are distributed among the investors based on the terms outlined in the syndication agreement. Keep in mind that every deal is different and the profit split will depend on the deal structure.
By owning a piece of the real estate property, passive investors receive monthly or quarterly income distributions from the asset. [2]
It’s crucial for investors to conduct thorough research on the syndicator, the property, and the terms of the deal before committing funds, as these investments often involve tying up capital for a significant period.
Why is Multifamily Syndication a Profitable Real Estate Strategy?
Now let’s discuss multifamily syndication profitability and why it is considered one of the most profitable investments in real estate.
One of the benefits of participating in a multifamily syndication deal is increased accessibility. With multiple investors contributing funds, it becomes possible to acquire larger properties that might be financially out of reach for individual investors.
The cost of apartment communities is a huge hurdle for most real estate investors looking into multifamily investing. These properties can easily cost millions of dollars to acquire. If you are planning to upgrade and renovate them, it will cost even more. This might not be a realistic investment for a lot of real estate investors, especially more risk-averse ones.
Multifamily syndication eliminates this barrier by having multiple investors pooling their resources together. At the same time, this reduces investment risk. While no investment is completely without risk, multifamily syndication is much safer than purchasing a property all on your own. You only have to worry about the capital you contributed, rather than worrying about the entire multifamily property.
Multifamily syndication is known for its strong and reliable cash flow. Investors can earn money passively, allowing them to benefit from real estate ownership without the day-to-day responsibilities of property management. Instead, they share in the profits generated by the property.
There are multiple profit structures for syndication deals, and each one is different. Find out how profits will be split before participating in the syndication deal. This should be detailed in the private placement memorandum (PPM) or syndication offering. Some of the most common profit structures include preferred returns, waterfall structure, and straight split. [3]
Syndication deals that have preferred returns are good for risk-averse passive investors. This ensures that limited partners (LPs) receive their initial investment along with a specific return before the syndicator gets paid. [3]
A waterfall structure means that the syndicator will begin to earn more of the returns as the investment reaches certain profit hurdles or waterfalls. A deal can involve an unlimited number of waterfalls.
Finally, the straight split uses one percentage rule to determine how profits will be split between the syndicator and investors. Some real estate syndication deals have 70/30 splits while others have 80/20 splits, with the investors getting the larger percentage. [3]
Syndication also allows investors to diversify their real estate portfolios by investing in different properties across various locations and property types. This is much easier than trying to acquire multiple single family properties in different locations.
Real estate investments even come with tax advantages. The amount of tax benefits an investor can use is proportional to their ownership of the property. Some of the tax benefits associated with multifamily syndication include depreciation deductions, 1031 exchanges, mortgage interest deductions, and cash-out refinancing. [3]
Finally, investors also benefit from professional management. Whether the syndicator chooses to manage the property themselves or hire a third party property manager, investors can rest assured that the investment is in capable hands.
It’s important to note that like any investment, multifamily syndication carries risks. Market fluctuations, economic conditions, management issues, or unexpected expenses can affect the profitability of these investments. It’s crucial for investors to conduct thorough due diligence and work with reputable syndicators to mitigate these risks.
How Can You Get Started with Multifamily Syndication?
The first thing you need to know if you are interested in multifamily syndication is that a lot of these deals are exclusive to accredited investors. If you fit under the net worth and income criteria of the US Securities and Exchange Commission (SEC), then you should be able to participate in a multifamily syndication deal.
Accredited investors are considered to have the financial sophistication and knowledge necessary to make intelligent financial decisions. Accredited investors have the ability to assess these investments and weigh the risks.
First you need to do your research before looking for a syndication deal. Learn about multifamily syndication, real estate market trends, financial analysis, and the dynamics of multifamily properties. Resources like books, online courses, podcasts, and networking with experienced investors can provide valuable insights.
Building a network by connecting with experienced syndicators and investors is important because they can tell you about syndication deals, particularly the ones that are not available to the general public. Attend seminars, conferences, and join real estate investment groups to expand your network.
Determine your investment objectives, risk tolerance, preferred location, property size, cash flow expectations, and investment horizon. Assess your financial situation and determine how much you can invest. This will help you choose a syndication deal that suits your preferences.
It’s also very important to work with a syndicator you trust, since they will be the one to make all the decisions regarding the investment. Do your due diligence and look into each prospective syndicator. Check their online reviews and look into their reputation. What are other real estate investors saying about them? Do they offer the type of syndication deal you are interested in? [3]
You can also ask about their return history, including their previous syndications and how they performed. You may also look for a syndicator who matches your level of risk tolerance. Learn about each syndicator’s specific business plan.
Lastly, you should also see if the syndicator offers adequate customer service. The syndicator will be the one to give you regular updates on the investment property. They need to be easily accessible and communicative. Poor communication is generally a red flag. [3]
Look for syndicators with a strong track record and a proven strategy aligned with your goals. Before making your investment, make sure you review and understand the syndication terms, including the ownership structure, profit-sharing, fees, and potential risks.
Engage legal counsel or advisors familiar with real estate syndication to review contracts and legal documents before investing.
Once you’ve selected a syndication opportunity, invest the capital and keep track of the performance regularly. Stay engaged with the syndicator and fellow investors to stay informed about the property’s progress.
Remember, multifamily syndication involves investing in a team and a property. Due diligence, understanding legalities, and aligning your investment goals are crucial for success and risk mitigation.
Overall, multifamily syndication is a profitable real estate strategy that offers investors the opportunity to generate passive income and build wealth. With the right education, network, and due diligence, multifamily syndication can be a successful and lucrative investment strategy.
Work With BAM Capital for the Best Multifamily Real Estate Syndication Deals
If you are looking for a reliable syndicator with a strong Midwest focus and a track record for excellence, work with BAM Capital.
BAM Capital is an Indianapolis-based syndicator that prioritizes multifamily real estate properties that are Class A, A-, and B++. This vertically-integrated company chooses apartment communities with proven upside potential and in-place cash flow. With their award-winning investment strategy, they can create forced appreciation while mitigating investor risk. [4]
As a vertically-integrated company, BAM Capital can handle every step of the syndication process, from locating the investment property to managing and renovating it. 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. Check out the Cap Rate Calculator from BAM Capital.
