When most people think of owning multifamily properties, they believe that the cost would be prohibitive. After all, you can find solid apartment building in many markets, such as Texas, Florida and Georgia for $70,000–$150,000 per unit. So how could it be possible to own 100 apartments for just $100,000?
The answer is surprisingly simple: by investing as a limited partner in a syndication. Syndication lets you invest money in properties, along with other investors, and own a share of the asset for a fraction of its value.
What Is Syndication?
If you’re not familiar with real estate syndication, a quick explanation will help. In syndication, a general partner, or syndicator, brings together investors to purchase a real estate property. By pooling their resources, they can leverage their funds to purchase a property that they otherwise wouldn’t be able to buy.
The syndicator does all of the work involved. That includes finding the property, finding the investors, negotiating the price, managing the property, and finding and securing financing. The investors, or limited partners, put up the down payment required to purchase the property.
Like most syndicators, I form an LLC, or a limited liability corporation, which owns the property. Investors then purchase shares in that LLC. They are called passive investors, because they don’t need to manage or finance the deal, other than putting up funds. All of the details of the project, including the rights of the investors and the rights and obligations of the syndicator, are laid out in the LLC operating agreement.
Why Be A Passive Investor?
The best part of being a passive investor instead of an active investor in real estate is that you don’t have to know anything about real estate. The syndicator is responsible for having the knowledge and skills to do all of the hard work. Most passive investors simply don’t have the time or the knowledge to handle all the aspects of a multifamily real estate deal.
Just be sure to do your due diligence when it comes to vetting the syndicator. Make sure they have a successful track record with other properties. Most syndicators are happy to share references from other investors who have participated in their prior deals. If they’re not willing to share, that’s a red flag, and you should walk away.
Earning Money As An Investor
There are two main ways investors make money on real estate syndication. The first is rental income, which is distributed to investors either on a monthly or quarterly basis, based on the terms of the LLC operating agreement. The second way investors earn money is through appreciation. Over time the value of the property usually goes up, and when the property is sold, the money earned is distributed.
One thing investors should always do is participate in a preferred return investment. That means that any profits from the real estate project are first given to preferred investors. First in line to receive returns from the income of the property is a good place to be.
There are also tax advantages to being a passive investor that can significantly increase your profits. First, there’s depreciation on the property, and as an investor you’ll get your pro-rated share, which you can deduct not only against the income from the property, but from your other sources of income as well.
You could also be able to defer capital gains when the property sells through a 1031 exchange. It simply means you exchange one investment property for another. Doing this helps your investment to grow tax-deferred over time. It’s definitely something to ask the syndicator about when examining the deal.
Summary
Without a doubt, being a passive investor in a multifamily syndication has many advantages that you won’t find in any other investment. They include not worrying about having the time or knowledge to put a deal together, two ways of earning income on your investment and several attractive tax benefits that can increase your profits. As long as you work with an experienced syndicator who has an exemplary track record and do your due diligence, syndication is a smart way to go.