Getting started with Multifamily Syndication…and some Key Requirements to be an Investor
Dear existing multifamily investors and would-be investors,
We know that many people are interested in multifamily real estate private equity (REPE) syndications, but it’s useful to have a fairly in-depth background knowledge about what’s involved before you invest. It’s also wise to learn about some of the requirements and regulations involved before becoming a multifamily syndicated investor.
Suite Life Multifamily has, therefore, recently started a series of informative articles about the lucrative world of passive real estate investment. These will allow existing investors to keep up to date with happenings in the multifamily world, and also help new investors gain enough understanding and confidence to invest in this fast growing asset class.
If you are already one of our registered subscribers and regularly follow news about our investment, thank you, and enjoy this read. If not, do keep a look-out for our new articles to gain more knowledge about passive investment into multifamily (Subscribe to our newsletter or like our LinkedIn Page). You can also keep up to date with all you need to know about syndicated private equity real estate investment!
SuiteLifeMF's vision is to help you create your own financial freedom through alternative sources of income and was founded to empower and educate those that want to build generational wealth through passive real estate investment opportunities. SuitetLifeMF has already successfully invested in a number of projects across the US.
How to get started in multifamily real estate investment
Let’s have a look at some of the basics of multifamily investing, plus consider why it’s necessary to work with an experienced real estate professional when investing in multifamily.
Getting started in multifamily real estate investment requires participants to have a solid understanding of their chosen real estate market and the investment strategies that are most effective for this type of investment.
One of the first steps is to undertake research and educate yourself about the multifamily real estate market, both at a macro level (nationally and regionally) and in the specific area/location where you are looking to make an investment. This includes understanding the different types of multifamily properties, current market conditions, and the various factors which influence the capital value of these properties.
Once you have a solid understanding of the market(s), it’s prudent to work with a real estate professional (see below). When investing in multifamily real estate, a wide range of factors, including the location of the property, its condition, and the potential for long-term appreciation. You should also consider the types of tenants who will occupy the units, as well as the financial aspects of the investment, such as the expected return on investment (ROI), the projected cash flow and the opportunity for tax benefits.
Maximizing investment returns from multifamily real estate investment requires careful planning and management. This includes selecting the right properties, maintaining and upgrading the properties, and effectively managing the tenants. It’s necessary to implement investment strategies that are designed to generate long-term growth and maximize returns, such as buying properties at a discount to market, being able to add-value by renovations or upgrades, investing in properties with strong rental demand and using debt as leverage to enhance returns.
Syndicated multifamily real estate investment can be a great way to generate steady cash flow, increase your wealth and achieve long-term financial security as such investment mitigate risks associated with real estate. However, even investing in syndicated multifamily property requires careful planning and research. Therefore, it's important to work with a knowledgeable and experienced real estate professional who can help you make informed investment decisions and maximize investment returns.
What is a real estate professional?
A real estate professional is a person who has a professional designation, such as a real estate broker or agent, property manager or real estate appraiser. To obtain such qualification, they will, typically, need to complete pre-licencing courses, pass state-administered examinations and fulfill continuing education requirements. The benefits of being a real estate professional include access to ongoing professional training and resources, increased credibility and the ability to represent clients in real estate transactions.
To qualify as a real estate professional, the person must have experience and knowledge in the real estate industry, and be able to demonstrate the appropriate skills through education, training and work experience.
A real estate professional can provide valuable insights and guidance on the best investment opportunities and help investors navigate the procedures involved in investing in syndicated multifamily real estate.
Please take a look at our FREE e-book: Passive Real Estate Investing
What is a real estate professional status per IRS (tax law)?
We are not tax professionals and we recommend consulting with a CPA, but this is what we know and more details can be found here from the Tax Adviser website. You can qualify for real estate professional status per the definitions of the IRS without having a professional designation mentioned previously.
A taxpayer qualifies as a real estate professional if
(1) more than one-half of the personal services the taxpayer performs in trades or businesses during the tax year are in real property trades or businesses in which the taxpayer materially participates, and
(2) hours spent providing personal services in real property trades or businesses in which the taxpayer materially participates total more than 750 hours during the tax year.
We have both single family and multifamily home investments in which we materially participate in. One thing we had to do was to elect to aggregate all of our interests in rental real estate for purposes of determining material participation. (This is key!!)
Sec. 469 provides that losses from a "passive activity" may only be used to offset income from a passive activity, with any passive losses in excess of passive income for a tax year disallowed and carried forward to the next year. Included in the definition of a passive activity is any rental activity, regardless of the taxpayer's level of participation.
A taxpayer who meets the qualification of a real estate professional under Sec. 469(c)(7), however, overcomes the presumption that all rental activities are passive. As a result, since the enactment of Sec. 469(c)(7) in 1993,1 taxpayers with rental losses have sought to meet the qualification of a real estate professional to prevent those losses from being treated as per se passive, potentially allowing the losses to be used without limitation.
On Jan. 1, 2013, qualifying as a real estate professional suddenly became meaningful even to taxpayers with rental income. On that date, the net investment income tax of Sec. 1411 became effective, levying an additional 3.8% surtax on, among other items of investment income, all passive income of a taxpayer. Thus, a taxpayer with rental income now has an incentive to qualify as a real estate professional: characterizing rental income as nonpassive to avoid imposition of the surtax.2
Let’s get a little more clarity on what the rules mean.
Greater than Half of Professional Time Rule - Real estate needs to be your primary role and not your side hustle. Not only do you need to spend a minimum of 750 hours in this activity, you also can’t spend more time doing something else to earn income. I.e. - you cannot have 750 hours in real estate plus 750 hours as a yoga instructor.
Materially participating in real property trades or businesses - Here’s a list of what IRS considers as activities that qualify for REPS (real estate professional status:
Here’s a list of real estate investment activities that would not qualify for REPS:
Searching for new properties
Studying financial statements
Managing the finances of an activity in a non-managerial capacity
Preparing summaries of finances or operations
Work done “primarily for the purpose of avoiding disallowance of losses”
Who can invest in multifamily or other syndications?
Quite simply, multifamily real estate investments can be made by anyone who has the financial resources to do so. This may include individuals, joint ventures, limited liability companies (LLCs), and even retirement funds.
The type of investment vehicle that is best will depend on your personal financial situation and investment goals. For example, for investors concerned about incurring liabilities, they may want to invest through an LLC. On the other hand, for investors who want to take advantage of certain tax benefits, they may choose to invest as an individual.
The Securities and Exchange Commission (SEC) regulates investment into syndicated multifamily real estate projects.
SEC 506b and 506c offerings are two different types of private placement offerings which are available to investors looking to invest in multifamily real estate. Understanding the differences between these two offerings is important to help make informed investment decisions and ensure that investors are investing in a way that aligns with their financial goals and risk tolerance.
SEC 506b offerings are private placement offerings that are exempt from SEC registration requirements. This type of offering is limited to accredited investors and up to 35 non-accredited investors. The benefit of investing in a SEC 506b offering is that it can be quicker and less costly for the syndicator to raise funds compared to a SEC 506c offering. However, the downside is that there are restrictions on the number and type of investors who can participate, which may limit the potential pool of investors for the syndicator.
SEC 506c offerings, on the other hand, are private placement offerings that are open to all accredited investors and are subject to SEC registration requirements. This type of offering requires the syndicator to provide more detailed information about the investment opportunity and the company, which can help to protect investors from fraudulent or unethical investment practices. Additionally, SEC 506c offerings do not have restrictions on the number or type of investors who can participate, which may make them a more attractive investment opportunity for some investors.
When considering whether to invest in a SEC 506b or 506c offering, it is important to consider your personal financial situation and investment goals. For the more risk-averse investor, a SEC 506c offering may be the better option due to the increased transparency and protection provided by the SEC registration requirements. On the other hand, for the more risk-tolerant, a SEC 506b offering may be a good option as it can offer the potential for higher returns due to the restrictions on the number of investors who can participate.
Ultimately, the choice between a SEC 506b or 506c offering will depend on an investor’s individual circumstances and investment goals.
Accredited investors are important players in the world of multifamily real estate syndications, as they are often the target audience for such types of investments. Accreditation is a designation given to individuals who meet certain financial criteria, which are established by the SEC. Accredited investors are considered to be financially sophisticated and able to handle, or be experienced with, the risks associated with investing in real estate multifamily syndications.
To be considered an accredited investor, an individual must have a net worth of at least $1 million (exclusive of their primary residence) or an annual income of at least $200,000 (or $300,000 for joint income). This designation is important because it enables individuals to participate in private investment opportunities that are not available to the general public. This can include real estate syndications, private equity funds and other types of alternative investments.
Investing in real estate syndications as an accredited investor can be a great way to diversify your investment portfolio and potentially generate higher returns than more traditional investments, such as stocks and bonds. However, it is important to understand the risks associated with these types of investments and to thoroughly research any potential investment opportunity before committing funds. Working with a knowledgeable financial advisor or real estate professional can also help ensure that you are making informed investment decisions and that your investments are aligned with your financial goals.
Some key investment considerations
To invest in multifamily real estate, two of the main alternatives are to make a direct investment in a property or through a real estate syndication. Direct investments in properties involve purchasing a property outright, whilst real estate syndications involve pooling investment funds from multiple investors to purchase and manage a property.
Glossary of multifamily related terms for Passive investors
Real estate syndications are typically managed by a sponsor or general partner (GP) who is responsible for sourcing and managing the investment. As an investor, you typically invest in a limited partnership or limited liability company (LLC) that holds the property. The sponsor takes care of all the day-to-day operations, including sourcing tenants, managing the property, and making any necessary repairs.
Minimum investment amounts
Most syndications require investors to provide minimum investment amounts and the typical minimum for a real estate syndication ranges between $25,000 to $100,000, depending on the size and scope of the project. Direct investments in properties typically require a larger investment, as the purchase price of the property will be higher. It’s important to note that investing in real estate in any form can carry risk, but often provides higher rewards. Accordingly, it’s essential to carefully consider your investment goals and risk tolerance before investing.
Purpose of SEC Regulations
The SEC's role in governing real estate syndications is critical to ensuring the protection of investors from fraudulent or unethical practices. The SEC requires that information about the syndication be disclosed to investors in a clear and concise manner, including the structure of the investment, the background of the sponsor, and full details of the financial projections for the property. This information allows investors to make informed decisions about whether the investment aligns with their financial goals and overall risk tolerance.
Investing in a multifamily property through a limited liability company (LLC) can provide added protection against personal liability, as the LLC is a separate legal entity from the individual owner. In the event of a lawsuit or other legal issue, the assets of the LLC are generally protected from the personal assets of the individual owner. This can provide added peace of mind for investors who are concerned about their personal liability.
Investing as an individual can offer certain tax benefits. For example, individual investors may be eligible for deductions related to mortgage interest, property taxes, and other expenses associated with owning a property. Additionally, individual investors may be able to take advantage of the so-called 1031 exchanges, which allow for the deferral of capital gains taxes when selling one property and investing in another, usually within a set timeframe.
Investing in real estate through a self-directed retirement account can also offer a number of benefits to investors who are looking for tax-efficient ways to build wealth and diversify their investment portfolios. A self-directed IRA or a self-directed solo 401(k) allows you to invest in a wide range of assets, including real estate, without having to pay taxes or penalties on the funds until you withdraw them in retirement.
When investing in real estate through a self-directed IRA or a self-directed solo 401(k), it is important to understand the rules and regulations that govern these types of accounts. For example, you must follow all of the rules for investing in real estate, including those related to prohibited transactions, and you must also ensure that the investment does not result in a self-dealing violation. Additionally, you must maintain the required records and documentation to ensure that you are in compliance with the relevant tax code.
Managing the property
Another important consideration when investing in real estate through a self-directed IRA or a self-directed solo 401(k) is that you must be able to manage the property and make informed investment decisions. This can be challenging, especially if you are new to real estate investing, so it is important to seek the guidance of a knowledgeable real estate professional who can help you navigate the process and make informed decisions.
Despite these challenges, investing in real estate through a self-directed IRA or a self-directed solo 401(k) can be a great way to build wealth and diversify your investment portfolio. By taking the time to understand the rules and regulations that govern these types of accounts, as well as seeking the guidance of a knowledgeable professional, you can maximize your chances of success and potentially generate long-term growth in your retirement savings.
In summary, syndicated multifamily real estate investment can be a great way to generate passive income and potentially build wealth over time. By carefully considering your financial situation and investment goals, as well as seeking the guidance of a knowledgeable real estate professional, you can maximise your chances of success in this exciting and dynamic sector of the real estate investment market.
Of course, the decision to invest in real estate or invest in stocks or bonds or indeed other asset classes, which offer different risks and opportunities, is a choice which depends on an investors risk tolerance, objectives, financial status and investment style.
Anna and Peter Tan
SuiteLifeMF has acquired, operated and invested in real estate for over 10+ years, investing in over 1500 doors and with over US$ 100 under management (900+ doors). They also operate a property management company that handles a portfolio of single family homes.
SuiteLifeMF maintains a disciplined approach to investing, which focuses on capital preservation and strong returns with a deep understanding of submarkets, economic and political situations.