Multifamily syndications, and why you need to be thinking about investing in this real estate asset
We know that many people have heard about terms such as multifamily syndications or syndicate sponsors or General Partners or real estate private equity (REPE) investments; but how many really know what these and other related terms are all about?
Therefore, SuiteLife Multifamily plans to bring you a series of informative articles about the rewarding world of passive real estate investment. These articles will be to help existing investors keep up to date with happenings in the multifamily world; plus allow new investors gain enough understanding and confidence to invest in this continually growing asset class.
If you are already one of our registered subscribers and regularly follow news about our investments, 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 syndications You can also keep up to date with all you need to know about other aspects of private equity real estate investment!
But, before we start, let’s remind you a little about us. SuiteLifeMF's vision is to help you create your own financial freedom through alternative sources of income. SuiteLifeMF was founded to empower and educate those that want to build generational wealth through passive real estate investment opportunities. We have already successfully invested in a number of syndicated multifamily projects across the US.
What is generational wealth?
Generational wealth is when assets (often real estate assets) which have been accumulated during the lifetime of an investor are passed from one generation to the next. If such assets are real estate assets, they may be properties which are either income producing (ie multifamily apartments) or vacant land.
It’s well known that, over the years, investing in multifamily real estate has been an important gateway to accumulating additional wealth as, for most people, it's not possible to assemble wealth from their day-jobs alone. Accordingly, any recurring rental income from investing in multifamily syndications serves to provide funds for an improved lifestyle, plus, upon sale of the asset, accumulated from profits capital growth.
It's interesting to note that any study of the top 100 richest families across the globe will show that many generationally wealthy families invested in real estate and built long-term wealth for their descendants, often from passive investing, providing income for years to come.
What then is multifamily investing?
Investing in multifamily PERE assets through syndications provides an investment return of what is often referred to as passive income. We’ll look more closely as what passive income is later, but let’s first consider the types of assets which many be considered as multifamily properties:
A multifamily home is a residential property which comprises more than one housing unit; the various types may include:
a semi-detached house: a single-family home sharing a common wall with another home.
a town home: a single-family home sharing unit dividing walls with more than one neighbouring unit;
single-level apartment in a complex with at least 5 or more units, and where certain common amenities such as a pool or car parking are shared with neighbours;
duplex: an apartment which has two interconnected floors above or below each other.
What is multifamily syndication?
Multifamily syndication refers to a real estate investment situation in which several investors combine their capital to buy a property. In the case of multifamily syndication, therefore, this involves a group of investors pooling their capital to purchase a multifamily apartment building project. There may be dozens, even hundreds, of investors using their varying amounts of investment capital to purchase a multifamily apartment block together.
There are two main types of investors involved in a REPE syndication:
General Partners (GP): the real estate syndicators are likely to be the sponsors and managers of the real estate syndicate. General Partners actively syndicate real estate and have an important lead role throughout the lifecycle of a multifamily syndication deal. GP are critical in the acquisition phase of the deal, as well as the ongoing asset management. They work directly with the property management team to ensure that everything is going according to the business plan in terms of NOI targets, and that investors are getting their projected returns.
The responsibilities of a GP will include the following:
o finding the property and doing a feasibility study to make sure the investment meets the designated criteria of the investors;
o finding capital or equity investors, both with large and small amounts of capital;
o securing any debt financing on as favourable commercial terms as possible;
o completing the due diligence and acquisition of the multifamily property;
o managing any renovations or monitoring construction;
o engaging a property asset management team;
o executing the business plan to achieve NOI goals and any refinancing;
regularly reporting to, and paying dividends to, investors.
Limited Partners (LP): (or so-called passive investors) have quite a different role in multifamily syndications.
The role of being a passive multifamily real estate investor fundamentally involves an investor providing their capital to the syndicator and reaping the investment returns with little to no effort. Arguably, it's that simple!
Passive investors are presented with REPE investment opportunities, do not have to look for investment opportunities on their own and are not responsible for any of the property’s day-to-day operational management or other issues. In short, all they have to do is to await dividend pay outs and a share of the equity profits once the asset is refinanced or sold. There’s no need to regularly review financials, or scrutinise tenancy applications as the GPs will attend to all such matters.
Why invest in multifamily syndications?
So, apart from the desire to be a passive investor rather than an active investor, why invest in multifamily syndications where you can enjoy regular cash flow, appreciation of capital and equity growth?
If we look at some of the fundamental reasons why to invest in multifamily syndications, some of the top ones include:
Attractive returns: syndicated or group investments in commercial real estate such as multifamily syndications offer the potential for higher returns. Investors in a multifamily real estate syndication project typically see annual returns of 5-10%, and sometimes as high as 12%;
Relatively limited financial risks to investors: multifamily syndicated investors only share the equity portion of a transaction. This shares the risk between a multitude of parties but also means that they are only liable for any losses incurred equal to the amount invested. In short, the financial and legal risks are spread wider and limited; on the other hand, being an outright home or other property owner means bearing the full burden of any losses.
Please take a look at our FREE e-book: Passive Real Estate Investing
Glossary of multifamily related terms for Passive investors
Leverage the experience and professionalism of the sponsors or syndicators: many would-be real estate investors do not have the requisite experience (or time if they have a “day-job”) needed to successfully invest in large scale real estate projects. Passive investors can take advantage of the financial strength and experience of a syndicator or sponsor so that available capital is aggregated amongst other investors and invested in properties offering high returns—and which otherwise might not be available to investors with smaller amounts of capital.
Diversification of real estate investments: investors in syndicates will have access to a wider variety of multifamily investments and will be able to participate in deals which they otherwise may not be able to access. Such investors can also choose which projects to invest in.
Tax advantages: syndications for multifamily projects offer a number of tax benefits which are not available for investing in single-family homes. For example, many passive syndicated investors don't need to pay taxes for the first five years after investment as their dividends can be offset by depreciation allowances. Syndications, typically, use two methods of depreciation to enable a paper loss to be recorded against the majority of income generated by an investment in the first year. Investors can also use tax-advantaged self-directed retirement accounts to invest in syndications.
Multifamily apartments are a resilient asset class: demand for residential rental properties is underpinned by long-term demographic trends. Indeed, the sector has been one of the primary beneficiaries of decade old economic expansion. Even in economic downturns, many people downsize from large homes into more affordable accommodation, uplifting demand for multifamily projects. Such rental demand is well supported by:
affordability of owning a home: in reality, nowadays in the US, many people simply can’t afford to own their own homes. Average household incomes continually rise less than property values in many areas across the US;
more retirees looking to rent: there are an increasing number of retirees looking to rent property (the so-called “Silver Tsunami”), with almost 35% of US households expected to be headed by a person over the age of 65 by the year 2035. A high % of estimated 79 million retirees across the country have a strong preference for renting, usually after cashing in ownership of other real estate they have held for many years;
millennials: this generation adopts a different approach to living arrangements. Millennials ie those born between 1981 and 1996 have disrupted the many ways of doing business—and the way they occupy real estate is no different. As a result of their high levels of debt, often from college level study, many millennials have limited affordability for buying property and renting may be the only option for some; additionally, many have specific locational requirements which are hard to fulfil.
Ongoing creation of capital value: the value of a multifamily property is essentially driven by the property’s net operating income (NOI). By increasing its NOI through appropriate capital improvements or enhancing operational performance, capital appreciation can also be achieved and steadily maintained over time. LP or passive investors can enjoy a share of such appreciation upon refinancing or sale of the asset.
Protection of investment: passive investments in multi-family syndications do not require a personal guarantee when acquiring, ownership is not easily traceable, and syndicated investments are usually held in entities which offer protection from legal issues. Conversely, single family home ownership comes with more financial risks and legal exposure.
Are there any downsides of investing in multifamily syndications?
It goes without saying that all investments, including syndicated real estate investments, carry risk. Whilst GP and sponsors of multifamily syndications always endeavor to mitigate risks, some of the rare things which may cause issues could possibly include those shown below. But, even if they do go wrong, the exposure of syndicated investors is generally limited.
However, some issues may be:
an imbalance of demand and supply, with lower demand and greater supply of multifamily units, leading to lower rents and NOI;
syndicators may enjoy preferential returns or earn money by various fees—even if some investors don't;
the syndication may be oversubscribed so that the investors' desired share of the equity may be diluted;
unfavorable debt repayment terms agreed by the syndicator;
passive investors don’t have any control over decisions regarding the investment and the GP or sponsorship team is responsible for day-to-day operations and strategy for the investment;
real estate syndications are usually long-term, and it’s not possible to withdraw invested capital as with stocks and mutual funds;
investors share the overall returns both with other investors and also with the syndication team;
some private real estate syndications have a high minimum investment (often $50,000 or more)
How does syndicated multifamily investment compare to alternative investments (stocks, bonds, etc)?
Of course, there are other types of investments which anyone with an amount of capital to invest can make.
Investing in stocks or bonds is a popular alternative to multifamily real estate investment as, usually, such investments have greater liquidity. However, stock and bond markets in the US and across the world move on economic fundamentals, interest rate changes, plus some speculation. In addition, short term bad (or good) news on the geopolitical front (ie wars or conflicts) also play a part in driving stock or bond prices and indexes upwards or down,
In reality, stock and bond markets dislike uncertainty, and can react with volatility to short-term news or events . What’s more, if the price of a stock drops dramatically there is nothing tangible to hold or own whereas, with multifamily REPE syndications, the underlying property asset will always have a residual value.
On balance, real estate can be a great alternative to stocks, offering lower risk, yielding better returns, and providing greater diversification. At the end of the day, people will always need somewhere to live!
Some of the key advantages on investing in syndicated multi-family real estate over stock and bond markets
Here is a summary of some of advantages to investors in syndicated multi-family projects compared stock and bond markets
Financing is readily available for a good multifamily project: a variety of lenders will finance multifamily transactions and the effects of such leverage means that gains are magnified. Furthermore, it’s usually possible to refinance the property once the NOI has stabilized in order to withdraw tax-free equity. In fact, commercial lenders are the largest debt investors in multifamily projects, providing around 55%-75% of the required purchase funds
Risk ratios: the risk adjusted return of an investment can be measured by the Sharpe ratio; the higher the Sharpe ratio the better the return and the lower the risk. Over any long-term period, multifamily has the best Sharpe ratio of any other real estate asset class;
Capital expenditure and depreciation: income or dividends from multifamily properties attracts little or no capital gains tax; depreciation and capital expenditure from the property’s income can be deducted which can, obviously, help increase returns to investors;
Investment returns start from the outset: investors in syndicates usually start receiving income as soon as a property is receiving rentals. Investors can receive regular distributions/dividends and also enjoy capital appreciation.
Investing in a multifamily project has many advantages as, on balance, real estate offers lower economic and inflationary risks than stocks.
Of course, the decision to invest in real estate or invest in stocks or bonds or other asset classes, which offer different risks and opportunities, is a choice which depends on an investor's risk tolerance, objectives, financial status and investment style.
If you’d like to know more about multifamily investing please feel free to contact us for a no obligation chat or subscribe to our upcoming newsletters.
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). The company also operates a property management company which 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.