A real estate syndication is a partnership between several investors who combine their skills, resources, and capital to purchase and manage a property they otherwise can’t afford individually. With apartment syndication, the investment property being purchased is a multi-family apartment building or complex. In this article, we’ll briefly discuss what apartment syndication is and some of the reasons why real estate investors choose this form of investing.
A Sponsor, also called a General Partner, makes an apartment syndication happen. The Sponsor puts in the sweat equity to find the apartment building, negotiate the deal, find investors, and manage and oversee the syndication. Then come the Limited Partners. They are the passive investors who contribute their capital to purchasing the apartment building. Finally, the Property Management Team, which is either part of the sponsor’s company or an outsourced 3rd party. The property management team takes care of the day-to-day activities related to the operation of the property, including the maintenance and upkeep of the building as well as leasing activities.
Owners and investors in multi-family commercial properties cannot ignore these. In apartment buildings and complexes they already own, or those they are looking to acquire, it will be necessary to consider improvements and renovations that maximize work- and school-from home amenities, such as hard-wired Ethernet, desk or office nooks, in-unit laundry facilities, and refrigerated package lockers, to mention a few.
Before investing, prospective investors will receive a document called the Private Placement Memorandum (PPM) which outlines key information about the prospective deal, including information about the property, the business plan, disclaimers of legal liability and risks, the projected returns, and the planned holding period. Very importantly, how returns from the deal are to be distributed between the partners will be described.
Bear in mind that the Sponsor is likely to receive money upfront for the sweat equity they put in, as well as an asset management fee for managing the property and the syndication. Beyond this, proceeds are likely to be split according to a “straight split” where parties get a percentage of proceeds in proportion to the percentage of the property they own, or a “waterfall” model where preferred investors get a defined return on their investment and any proceeds above this are distributed proportionally.
By investing in an apartment syndication, the high barrier to entry of multi-family properties is lowered. Instead of needing large sums of money (or debt) to buy entire properties that easily cost in the millions, investors can get in the door with much smaller sums. Here at Kennedy Remedy Investors, this can be as low as $25,000, depending on the deal.
This lower point of entry also means that investors can invest in several, different apartment syndications and not put all their eggs in one basket. This allows even smaller investors to have a diversified real estate portfolio.
A potential disadvantage of investing in real estate, and also in apartment syndications, is that money cannot be withdrawn easily. Investors should understand how long the holding period of the property is likely to be. However, in exchange for tying up their capital for that period, investors do receive regular revenue payments.
In addition to receiving regular returns, partners in an apartment syndication also stand to gain from the appreciation of the property. Although not always, and not at a predictable rate, properties do tend to gain in value over time, and any appreciation gains are also paid out to partners in the end. This means that investors tend to get more out than they originally put in!