What is multifamily real estate investing & how does it work?
It’s widely known, especially amongst high net worth individuals, that there's an abundance of opportunity to build wealth through real estate investing. After all, Andrew Carnegie once said, “90% of all millionaires become so through owning real estate”. When people look to get started, they first think about single family homes, short-term rentals, flips, or maybe small multi-unit properties (duplexes, triplexes, etc.).
While many investors have had success with these asset classes, it’s easy to become overwhelmed with all the responsibilities that come with owning them. The prospect of fixing toilets at 2am or dealing with unruly tenants obstructs your vision of financial freedom.
Not many people think about real estate syndications, and that’s partly because your typical investor may not even know they exist, let alone the definition. Let’s continue our journey by understanding what a real estate syndication is, how they work, and walk through an example together.
Defining real estate syndications
A syndication is simply the process of pooling funds together in order to purchase an investment that’s larger than most individuals could acquire by themselves. They bring together a group of investors to unlock economies of scale, take greater advantage of leverage, and mitigate risk without having to commit too much of their time or resources (depending on the role they play).
How real estate syndications work
There are usually two distinct groups when creating a syndication - the general partners, or GPs, who are the active investors, and the limited partners, or LPs, who are the passive investors.
GPs are responsible for doing the leg work - finding and vetting the deals, developing the business plan, building an ecosystem of partners to manage the business, and executing the plan. They are responsible for the project and have demonstrated expertise in this space. By contrast, LPs strictly invest in the deal and have no managerial or operational responsibilities. Together, the GPs and LPs create an entity, usually in the form of an LLC, which is established to own the property.
Once the deal closes, the GPs work closely with the property management company to execute the business plan - renovating and turning over units, increasing occupancy, and reducing operating expenses - all of which drive increased net operating income or NOI. This, in turn, increases the valuation of the property. Monthly updates are sent to the LPs to keep them informed on the status of the investment and progress made against the business plan. LPs also receive regular cash flow distributions (as aligned to in the business plan).
As the business plan is completed and the projected hold time comes to an end, the GPs work to disposition or sell the property. Timelines vary, but this usually happens between 3 and 5 years after the acquisition.
A real estate syndication example
Caroline and Al are both interested in acquiring multi-family properties through a real estate syndication in the Phoenix area. Caroline lives in Scottsdale, so she’s an “expert” in the market, knows which areas have greater potential for investments, and can communicate with local real estate brokers to find a property that meets their stringent requirements.
After reviewing numerous deals at a high level and walking through several properties, they finally find a property that checks all the boxes and is listed for $8M. Once they receive the detailed financial information, Al completes a more thorough financial analysis of the deal, also known as underwriting, to make sure they are confident the property can perform and deliver exceptional returns.
Caroline and Al don’t have enough capital to purchase the property by themselves, so they decide to create a syndication listing. They work with a special attorney to structure a contract that demonstrates a clear business plan with an investment summary for possible investors. Next, they find passive investors Martin and Andrea, among others, that want to invest in multi-family real estate, but don’t have as much time to dedicate to actively contribute their time. They are eager to be on board. Once they have sufficient funds, they put in an offer and the escrow closes accordingly (i.e. both the buyer and seller have met the conditions of the contract and are ready to move forward with closing).
When the property closes, Caroline partners with the property management company as they renovate the units, making sure they do so in a timely manner and within budget. Throughout the duration of the project, Al is sending monthly updates on the status of the project (occupancy, reno status, challenges, etc.) and cash flow distribution checks to Martin, Andrea, and the other LP investors.
After 5 years, the property appreciates to $11,000,000 and Caroline and Al determine the time is right to sell. As the sale is completed, the LP investors receive their original investment plus the earned profits according to the business plan (e.g. 70% to LPs, 30% to GPs).
Final Thoughts
Hopefully this first explanation of what a real estate syndication is has made the journey to financial freedom feel a little more tangible and within reach. Imagine receiving your first passive income check and being one step closer to unlocking your dreams. This is only the beginning, though. We have much more information to unpack and process together. If you have any questions, please email me (josh@vidascend.com) or Patricia (patricia@vidascend.com). We are always glad to connect and dive in further!
