How much money do investors make from a syndication investment?
Unlike a joint venture situation, investors in a multifamily syndication don't receive the full value of their investment in equity. For example, if the deal requires $1 million in capital, an investor who contributes $100,000 doesn't get 10% of the equity.
The sponsor gets a piece of the equity in exchange for putting the deal together, signing on the loan, and managing the asset. The equity splits vary from one syndicated deal to another and from one sponsor to another. You can typically expect to see an equity split of 80/20. The investors get their proportionate share of 80% of the equity, and the sponsor gets 20% of the equity.
Many syndications are structured with a preferred return. This means that the investors have to receive a minimum return on their investment before the sponsor gets a share of the cash flow.
For example, the preferred return may be set at 7%. This means that any return up to 7% has to be distributed to the investors. The preferred return rate is known as the threshold.
The sponsor in this example would start to receive a portion of the cash flow after the threshold is met. If the annual cash flow ends up being 8%, the sponsor and investors will split the difference of 1% according to the subscription agreement.
The method of how the distributions are split after the threshold is met vary depending on the deal. The waterfall method is a common structure. This is where the sponsor begins receiving a higher percentage of the profits as the return increases.
Who can invest in an apartment syndication?
There are multifamily syndications that pretty much anyone can invest in, but most are reserved for accredited investors. This means that the investor has to have an annual income of at least $200,000 for the previous two years or a net worth of at least $1 million. The minimum income increases to $300,000 for married couples.
These syndications are structured under SEC Rule 506(c). This is a securities exemption that makes it easier for real estate investors to seek capital from other people, but the investments can only come from an accredited investor.
Non-accredited investors can invest in syndication deals, but they have fewer options available. Real estate syndicators have more stringent and expensive SEC regulations to meet if they want to accept money from non-accredited investors. Even on this type of apartment deal, the real estate investor has to be considered a sophisticated investor. This means that they understand the investment, how it works, and can make an informed decision.
How to find multifamily syndication deals to invest in
You can find a multifamily syndication investment opportunity through equity crowdfunding websites or local investors or by searching for private real estate investment companies that specialize in multifamily syndication deals.
Networking with other investors is a great way to find a safe and profitable multifamily syndication deal. Talking to other multifamily investors about properties they've invested in with a syndicator and any syndicators they might know is a good option for finding multifamily investments to partner on.
Just like any other real estate investment, you want to do your due diligence on the multifamily investment that's being offered as well as the person or company sponsoring the deal. You're investing in not only the property but the sponsor as well. You have to be able to trust them with your money.
What to watch out for in a syndication investment
The private placement memorandum will likely be very long and have the disclosures on fees, splits, and any other financial matters buried throughout it. It may be daunting to read, but you should do it anyway. It would also be wise to have it reviewed by an attorney.
It's common for the deal to involve various fees paid to the sponsor. The multifamily deal having fees isn't necessarily a cause for concern on its own. The amount of fees and the number of them are important to understand. Some sponsors may try to charge so many expenses to the investors that it's difficult for them to make money.
Common fees include: