Investing in Apartments does not have to be done on an individual basis. This could be done through a syndication. A syndication is where investors pool their money together and as a group they make real estate purchases.
Why you should consider investing in a Syndication:
- You are protected from liability.
- Steady predicable income.
- No liability.
- Asset diversification
- You don’t need to be an expert on apartment investing and managing
- This is total passive you are not responsible for anything and requires non of your time (accept reading communication from the Syndicators that give updates about the property, typically it is once a month).
- You can share in the deprecation tax write off each year.
- You don’t have to provide all the cash.
There are two groups in a syndication. General Partners (GP) and Limited Partners (LP).
The GPs is the group that present the opportunity to the LPs. The LPs have limited role. They make know decisions. They only provide the capital. Imagine being on an airplane, going from Oakland to Chicago. If you were to fly by yourself and rented a private plane it will be expensive. In order to cut costs you can get on a plane and share the costs with others going the same destination. So all the people in the cockpit flying the plane are the GPs and all the passengers on the plane are the LPs.
In a nut shell, here is what GPs do:
- They will find a property, manage, organize, plan, and represent the syndicate in legal dealings.
- They will have a team of people they rely on for success. RE brokers, mortgage brokers, contractors, due diligence team, real estate attorney, real estate securities attorney and property management.
- They will underwrite/analyze the deals.
- They will either perform property management or rely on 3rd part property management (and then manage the Property Management company to make sure goals are met).
- They will qualify for the loan as the guarantor.
- They will determine the real value of the apartment, negotiate purchase price, define terms, finance, or manage.
- They will send a Private Placement Memorandum. This is over 100 page document that states that the GP will be fiduciary responsible and states the LP are aware of the risks and it set to minimize their ability to sue the GP in case the deal goes bad, Operating Agreement, and Subscription Agreement. This is done by syndication attorney.
- They establish clearly defined team goals. They will determine the minimum amount needed for cash reserves, down payment, rehab costs, capital improvements, and other fees for the deal. The GP may state in the PPM a need for 10% extra money raised to have as contingency if they don’t get all the needed money.
- They will develop a plan of action
- They will measure and monitor progress
- They will identify roles and responsibilities
- They will ensure all team members are engaged and committed
- They will get property under contract
- They will analyze the property
- They will take the right price and terms
- They will perform important calculations
- They will take necessary precautions
There are two options for Syndications.
1. Blind pool where the money is raised then they go out and look for a property.
2. Single. Property is found before the money is raised.
- The person who is managing the Syndication is called, a Syndicator, Sponsor or General Partner GP.
- The people that invest are known as a Limited Partner LP.
There are two types of investors:
- An accredited investor is a defined by the United States Securities & Exchange Commission as someone who makes a minimum of $200,000 ($300,000 if filing jointly) or has a net worth of 1 million dollars excluding personal residence.
- Sophisticated investor, person has knowledge but not the money to be considered an accredited investor.
The typical minimum amount to invest is 50k. GPs will strive to keep the amount of LPs to 40-60 per deal. At the end of the year the GPs will send out K1 tax statements showing the gain/write offs.
The typical holding time for the property is 3-7 years.
There are two types of approaches:
- Regulation 506c – They syndicator can advertise in the media, but they cant have any non accredited investors. To prove that they are accredited, they will need a letter from an attorney or accountant.
- Regulation 506b – Majority of syndications happen this way. Here there can be no advertising in the media. Investors will “self certify” that they are accredited or not. There can only be a max of 35 non accredited investors.
How do Syndicators get paid?
Each Syndicator will have their own business plan on how they are paid. Some may only choose 1 or 2 of the options below:
- Acquisition = 1-3% of purchase price
- Loan guarantor (is the person who signs on loan) = 1-2% of loan
- Asset management = 1-2% of gross collected revenue
- Refinance/Sell Price = 1-3%
Another option some GP might Provide is 90-10 split. Where they get 10% of equity and LPs will get 90%.
This is how the structure may look:
A preferred return (aka “pref”) is a great option for investors. In a nutshell, it sets a “hurdle” that an investment must return to passive investors before the operator can be paid. So on an investment of $100,000, a 7% preferred return means you will get a minimum of $7,000 annually.
Some GP offer a Preferred return percent (like 6%). This means you will get paid first at 6%. Payment comes in “waterfalls.”
Example, Investment of $50,000-$99,999: 6.0% Preferred to Investor; 75/25 split thereafter
After a 6% preferred return is distributed to investors, the remaining cash flow will be split 50/50 between investors and the GP. Upon refinance or disposition of the property, any accrued unpaid preferred return will be paid first, then 100% of investor equity will be paid back in full. All remaining proceeds from refi or sale will be split 70% to the investors and 30% to GP.
Or a deal could look like this:
80% LP – 20% GP (sponsor split)
70% LP – 30% GP (sponsor split) with 8% preferred return.
FYI, I constantly listen to Podcasts on Apartment Investing/Managing. I keep a directory of guest I hear on these Podcast shows that do Syndications through out the country. Email me if you would like to get the list
cordell @ SmallApartmentInvestors . com