Multifamily Real Estate Investing Through Syndication: What You Need to Know
By Charles Schaffer
Multifamily syndication is an investment strategy in which investors pool their money to build a new residential property or purchase an existing one. This form of investing is considered an alternative investment.
Multifamily syndications are a popular investment vehicle for many reasons. One reason is that they allow investors to combine their resources to purchase a property they might not be able to afford as individuals.
Because of the many nuances of this investment category, reading this article will simplify the topic for you.
With real estate syndication, a professional team manages the property or properties. Investors share in the profits and losses generated by the real estate asset.
While there are several alternative investment options for accredited investors, this article focuses on the pros and cons of the multifamily housing investment class and details about how it works.
This form of real estate investing does not burden investors with the responsibility of being a sole owner and landlord — along with the hassles of managing rental properties. Plus, there's no need to hold a mortgage or work with a seller's agent.
The development model
The development model of multifamily real estate investing is a greenfield model that involves acquiring land to construct new apartment buildings that are rented out to tenants on completion.
The stages of this model are land acquisition, planning & design, financing, construction, lease-up, and then property management.
Throughout this process, a syndicator carefully manages costs, timelines, and risks to ensure the project is completed on time and within budget — ultimately generating a positive return for investors.
The value-add model
A value-add approach involves purchasing an existing rental property, renovating the apartment units, and improving shared spaces to raise rents faster than normal and generate more cash flow from a property. Tenants pay more for better quality and an increased sense of community.
In the third quarter of 2022, new construction was hampered by supply chain disruptions, labor shortages, and high commodity prices. Because of this, some syndicators switched from new construction to value-add. Syndicators may pivot back and forth between new construction multifamily opportunities and value-add properties as market conditions change.
Property types
When investing in multiple real estate units, various options exist. Typical asset choices are apartments, duplexes, row houses, townhouses, and single-family homes.
Apartment complexes are part of more extensive developments and usually have shared amenities like pools, workout areas, and common areas. They may attract investors searching for a lower-cost property that requires minimal maintenance expenses.
Duplexes are dwellings with two distinct parts, each with an access point and interior. This can be a stellar option for people hoping to inhabit one segment and rent out the other or those seeking earnings from both spaces. Triplex and fourplex properties are also in this category.
Row houses are groupings of nearly identical low-rise homes. They are lined up shoulder-to-shoulder and share a roofline.
Townhouses can be an excellent investment for those who need more room and autonomy than what a condo offers but still benefit from the features of a significant development or neighborhood. They usually provide more space and seclusion in comparison to traditional condos.
Single-family homes provide more seclusion and autonomy than multiple occupants living in adjoining structures.
Benefits of investing in multifamily
The benefits of investing in multifamily syndication include:
1. Increased buying power - When you pool your resources with other investors, you have more buying power. Therefore, you can purchase more extensive or expensive properties than you could on your own.
2. Diversification - Investing in multifamily syndication can spread your risk across multiple properties and geographic areas.
Who invests in this asset class?
Multifamily real estate is a good fit for investors looking for tax-advantaged returns from investing in a hard asset that doesn't have the volatility of the stock market or cryptocurrency.
Historically, the risk involved in real estate syndication has been relatively low compared to other investment strategies. The time commitment for multifamily syndication is also low, as the property management company will handle most of the day-to-day tasks.
Multifamily syndications are an excellent way for investors to add to their investment portfolio and generate passive income.
Returns on investment
Multifamily syndication generates passive income for investors through rent payments and appreciation of the property value. Here are three key metrics.
Equity multiple
The equity multiple is the amount that your capital or equity will be multiplied throughout the projected hold time.
If you were to invest $100,000 and exit at the end of the hold time with $200,000, the equity multiple would be 2x.
IRR
The internal rate of return (IRR) is a metric used in financial analysis to estimate the profitability of potential investments.
Simply stated, IRR is the percentage rate earned on each dollar invested for each period the dollar is invested.
ARR
The annual rate of return (ARR) is the average annual profit divided by the initial investment. So, if you invest $100,000 in a property and the average annual profit is $10,000, the ARR is 10%.
ARR does not consider the time value of money or cash flows — it's a straight calculation.
In the following example, which we created using a spreadsheet IRR formula, you can see that when cash flows increase enough over time, the ARR is greater than the IRR.
When cash flows decrease enough over time, the IRR is greater than the ARR. This is because the time value of money is higher in this scenario.
| Year | Cash Flow | Year | Cash Flow |
| 0 | -$100,000 | 0 | -$100,000 |
| 1 | $5,000 | 1 | $15,000 |
| 2 | $7,500 | 2 | $12,500 |
| 3 | $10,000 | 3 | $10,000 |
| 4 | $12,500 | 4 | $7,500 |
| 5 | $115,000 | 5 | $105,000 |
| IRR | 9.55% | IRR | 10.5% |
| AAR | 10% | AAR | 10% |
Tax deferral with a 1031 Exchange
1031 Exchanges, as defined under section 1031 of the IRS Code, are strategies that let an investor defer paying capital gains taxes on an investment property.
Using a 1031 Exchange, an investor does not pay tax on an investment property when it is sold as long as another "like-kind" property is purchased with the gains.
Those planning to invest in a syndication want to know if this investment can be used for a 1031 exchange. The answer is, unfortunately, no. A syndication cannot use a 1031 to transfer into another property to avoid capital gain taxes. However, people with 1031 properties can invest side-by-side with a syndication through a "TIC" (Tenants in Common) structure.
Syndication companies
The group is typically led by a syndicator whose firm is responsible for finding and vetting investment opportunities, negotiating deals, and managing the property or properties.
The syndicator typically puts up a portion of the money needed to purchase the property and then raises the rest from investors. Syndicators are the sponsors of a project.
How do syndicators decide where to invest?
Many syndicators take data-driven approaches to decide what market areas to invest in. Southern California, Arizona, and Texas have been popular states.
Here are some long-term criteria that factor into what markets to invest in.
Population growth
Job growth
Growth in single-family housing prices
Leveling or reduction in crime statistics
California's Inland Empire has been a focus here at SDC Capital Ventures due to strong job growth and low vacancies.
Minimum investment amounts & hold times
The minimum investment for multifamily syndication varies by syndicator and project.
We have seen minimum investments ranging from $50,000 for Class B apartment buildings to $500,000 for a Class A development.
Hold times vary, but 5 years is typical. A hold time can be as short as 3 years or as long as 10 years.
What are the tax implications?
Multifamily syndications are typically structured as pass-through entities, meaning that the income and expenses from the property are passed through to the investors.
This provides tax advantages, as investors can deduct their share of the expenses from their personal income taxes.
The risks of this type of investment
There are several risks associated with investing in multifamily syndication. These include
1. The risk the property may not perform as expected and the investment may not generate the anticipated return
2. The risk the property may not be well-maintained and may require significant capital expenditures to keep it up to par
3. The risk of tenant turnover and the associated costs of re-leasing the units
What due diligence should I perform?
The first step in any multifamily syndication is to perform due diligence on the sponsor. This means looking into their experience, track record, and references.
You should also review the offering documents and financials in detail to fully understand the investment.
Many accredited investors include multifamily real estate as part of their portfolios to have passive short-term returns and preserve generational wealth in the long term.
How do I find a real estate syndication to invest in?
The best way to find a multifamily syndication to invest in is to do your homework — research the different types of multifamily syndications that are available.
There are many different types of multifamily syndications, each with its own set of benefits and drawbacks. Once you have a good understanding of the different types of syndications, you can start to ask around.
Does the syndication have a system in place to ensure high occupancy rates of tenants? How can a property have occupancy rates of 99% instead of 90% or less?
An emerging trend in rental business - Build-to-Rent
The Build-To-Rent (BTR) approach involves designing and constructing multifamily properties with the sole intention of leasing all the property's units.
This approach requires a substantial upfront investment to develop the properties, which makes it suitable for the pooled investment model of syndication.
The properties can be crafted based on the means and requirements of area tenants looking for long-term living situations. More extensive developments also mean economies of scale for construction and other startup costs.
The Build-To-Rent framework provides an enticing opportunity for real estate investors to become involved in the multifamily housing market and benefit from ongoing passive revenue streams.
How do I know if a syndication is a good real estate investment?
There are several factors to consider when determining whether or not multifamily syndication is a good investment. First, you need to consider the experience of the syndication sponsor.
A good sponsor should have a proven track record of successful multifamily investments. Second, you need to review the business plan for the syndication.
The business plan should outline the sponsor's investment strategy and expected return on investment.
No business plan can predict the future's unpredictable events (COVID worldwide shutdowns, excessive material and labor cost increases due to hyperinflation, etc.).
However, the enduring value of residential real estate, particularly apartments, is that properties in good markets recover from downturns and are valuable portfolio assets for investors.
Charles Schaffer
President and Founder, SDC Capital Ventures
Charles has founded and operated several development companies over his 35+ year history to pursue his passion for Alternative Investing where he believes outsized returns can be achieved without a corresponding increase in risk. Under Charles' leadership, SDC has developed and financed over $80 million of commercial real estate and renewable energy projects.
