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Ultimate Guide to Multifamily Real Estate syndication

Investing in real estate is not a one person job. There’s a lot of time and resources involved to make and sustain a real estate investment. But if investing in real estate isn’t your primary source of income, then it’s bound to get overwhelming managing everything by yourself.

That’s where Multifamily syndication really shines as it helps you grow your real estate investments passively without having to take up the role of a landlord or lose yourself in tedious legal processes.

Multifamily syndication can help you join with other investors and help you grow bigger faster.

Chris Salerno, founder & CEO of QC Capital joins Dr. Allen Lomax for an episode of Creek Side Chats with Successful Real Estate Investors to discuss topics they both care about - Multi family Real Estate Syndication.

About the Episode

In this podcast episode, Chris, who had sold more than 40 million dollars worth of real estate by the time he was 24, talks about his early years and how he had a passion for working since he was as young as 5 years old.

Chris also talks about how he thinks there is no replacement for putting in the effort. That is what distinguishes QC Capital, LLC and enables them to find inexpensive Class A and Class B assets. QC Capital, LLC founders have recognized amazing prospects throughout the years - not by magic, but by researching and working an area until there is no information left to unearth.

If you're ready to put in the effort, put your boots on the ground, and know what growth drivers to look for, there are a number of really exciting opportunities out there. This approach has propelled QC Capital, LLC to the forefront of the industry and established them as a pioneer in syndicated multifamily investing. The properties he invests in are better for it, as are the communities in which they live, and, most significantly, our investor partners are better for it.

Listen to the full episode of Creek Side Chats here.

hands holding a house figure with a family inside

What is Real Estate Syndication?

Multifamily syndication is a real estate deal in which several investors combine their funds to buy a property. A sponsor is responsible for locating the deal, coordinating the transaction and funding, and managing the investment once the transaction has been completed. The general partner is this sponsor. In exchange for equity in the real estate, passive investors provide the majority of the funds.

A syndication transaction can be made with any sort of real estate investment, but multifamily is now the most common. Many real estate investors like multifamily investing because it often provides steady income and is regarded as one of the safer forms of real estate investments.

What to Consider before doing multi-family syndication?

Multifamily syndications are not all set equal. Your involvement in this project will be front-heavy, in the form of study and analysis on whether or not this transaction is good for you, as it is with most kinds of passive investment. When you come across a venture that makes you want to go into multifamily syndication, you'll need to pay close attention to various factors.

Preferred Returns

A preferred return can be built into syndications. This implies that before the sponsor is paid, investors must obtain a specific minimum return on their investment. Selecting a multifamily syndication with preferred returns might provide you with some peace of mind, knowing that the sponsor must first create money for the investors before they can be compensated.

Splitting The Profits

Sponsors may take a part of the net revenues when the property is sold, just as they do with monthly income. Monthly splits may be modest, while equity splits may be substantial, or vice versa.

businessman showing liquidity of real estate investing 

Fees

It is normal for sponsors to charge fees to investors. What investors should look for in the syndication agreement is if the fee structures will eat away at profit margins.

Loan and Financing Options

The loan and funding details indicated in the syndication memorandum should be understood. The most typical kind of loan for multifamily syndications is a non-recourse loan, which means that if there is a default, the sponsor or sponsors are fully liable. This sort of loan has a high-interest rate and strict standards for the sponsors, but it offers investors security.

Evaluate if the project will be funded with a permanent or temporary loan. 

Bridge loans are short-term loans that allow the sponsors to make interest-only payments while long-term financing is found. There are situations when bridge loans are suitable, such as when they allow the project to get a contract that is unlikely to remain on the market for long. They can, however, be dangerous if the sponsors are unable to get long-term funding.

Is real estate syndication profitable?

The Sponsor and the Limited Partners gain money through multifamily syndication in two ways: property appreciation and rental revenue.

The Sponsor distributes rental money from a syndicated property to investors. This usually happens on a monthly or quarterly basis, in accordance with predetermined parameters. The value of a property normally rises with time. As a result, investors may expect increased rentals and profit margins when the property is sold.

Payment of rental income or profits is dependent on how long the investment takes to mature. Some syndications may be completed in as little as 6-12 months, while others can take up to 7-10 years. Every investor earns a portion of the earnings.

For seeking and obtaining the property, sponsors frequently take an upfront profit at the start of the contract. This is the cost of a call and an acquisition. A 1% purchase charge is typical (although it can be anywhere from .5 to 2 percent depending upon the transaction).

All investors receive a 'preferred return' before a Sponsor participates in the earnings for their services as manager and promoter. The preferred return is a payout that is provided to all investors as a benchmark. This amounts to around 5-10% of the initial investment each year.

You can check out which cities are the best to invest in in the US here.

person singing a contract 

How do you structure a real estate syndication deal?

A limited liability company (LLC) or a limited partnership (LP) are the most common structures for syndications. The Sponsor is a General Partner or Manager. Limited partners or passive members are the investors.

The LLC Operating Agreement and the LP Partnership Agreement are also crucial. They lay out the Sponsors' and Investors' rights. This includes the Sponsor's rights to payouts, voting privileges, and fees for administering the investment.

The form of an LLC or Limited Partnership is quite similar to those of other personal funds in the Venture Capital, Private Equity, and Venture Debt arena. These legal organizations exist to safeguard both the Sponsor and the Limited Partners in the event that the agreement fails.

Are real estate Syndications tricky?

For real estate investors who don't have the time or inclination to manage their own properties, multifamily syndication is a terrific solution. Many investors seeking passive income are attracted to the possibility of investing in real estate that they can simply forget about.

Syndications are popular among active real estate investors who wish to become involved with larger properties or assets in other areas. Investors who prefer greater control over their assets, on the other hand, may dislike the passive structure.

Investing in multifamily syndication might be a wonderful alternative for you if you're willing to tie up your money for three years or more, are interested in passive investments, and can discover a transaction that suits your needs.

If all of this appeals to you but you're not sure where to begin, here are some pointers to help you get started with multifamily syndications:

  • If the project memorandum is unclear, get legal advice. The memorandum will most certainly be long, but it is critical that investors comprehend it. The memorandum covers crucial aspects such as preferred returns, the investor-sponsor split, the discontinuation plan, and more.
  • Assess the sponsor with attention. Significant sums of money are entrusted to the sponsor's initiative by investors. Investors rely on the sponsor's experience and abilities to assess the project's chances of success as well as the sponsor's capacity to meet the project's objectives. A shady or unscrupulous sponsor can wipe out profit margins and deplete equity. Failure to effectively manage the property can result in diminishing rentals and property value, and an untrained sponsor can cause just as much damage.
  • Take a look at qualities that add value. When multifamily syndications focus on inexpensive homes in need of refurbishment, they may be extremely profitable. When the rent is increased, as well as when the property is sold, these sorts of properties can experience significant improvements in both monthly revenue and equity.
computer and a cup of coffee on a wooden table

Pros & Cons of Multifamily Syndications

As it's the same with all kinds of investments, there are pros and cons to multifamily syndication as well.

Pros

  • Multifamily syndication is a cost-effective and simple option to invest in real estate. Entry investment opportunities might be as little as $50,000, depending on the project's financial requirements. For the typical American who cannot afford to own an apartment complex on their own, multifamily syndication offers a way to take advantage of some fantastic rental options that would otherwise be unavailable.
  • Tax regulations encourage real estate investment, and multifamily syndications are one method to take advantage of the various tax benefits that come with it. When you invest in multifamily syndication, you're investing in a pass-through entity that doesn't benefit from real estate tax savings. The investor is entitled to a portion of the depreciation and other benefits.
  • After the initial investment, the project requires no further attention from the investor. The sponsor takes on all of the responsibilities that come with owning an apartment complex or other rental property. Investors can maintain their employment, hobbies, and other commitments.
  • Multifamily properties are regarded as one of the most reliable sources of passive income. Anyone who has ever lived in a crowded town or metropolis of any size will understand this. Because not everyone can afford to purchase a home, there is a need for rental housing. Multifamily houses satisfy a demand that is unlikely to go away since they are the most economical option for individuals to acquire housing.
  • Even if the building isn't fully occupied, investors profit from the increase in equity value. Multifamily syndication investors may receive an extra return after the project ends and the property is sold, in addition to participating in any profits from monthly income. Of all, projects might hit a rough patch in the real estate market or be hampered by unpredictable local factors, so equity growth isn't always guaranteed.

Cons

Multifamily syndications provide a number of advantages, but they also have certain disadvantages for some investors. Despite the fact that multifamily syndications are promoted as a safe and "simple" investment, potential investors must be educated and informed about the dangers involved before deciding whether this is the right investment for them. Risks include:

  • The rental market may be unpredictable and out of your control. Low mortgage rates have made house ownership more enticing than ever, while eviction moratoriums have kept non-paying tenants in apartments, making 2020 a difficult year for multifamily property investors. Each neighborhood or metro region is its own real estate ecosystem, vulnerable to localized changes rather than a global epidemic. The decline in industry, aging populations, and a slew of other variables can all conspire to make the rental market anything but certain. Even in times of crisis, real estate investing tends to be more stable than other investment options.
  • There are multifamily developments that do not succeed. Apartments constructed in the wrong location at the wrong time may never achieve their intended purpose. Occasionally, a sponsor will put up syndication based on expected community developments that do not materialize. Not every multifamily housing project is profitable. As a result, it's usually best to deal with a seasoned syndication firm that can show you a complete portfolio of previous projects.
  • It could be difficult to break free from the syndication. Before you invest, bear in mind that the syndicate may impose limitations on how, or even if, shares can be transferred. Furthermore, investors are unlikely to have any say in project decisions or operations, and their funds will be locked in for several years. Investors with cash they may need access to before the project's predicted termination should carefully examine if they can live without this money for the designated period of time.
  • The sponsor and the investors divide the proceeds. A ten percent investment in the required capital does not imply a ten percent reduction in earnings. Profits are distributed between the investor and the sponsor, with 80/20 splits being particularly frequent. Consider the sponsor split when comparing investment possibilities.

 

Conclusion

The world's wealthiest people have amassed their fortunes in a variety of ways, but many of them have one thing in common: they have made real estate a key component of their investing plan. Real estate outperforms every other strategy, by three to one, among the ways the ultra-rich built their riches. Multifamily properties can be your stepping stone to growing your wealth faster!

If you, too, want to invest like the world's wealthiest contact us today!

And if you're a real estate agent check out the best marketing tools for real estate agents to grow your business and generate consistent leads.

Listen to the full episode on how Chris is building a lasting legacy on the foundation of Multifamily Investing here.

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Chris Salerno

Chris believes investing in real estate is the best building block for financial freedom. He is a firm believer in affirmations exemplified by notes personally placed around every corner, which serve as a constant reminder that every day is special and that his life is purposeful!

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