What is a Multifamily Real Estate Syndication?
The term “syndication” makes the term “real estate syndication” seem more complicated than it really is. Think of it like buying an airline ticket. Anyone who has purchased an airline ticket has participated in syndication. Each ticket sold goes toward funding the flight. Some people might pay more or less than others for their tickets. Some people might buy more than one ticket. Yet collectively, the proceeds from the ticket sales are used to pay for the trip.
Syndication real estate is no different. Investors pool their capital to, collectively, invest with a sponsor in a real estate syndication.
Syndications are becoming more popular than ever. That’s because multifamily investing, once considered an alternative investment vehicle, is starting to enter the mainstream. Investors, large and small alike, are starting to see the benefit of investing in multifamily properties. Multifamily investing, for example, continues to prove resilient even in the wake of widespread economic uncertainties. Given the illiquid nature of multifamily property (i.e., it is not as easily purchased and sold as other commodities, like stocks and bonds), it is not as prone to market volatility.
That said, even the most sophisticated investors are sometimes at a loss with how to start investing in multifamily properties. Some of the best, most lucrative deals are usually only accessible to the upper echelon, including institutional investors and large private equity investment firms.
Given the high barriers to entry, many investors are now participating in syndication real estate. With this type of multifamily investing, a sponsor identifies a deal and then pools capital from multiple people to use as the equity investment in that deal. The sponsor then oversees the deal on behalf of the investors, who are otherwise passive limited partners.
In this article, we take a deeper look into how syndication real estate works, including the roles and responsibilities of each party and how profits are generally distributed. Read on to learn more about multifamily real estate syndication.
What is syndication real estate?
Syndication real estate is a way of pooling capital from various individuals to then, collectively, invest in a real estate asset. Syndications are a great option for those interested in passive real estate investing.
As was the case with the airline ticket example above, real estate syndications function in a similar manner.
Several individuals invest in the syndicate, and then the manager of the syndicate (known as the “sponsor”) will then leverage those funds to invest in a real estate deal.
Syndications can be as simple as two people investing together. Others can be much more complex, with dozens if not hundreds of people investing in a specific deal or real estate fund.
Syndication Real Estate: The Preferred Form of Passive Real Estate Investing
In recent years, syndication real estate has become the most popular form of passive real estate investing. Real estate syndications allow investors to “set it and forget it,” leaving all day-to-day activities to the sponsor overseeing the deal. The sponsor, considered the active partner or general partner, owns all responsibilities associated with multifamily investing – ranging from acquisition to permitting, design, financing, construction, lease-up and eventually, refinancing or disposition of the property.
Another reason investors are drawn to syndication real estate is that they may not have sufficient capital to invest in multifamily property on their own. They might only have $100,000 to invest, for example, which may not be enough to acquire, renovate and stabilize a property. This is a prime example for when the syndication’s partnership model works particularly well.
Syndications also open the doors to deals that individual investors could not access on their own. For example, a sponsor might create a $50 million fund for investing in multifamily properties. With leverage, this might equate to three deals collectively worth $200 million. An individual investor typically cannot access deals of this scale on their own. Investing in a syndication real estate is a way to access deals that are historically only available to institutions, pension funds, family offices and the like. With a smaller yet still substantial investment of say, $100,000, an individual can participate in the fund and reap the benefits that come with investing in multifamily properties of this scale. In short, pooling money through a multifamily real estate syndication allows people to invest in larger, often more lucrative deals.
Investors are also drawn to syndications as a way of mitigating risk. Rather than making one large investment in a single deal, syndications create opportunities for investors to invest smaller denominations in multiple deals. This approach allows people to spread their risk across projects, product types, and geographical locations.