I’m sure what brings you to this platform is the exclusive love of your job and pure contentment of where you currently are in life – right? If you are anything like me, it is actually probably the exact opposite because you want to grow and have big goals! This article is about using that as your motivation and learning how multifamily syndication can improve your situation. And if you are a person that loves their current job and life situation, then this article is for you too because generating passive income with syndication can free up more of your time to focus on and be involved with those things.
So what is syndication?
Syndication is where passive investors pool their money into a deal operated by active investors and they all split a piece of the pie – meaning they all share in the cash flow, depreciation, equity build-up, and appreciation that comes from the property. Everyone has ownership and receives all of the same perks based on their contribution.
This is most common in large commercial multifamily investing because these types of properties are oftentimes too large for one person to do by themselves. So General Partners and Limited Partners alike pool their resources to knock out these large deals because the whole is greater than the sum of its parts. To clarify, General Partners, or GPs, are the operators and the ones who find, manage, and run the day to day for the deal. The Limited Partners, or LPs, are the passive investors who invest their money instead of their time into the deal.
In regards to the components that drive every deal – Time, Expertise/Knowledge, and Money – it is important to understand who brings what to the deal and also important to realize that you do not need all three. You can provide value to a deal by bringing only one of the three. LPs bring the money and GPs bring the time and expertise, and it’s a system that works wonderfully. Passive investors get their time and greater-than-stock-market returns while GPs get compensated for bringing the deal together and don’t have to bring all of the money themselves.
Syndication is so powerful because it gives both GPs and LPs access to deals that they couldn’t do alone. If I told you that the only way to close a large multifamily deal was to bring $5M dollars to the table for a down payment and capital reserves then you might think that is completely out of range (at least for the foreseeable future). However, it is much more digestible to bring a group of investors together who each bring $25k or $50k to the table.
That’s the name of the game! You can reach higher peaks of investing by syndicating large deals. But wait – why are larger deals good?
If you have ever owned a single family house, or two for that matter, you know that things go wrong and things break. Maintaining single family homes means a set of unique issues. In each home, the materials used, the age, the overall condition, and a long list of other items all contribute to difficult maintenance. Take it from the guy who has been there, and has experienced this problem even with only a few residential properties.
In contrast, when you are able to jump up to the big leagues in the commercial multifamily (5+ units, but the bigger the better) world you open up new doors for scalability and efficiency. In large commercial multifamilies you get economies of scale. In other words, your cost of operation and maintenance goes down with the number of units you grow. It is much more costly, on a per unit basis, to upkeep a single family home than it is to maintain a large apartment complex. Each unit in the complex has the same parts, is in the same location, and has on-site management to reduce maintenance and turn time. If you had the same number of units across town in single family homes, you would have to account for your maintenance man’s drive time to each property, drive time to Lowe’s because the part that fixed the last house doesn’t work at this house, and so on and so forth. Having everything under one roof dramatically increases your efficiency and lowers your per unit costs.
One of the many concepts I love about syndication is that it makes large deals accessible to ordinary people. It is how ordinary people can accomplish extraordinary things in real estate. You don’t have to be a hedge fund manager or the head of a family office to invest in these properties.
Furthermore, investing in these deals shouldn’t be scary. Your job as the investor in a syndication is to screen the operator or GP – not source the deal, underwrite, finance, and operate it. That’s the beauty of it! Find a team that you are comfortable with and who you feel would be a good steward of your money. The framework is there for you and the data shows it is a sound investment. Once you find a good team you will be off to the races making making passive income.
That’s it in a nutshell! Syndication is a strategy where multiple investors combine forces and pool the funds together to purchase large deals. How I like to think about it is a way to put your money to work so you don’t have to.
Stay tuned for Part 2 of the syndication series as we dig deeper into removing the veil of this seemingly complicated strategy.
Blake Dailey is a multifamily real estate investor and Host of the Multifamily Journey Podcast. He has reached his financial independence (Passive Income > Expenses) number through investing in real estate and aims to help others do the same. He helps passive investors impact their lifestyle and wealth by investing in multifamily real estate through his company Growth Vue Properties. Growth Vue seeks to help investors achieve the ultimate asset – Time – by making their money work so they don’t have to.
Find out about investing in multifamily with Blake at thegrowthvue.com or learn more about Blake, read his articles, or connect with him through his website at multifamilyjourney.com.