Now that Halloween is over and we are past Spooky Season – it’s also time to bury the scary thoughts about multifamily syndication. It is simply an investment vehicle, such as mutual funds, corporate bonds, or any similar accounts where you park money expecting a return on your money. The difference is, syndication is tied to a physical asset and you get all the benefits of owning an actual piece of the property.
You Get Physical Ownership
When you invest in a real estate syndication, you can point to the actual property and say you have ownership of that asset – because you do! You actually own a proportional chunk based on the amount you invested in the syndication. For example, if your investment composes 10% of the total equity in that property, you will receive 10% of the total cash flow, 10% of the depreciation tax benefit, 10% of all future appreciation, and 10% of all future equity pay down on the existing debt. In my opinion, this beats investing in the stock market where you pay a percentage of your earnings in fees to own a sliver of hope that the company or fund appreciates.
Opportunity for Greater Returns
These four revenue drivers (cash flow, depreciation, appreciation, and equity pay down) combine over the life of the investment to make your total return, or in investment speak, your Internal Rate of Return (IRR). IRR is the annual growth rate of an asset measured over time – meaning it takes into account your net cash inflows and outflows – and is a great marker for the performance of your investment.
Some funds will tout high cash on cash return, while others may tout a high equity multiple – and that’s completely fine. Varying investors may find more value in one or the other depending on their investment goals. However, IRR is a sound metric to measure your total return. For example, my group Growth Vue Properties, invests for cash flow from day one yet that cash flow may only be in the 5-8% range. What is important for us, because we follow a value-add strategy whereby we create value by rehabbing units and improving the operation of the asset. In doing so, we are able to achieve higher IRRs in the mid-teens. This IRR is the total return our investors can expect taking all of the revenue drivers into account.
And this is the number that their principal investment will grow by over the life of the asset. Invest $100,000 into an asset that returns an IRR of 15% and you will turn that $100,000 into $115,000 over the time of the investment. And that is before taking into account that you are cash flowing in the meantime and any future refinance where you may have a return of a capital event that lowers your basis and returns your money to your pocket while your equity still works for you, growing and producing cash flow.
These are a few syndication specific benefits for the purpose of this article. If you want to know more (and the potential downfalls) you can check out my previous blog posts on LinkedIn or on my blog at multifamilyjourney.com/blog.
How You Can Get In
The complicated answer here is that you can spend the time educating on how to operate multifamily properties, on how to finance them, on how to syndicate them, and then go about building the relationships and the team to put all that education to work. This is what I and my team have done in the last year. It’s not necessarily sexy at the beginning but delayed gratification reaps rewards. To find out more about this route check out my Active Investor Toolkit here.
The simple answer is to find the right group and invest with them passively. This path also comes with massive rewards, like those mentioned above and so much for. Taking this path is how you can accelerate your financial well-being and achieve a passive income that can drive the lifestyle you want and open up the possibility for you to follow your true passions.
Ask yourself: How much would I need to be free?
Freedom could be getting free from your job, making more income passively than you spend on living expenses each month, or the financial freedom to take a long-overdue trip. It is different for everyone – that’s why you must examine what it means for you. Either way, passive income is the vehicle that gets you there. Passive cash flow is key.
As I mentioned above: you want to find the right group that matches your goals and embodies your values. You don’t want to make purely fiscal decisions or purely emotional decisions but weigh the value the group brings. The syndication group you invest with is going to drive the direction of the deal so your paramount duty in vetting syndicators is to find a person or group that you trust.
Things to Consider
Each investor is going to have their own set of questions they will want to be answered. However, the broad questions to determine when choosing to invest with a group are as follows:
- Would I trust this person/group with a large chunk of my money?
- Do the fund’s goals match my investment goals?
- Is their strategy sound? Does it make reasonable sense in today’s market?
This is not a comprehensive set of questions, but a solid overview to get an idea if you are a good fit for a group. The secret sauce of a group is another thing that may set them apart from others for you and is something you will want to consider as well.
What does that mean – secret sauce? Let me give you a taste (pun intended).
My group, Growth Vue Properties, donates 10% of company profits (which does not impact investor returns) to our endowment fund which we have set up to provide assistance to charities such as Operation Second Chance, The Tim Tebow Foundation, and Blood:Water. Our investors do more than just invest in real estate. They are a part of an investor group with a higher drive than getting filthy rich. Of course, financial motivation is a leading factor but when you pair that with social good and giving back we have seen sparks fly! Everyone likes making money, but we have found that the right kind of people also loves making an impact. Our investors build their legacy while they also build their wealth. That’s what our group provides, and that’s what sets us apart. You can learn more about our investment mission here.
After you have consciously chosen the group you want to invest with, it’s time to put that parking lot money (money you just have sitting in a low interest-earning account) to work and turn it into mailbox money!
In most syndications, investors are added this way:
- You have a conversation with the syndicator so that you can begin to build your relationship.
- You fill out a questionnaire and letter of intent (LOI). The questionnaire usually asks about your goals and helps to build the relationship. The LOI is your soft commitment (not legally binding) to invest with the group.
- You get added to the list and receive information on all incoming deals and upcoming opportunities. This is when you get access to the deals!
Once a deal is identified and the team moves forward on it, the next step is the Private Placement Memorandum (PPM). This is where a syndication attorney will draft all the legal documents and the deal becomes real. The team will then start collecting down payments for the purchase to lock in the interested investors. Once all the due diligence is completed and the deal gets to the closing table, wiring instructions will be sent to each investor for the rest of the funds and then they fund the deal. Then it’s game on with executing the business plan and distributing investor returns.
This was the condensed version but gives you the outline of how the process works and sheds light behind the scenes. As you can see, this is not complicated stuff for private investors. The GP team does all the work – which is the benefit to the private investors.
Wrapping it Up
Hopefully, this article illuminates that syndication isn’t scary; especially for private investors who are spared the complicated steps to set it all up for themselves. It’s actually a straightforward process and gives you access to better returns than being in the stock market. Getting off of Wall Street and on to Main Street can be a big benefit to the average investor as a way to diversify their portfolio so it’s important investors know their options and realize that syndication is more accessible than they think.
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.