Last week we covered a fascinating way to grow your portfolio rapidly with a limited amount of capital using the BRRRR Strategy. In our final week of the series we will go over a technique known as Syndication. Syndication is simply multiple investors pooling resources to purchase real estate investments. This is a great technique because it allows smaller investors to take part in very large deals that they couldn't do alone. Syndication also offers opportunities for people to invest as "Limited Partners" and stay passive in the process. This means you don't have to be a real estate, financial, or management expert to be part of a large transaction. There are many different ways to apply Syndication but we are going to focus on using this technique to purchase larger multifamily apartment complexes.
Syndication - Pooling capital with other investors for the purpose of purchasing a real estate asset. Most syndications consist of General Partners and Limited Partners.
General Partner - A general partner in a syndication is an investor that is involved in leading the transaction. Most often the general partner(s) are the ones signing on any loan documents and making the management decisions to execute the business plan.
Limited Partner - A limited partner in a syndication is an investor that contributes capital to the transaction in return for a portion of the cash flows and/or profits. Limited partners do not participate in the asset management or execution of the business plan. They are also protected from most of the risks like lawsuits, bankruptcy, etc..
Value Add - A value add strategy is one where an asset is purchased with the intention of adding value to it through a business plan usually consisting of increasing management efficiencies and/or increasing rents through remodeling of the property.
Cap Rate - Cap rate is a metric frequently used in the multifamily real estate world to compare assets using the rate of return. The formula for cap rate is Net Operating Income/Asset Value. This means that the higher the cap rate, the more profitable the asset should be.
Cash on Cash Return - CoC Return is another profitability metric often used in real estate. It is the ratio of cash income earned to the cash invested in the property. The formula is Annual Pretax Cash Flow/Total Cash Invested
IRR - IRR stands for Internal Rate of Return and is considered one of the best metrics of an assets profitability. The IRR is a measure of return that takes into account all cash flows (both negative and positive) as well as the timing of those cash flows. The formula for IRR is pretty complicated so I recommend using a financial calculator or computer model to calculate (Excel can do this for you).
How it works: There are different ways to structure a syndication but in general a group of General Partners locates an investment that they are interested in and then puts together an entity to purchase it. The entity (LLC, Corporation, etc.) will consist of two classes of ownership; the General Partners that will be responsible for handling all of the duties to purchase, manage, and sell the asset and the Limited Partners that will contribute capital towards the purchase but not be involved in the actual work involved. A legal agreement will be used to outline each partners duties, how the profits will be split and distributed, and any other important information. Most syndications will pay an agreed upon portion of the investments cash flow back to the investors and then profits will also be split upon completion of the business plan and sale of the asset.
How to invest: To invest in a Syndication as a Limited Partner you will need to do some homework on reputable operators that are investing in the asset class you are interested in. If you are an accredited investor, meaning you have a net worth of $1,000,000 or more (not including your primary residence) and/or have earned more than $200,000/year for the past two years with the expectation of the same in the current year ($300,000 if filing jointly with a spouse), you can find syndicators advertising their opportunities online, on social media, and through other public methods. If you are not accredited, you can still seek out syndication operators through your own research, referrals, or networking events. The reason for the difference is that operators that publically advertise their opportunities can only accept accredited investors in their deals. In order to accept non-accredited investors, a syndication has to be set up to do so and can only accept investors that they have an established relationship with. While you don't need to be an expert in real estate, finances, or syndication to invest as a Limited Partner, it is very important that you understand the basics, research the operator, and ensure that the investment aligns with your strategy and goals. There is a ton of public information out there to study up on before handing over your funds for one of these investments.
What is Real Estate Syndication?
A Complete Guide to Modern Real Estate Syndication
Syndication is a great way to reap the benefits of investing in solid multifamily assets without having to come up with millions of dollars on your own or manage a portfolio of large apartment complexes. You can often get in as a Limited Partner for $25,000 - $50,000 and receive monthly or quarterly cash flow while waiting for the business plan to be executed and realize healthy profits along with the return of your original invested capital.
Please reach out to me with any questions or comments using the comments button or through the contact page on my web site. If you would like to talk more about any of these investment methods or discuss how we can partner together, please contact me.