Posted 7 months ago

Apartment Syndications And How To Tap Into Huge Passive Income Profits

If you’d love to own an apartment building or an apartment complex and want to learn the secrets of how to do it accurately and effectively, then this article may be the most important one you ever read.

My goal is to make this post the most Comprehensive Post On Apartment Syndications so I better deliver you some quality content based on my experience syndicating apartment deals. 

I have bought and sold almost 3,000 apartment units and have raised millions from investors via syndications.

And if you’ve been following me here on BP and have ever visited my website and read any of my blog posts, then you know that I’m a very strong advocate of apartment investing. Real estate investing in general, in my view, is the best of all possible investment vehicles.

Why?

While it’s true that there are other investments that can give you higher rates of return – more cash flow or more long-term equity buildup… they’re also far more risky and in just about every case, you have little or even no control.

You could buy a stock that quadruples in value overnight. You could invest in a business or open one up yourself that makes it big and sends big profits. You could open a diamond mine and hit a big deposit.

Or… you could lose everything.

With real estate, there is a great balance between good returns, reduced risk and even incredible tax advantages. Sometimes buying a piece of an apartment deal is worth the tax breaks alone, frankly.

This is particularly true for multi-family properties of 5 units or above. Once you get past the duplex, triplex and four-plex realm, which is really nothing more than like buying a house, you get into an entirely different set of rules and a whole new game.

Now since this article is about syndicates, I won’t belabor this point about apartments. Just understand that with apartments, income determines value – they’re worth what the money they currently make says they’re worth.

That’s a great place to begin, because when you need to raise a few hundred thousand dollars or millions to get that 300 unit apartment complex… you’re probably going to need some help. You’re going to need capital partners to help you put the deal together, and the first thing they want to know is how much do I put in, how much and how often do I get paid, and when do I get my money back!

So with that in mind, I’d like to address some of the most common questions I’ve found that people have about real estate investing syndicates. We’ll start with the syndicates themselves…

DISCLAIMER: All information provided is for educational purposes only. I am not an attorney. All parties are encouraged to consult with their attorney, accountants and other advisors and perform own due diligence.


FORMING THE SYNDICATE:

What is a real estate investing syndicate?

At its core, a syndicate is basically a partnership. A group of people that get together and pool their resources in order to buy a property that they otherwise couldn’t afford on their own.

A syndicate can take many forms, such as being created under an LLC or a limited partnership. Often this is determined by the property and who’s involved.

A good example would be something like this: A 300 unit apartment complex is selling for $10 million. The bank requires 20% cash as a down payment, or $2 million. You and 9 other individuals each have $200,000 and want to pool your money. You form a syndicate to do this and each take a partial ownership equal to your contributions.

Of course, it can get more complex. As the general partner or manager of the deal, you may take a 19% ownership and give your investors a 9% ownership in the syndicate. You’re doing the work, finding the deal, etc. But those are details that can be worked out later. The point is that a syndicate is one of the best ways to buy big and profitable properties.

What are the basic Securities and Exchange Commission (SEC) rules on syndicates?

As you might expect, there are rules and regulations that govern how you can put together a real estate syndicate. If it’s as simple as you, your wife, your brother and his wife putting in a bunch of money and buying a property, then you might simply form a joint venture (JV) with active roles and define who does what and go for it.

However, beyond this type of relationship, putting together a syndicate is very similar to what happens when you form a business and let people buy into it in exchange for shares. For this reason, the SEC provides several exemptions that allow you to raise money from others. The two common exemptions are a 506(b) and 506(c) private offering.

These exemptions are similar, however, there is one big difference between a 506(b) and 506(c) offering.

In a 506(b) offering, you can’t advertise publicly. You may have seen posts on BP such as:

“I have a deal that pays XYZ% - contact me if you are interested”

Be very careful with posts like this as the SEC would deem this as advertising or general solicitation.

Investors of 506(b) offerings MUST be those with whom you have a pre-existing relationship. Because of this, the rules of qualification are a bit looser. You can have unlimited accredited investors and only have up to 35 non-accredited investors who meet the sophistication requirement.

We’ll cover this later.

In a 506(c), you can publicly advertise the offering by posting on social media, billboards, radio, tv, etc.

This mean, though, that you can only have accredited investors involved and you have to go through some rigorous diligence to verify their status. In the 506(b) type, all you have to do is have the investor fill out a questionnaire in the subscription booklet.

How much does it cost to put a syndicate together?

Now I want to quickly address this one. When talking costs, I’m simply referring to the investor documents. Your securities attorney will prepare the private placement memorandum (PPM), operating and subscription agreement. These are created for you by an attorney and the cost can run anywhere from $10k to $20K. The cost depends on the complexity of your deal.

Who should be on your syndication team?

You already know that a syndicate needs 2 critical things – the investors who put up the majority of the capital and share in the benefits that come with owning the property. And of course there’s you the syndicator or sponsor. You find the deals, get the financing, perform the due diligence and manage the asset.

Yet if you’re really looking to find and acquire the best deals, then there are a few other folks you’ll want to add to your network to help you truly succeed.

  • An attorney experienced in multi-family real estate and syndicates.
  • A CPA with the same experiences as your lawyer.
  • One or more real estate brokers, realtors and agents who help you find the good deals.
  • People you can call on for the due diligence phase to help you analyze the prospective property – property manager, contractor and property appraiser.
  • Lenders – banks and hard money lenders who are willing to provide financing.

When should you syndicate a deal?

In a perfect world, you wouldn’t need to syndicate any deals. If you find a $1 million, 25 unit apartment building and can finance $800K and put down $200K of your own cash… then you are all good. You get 100% of the cash flow, equity buildup and tax breaks.

However, if you are targeting bigger deals and when the cash needed far exceeds your personal resources, it’s time to consider a syndicate. I suppose the short answer is to syndicate when you need too.

What are the benefits of a property syndication?

The most obvious benefit is that a syndication allows you to acquire larger properties than you otherwise would or could on your own.

Additionally, there are fees that you can collect above and beyond just simply sharing in cash flow and proceeds from the eventual sale. For instance, the sponsor usually gets a fee for setting up the deal. This can be a flat amount or industry standard ranges between 3 to 5% of the purchase price commonly referred to as an acquisition fee.

There’s also an asset management fee. This comes into play because you’re actively overseeing the management of the asset. Not the property per se, but you deal with the property management, see to it that rents are up to market, that improvements are being made and so on. This is above and beyond your share in the cash flow. An asset management fee can range between 1 to 2% of total monthly collections.

Another fee that could be charged is a disposition fee. This is normally 1% of the sales price as it is a lot of work to get the property ready for sale and negotiate the sales contract as there are many steps to get a large deal sold.

Another benefit is that if you successfully create and manage a syndicate – that is, to make your investors’ money – they and others will want to do more deals with you in the future.

What are the risks of syndicating?

Everything worth anything in this world comes with some form of risk. Generally when we’re talking syndication risks, we’re talking about the opposite of the benefits.

The investment could flop and you could incur the wrath of your capital investors. You could lose your own money. You could try and cut corners on following the SEC guidelines and get yourself into serious legal trouble. Improperly structuring the legal entities that hold the property could leave you and your investors open to lawsuits.

Don’t worry though – if you’re careful and due your homework and manage things the way they’re supposed to be managed, then you do a lot to dramatically shrink your risk. That’s one nice thing about real estate investing, especially investing in apartments that are already running – you have a lot of control.

When are you allowed to accept an investor’s money?

There are two things that must happen in order for you to accept money from an investor. First, the investor must review the PPM, operating and subscription agreement.

Second, those involved in your syndicate must qualify. They must be either accredited investors or sophisticated investors. These are important terms and we’ll discuss them next.

What’s the difference between Accredited and sophisticated investors?

In order to be considered an accredited investor, a person must have an annual income of $200K alone or $300K if we’re talking a married couple. They must have maintained this income level for the past  years and have an expectation that it’ll continue. You can also be considered in this investor class if your net worth is above $1 million, excluding your primary residence.

A sophisticated investor is someone who doesn’t meet the accredited investor status. They can qualify for this classification when it’s determined they understand the investment and risks. This is more subjective and your investor documents will need to have more disclosures for sophisticated investors.

Here is a link to the SEC with a formal definition of an Accredited Investor

INVESTOR CONCERNS:


Now that you have some idea of what syndicates are and how they work, let’s focus on another very important area. Taking care of your investors should be your top priority. They’re putting their money at risk and want to know that you’re capable of making them a profit and protecting their funds.

How do you accurately prepare projected returns for your investors?

As a seasoned real estate investor, you should already be good at analyzing a deal. In preparing your projections, you must accurately analyze the property, its income, its expenses and its potential for upside and downside risk. You will need to communicate with the investors why the deal is so good and will need to prepare an investment summary or “pitch book.” Your investment summary should include:

  • Overview of deal
  • Current NOI (net operating income)
  • Distributable income after debt service and fees
  • Auxiliary income
  • Foreseeable expenses beyond the monthly expenses – improvements, etc
  • Projection of rental increases and equity buildup
  • Exit strategy – how they get their initial capital back and how they’ll share in sale or refi proceeds

When does the investor get paid back?

There are usually several ways in which your investors receive money. If you’re buying a rental property, for example, they’ll get a share of cash flow. However, as noted in the list above, you should have an exit strategy that illustrates how the investors get their initial seed money back and when.

This is done in a variety of ways. Your agreement could state that they get their capital back when the property is sold or exchanged. You could also repay them by refinancing the property, pulling out the equity and then paying them back with it. Their return could also come as part of the regular income from the property.

The point is to spell this out carefully. The faster they can get their seed money back, the better.

What does the investor need to review?

You should provide them with anything they need to make a wise decision. This includes the PPM, operating and subscription agreement, investment summary and other relevant deal information.

The more information you can give them on your experience and expertise is a good idea as well.

What is the investor’s involvement in your deal?

Keep in mind that a real estate syndicate is generally a Limited Liability Company (LLC). That term “limited” is there for a reason. As the managing member of the LLC, it’s your job to manage the asset and to distribute funds and so on. Your investors, while they may offer suggestions and you may want to hear from them, the investor normally doesn’t take any active role in the day to day operations of the deal.

That’s one qualification for passive income. They sort of exist in the background without any real control. That’s why your job is so important. Take care of the deal and those people with whom you’ve partnered.

What’s the minimum investment?

This is a tricky question to answer because there really is no exact figure. In my case, for example, I require a minimum of $100,000 to invest in my deals. There’s a couple of reasons for this.

For one, a syndicate could consist of 10 to maybe 50 investors. You really don’t want to put together something with hundreds of people… its complex and you have a lot of investor personalities to manage.

So, if we’re trying to buy a $10 million property and need a total of $4 million in seed cash plus funds for capex, fees and reserves, then I’d rather do this with as few investors as I can. With my minimum, I only need a max of 40 people. If you have a smaller threshold, then you’ll need more.

Beginners often set their minimums lower, Maybe $25K. After all, your first syndicate might be on a smaller property, perhaps that 25 unit, $1 million I referenced earlier. With a $25K minimum, you could do this deal with a max of 8 or 10 investors.

I started at a minimum of $50k and found that as I did more and more successful deals, it became easier to get larger sums of money from fewer people.

How do you find a syndicator with whom to invest?

Believe me, this isn’t hard. Here on BP alone there are solid syndicators. You can also find them on Google, social media, networking, real estate groups, seminars, etc.

I’m one, for that matter!

The trick, though, is determining if you’re going to be successful with a syndicator. My advice would be to study their track record. How many deals have they done? How successful and profitable were they?

THE SPONSORS:


Before I say goodbye, let me address a couple of specific points that those of you who wish to sponsor a syndicate may want to check out, as well as points that those of you who may want to invest in one will want to know.

How can I syndicate my first deal?

No discouragement here at all…I just want to give you an honest answer.

Putting these syndication deals together is a lot of work.

If you can syndicate your first deal with no experience, no money and little net worth that is awesome.

What normally happens, and this was my experience, I invested with someone who had the experience and track record I wanted. I was able to learn the ropes, “lingo” and gained experience.

I was able to leverage this experience to syndicate my next deal.

If you have a great deal and lack the various ingredients you need to syndicate your first deal. Don’t worry – find a sponsor you trust and like, share what your goals are with them and what value you can bring to the table and see if you can be part of the deal.

Know going into the deal when you are first starting that you need the sponsor more than they need you.

Something is better than nothing, so be prepared to give a portion of the deal away to the right sponsor to help kick start your syndication business.

What’s the difference between an operator and loan sponsor?

The syndicate sponsor, as you probably already know, is the one who’s forming the deal. Sometimes, though, especially if you’re doing your first deal, you may need another person who can act as loan sponsor. In my case, I’m both now, but in the beginning, I had to bring in this extra person.

The loan sponsor is the one who adds their name to loan documents in order to satisfy the lender’s requirements. This person often has good credit, a high net worth, liquid funds, experience with real estate deals, experience with the lender or any combination of these factors.

What makes a good syndicator?

I suppose the most obvious answer to this question is one that makes his or her investors’ money. Of course, in order to do this, a good syndicator needs to know their business.

You need to know how to find, analyze and manage good real estate deals. You need to see opportunities to increase the value of the properties wherever possible. You need to be able to spot issues before they blossom into big problems as well.

Yet another side of the coin is understanding that you’re dealing with people and that you’re dealing with their trust in you. Treat the investors well. Communicate with them often and keep them in the loop. A good syndicator isn’t just a good sales person – you need that skill at the beginning. You also want to be good at preserving those relationships, too.

I hope that this extensive article has helped to flesh out your knowledge of real estate syndications. They’re an exciting way to get into the truly big deals and to build relationships with investors or syndicators. It’s all about winning and making everyone money, and when syndicates run properly, are highly effective.


Comments (18)

  1. Thanks for the article, this is very informative as I want to learn more about syndication.


  2. hi guys , I have $50k to syndicate into a deal. If there' s anyone wanting to start into smaller multi family units and get the ball rolling , please reach out for me . Thanks and good reading.


  3. For all folks thinking of entering the realm of large multi-family building investing, this write-up is a foundational gem. I've read my share of articles, books and listened through podcast and coaching calls on this funding concept that the big leaguers use, and Brian does an efficient and effective job of breaking down all facets in a manner that a layman can understand. Thanks, sir, for sharing your knowledge with myself and the BP community. This was great.


    1. @Albert M.I really appreciate your kind words.


  4. @Brian Adams thanks for great post!


  5. Great article! I appreciate you sharing.


  6. Thank you for this very informative article


    1. @Festus Edward thanks


  7. Hello Brian,

    Thanks for the great article! I am a manufacturer of bathtubs and bathroom vanities and supply all finish materials for apartments, condos, and hotel projects. Recently I have been aggressively looking for large apartment units  to syndicate.
     
    1) Have you created any posts on prospecting for these larger deals? 
    2) Have you created / do you have any information on how you analyze deals?
    3) I currently live and operate in Los Angeles, and inventory of large units don't come up often. Do you recommended smaller markets / sub-markets to find these deals in? Are all your deals within driving distance for you?

    Thanks for your time and help.

    Ben


    1. @Ben Dreicer Thanks

      I have a pretty active thread on how I got started that covers a variety of topics.

      Here is the link for you: https://www.biggerpockets.com/forums/432/topics/18...

      None of my deals are in driving distance. I live in PA and a month ago bought almost 550 units in Georgia.


  8. @Brian Adams Sounds good, thanks!


  9. Hi @Brian Adams, thank you for the great article. My company has actually put together 5 syndications so far (all in Philly), but only <=4 unit properties. We are targeting something on the larger side in the next 6 months to a year. A few questions for you, 1) We still own all of the deals we've done, but would love to trade them up. The problem we've run into is that each deal is its own LP. Knowing the rules of a 1031 Exchange, have you used any creative ways to combine assets to trade up? 2) Having so many entities we associate with is an administrative and tax time nightmare, do you have the same problem? 3) Do you use any software to manage the syndicates, i.e. Juniper Square? 4) Are you available sometime for a cup of coffee or a beer on me? :-) We are based in Springfield, PA

    Thanks in advance for you help and wisdom.


    1. @Sergio A. great job on putting deal together.

      For 1031s, you may want to check with my friend @Bill Exeter who is on BP and you can search the site for other connections.

      For managing my syndicates, I leverage my property management company, my CRM and as a CPA, I can do what I need to do with Excel.

      I have a busy summer - we can pencil some time later in the year if that is okay.


  10. Thank you. thank you, thank you.


    1. @Karen Young your very welcome!! If I didn't hit one of your questions, let me know and I will address.


      1. @Brian Adams, when presented with an investing opportunity in a syndication, what are some of the basic steps I should take to research the offering?


  11. Awesome break down of this strategy.  Thanks!  


    1. Thanks @Brian Ambrose