5 Signs You’re Ready to Invest in Multifamily Real Estate Syndication

When is the right time to invest in a multi-family syndication?

Whether you’re brand new to real estate investing or you have been investing in other types of real estate assets, this is one of the most common questions I get asked.

So here are five signs that it’s time for you to invest in a multi-family syndication:

1. You are sick and tired of the wild rides

Have you looked at the stock market lately? We’ve had major ups and downs. So if you value asset stability and predictability, definitely consider investing in a multi-family syndication.

CBRE released a study on how various real estate assets, including multi-family real estate, performed over the past number of recessions. What they found was multi-family was the most stable asset class. It had the least amount of downturn. And when the market recovered, it also exceeded the previous peak faster than all other real estate assets.

Rule #1 of investing is: “Don’t lose your capital.” Everything looks rosy when the market is going up. But what matters is how the asset performs when the market is going down. Multi-family is so incredibly stable. History is a pretty good indicator of future performance and multi-family has performed exceptionally well in market downturns. So if you’re tired of wild swings, multifamily is the investment for you.

2. Cash flow

Equity is great. But if it’s all tied up, you can’t use it. Cash flow funds our lifestyle and all the things we want to do. So if you value cash flow, you should consider multi-family real estate. Stocks are not paying great dividends right now — the returns just aren’t there. So if you’re investing solely in stocks, you’re missing out on the cash flow multi-family real estate provides.

But let’s say you’re already investing in single-family homes. If you’re investing in duplexes, triplexes, and residential real estate, the cash flow, the rental yield, is just not there. The price of the asset has gone up so much. But the price of the rent you’re getting hasn’t really kept pace. So the yield has diminished significantly over the past number of years. So you might be equity rich but you’re definitely cash flow poor. And cash flow is essential for investing in real estate.

But with multifamily, you benefit from the economies of scale. Let’s say you only have two units. If one tenant moves out, you lose 50 percent of your revenue. Imagine owning a business where you lose half of your revenue overnight. This has actually happened to a lot of people during the COVID-19 pandemic. Businesses can’t survive if their revenue gets cut that much. Same thing with your real estate portfolio. Look at it from a business point of view.

So let’s say you have 100 units and five tenants move out. In that case, the cash flow can still support the property. So multifamily is far more stable and predictable. So if you value strong cash flow from your investments, definitely consider investing in a multi-family syndication.

3. You are paying way too much tax

Let’s say you’re actively trading stocks right now. That is active income. Or let’s say you’re flipping houses. That is also considered active income.

You need to take advantage of the capital gains tax laws. It basically allows you to pay a lot less tax. Plus, with the multi-family syndication — because we’re dealing on such a large scale — you can take advantage of cost segregation, where you strip out everything not related to the actual building so you can depreciate it faster. That means you get to take advantage of paper losses on Day One so that it basically wipes out a big portion of your tax liability.

It all comes down to the time value of money. I would rather have more money in my pocket on Day One than spreading out that depreciation over the next 5, 10, 15, 25, or 30 years. That money in my pocket today is a whole lot more valuable; I can do a whole lot more with it.

Multi-family real estate, and even commercial real estate in general, is exceptional for minimizing your tax liability. So if you’re a high-income earner, a lot of investors like you will really enjoy investing in real estate. Not only because of the stability, the good returns, and the cash flow, but also because you can manage your tax situation and pay a whole lot less tax.

4. Financing

Let’s say you’re building a residential real estate portfolio. You’re doing duplexes and triplexes. There will come a time when you’ll no longer fit inside the lender’s box. Lenders have certain parameters for their borrowers. If you’re acquiring a lot of property, you will rapidly exceed that box and their criteria.

I went through this when I was investing in single-family real estate. The reason is, the lender is looking at you to shoulder the liability and support the debt payments for all those properties. So no matter how strong your income is, at some point the lenders won’t want to deal with you. This is the reason why scaling a single-family portfolio is so incredibly challenging.

On the multi-family side, if you choose to invest in a syndication, there are so many benefits like the strong cash flow, which a lot of people are not getting right now on the residential side. Also the tax side, with cost segregation doing a single-family portfolio. It usually doesn't make sense to do class segregation. But the scale with multi-family brings a whole lot of benefits to it. So you are able to invest in a syndication and realize that strong cash flow — that forced appreciation.

Take advantage of how commercial real estate is valued with the income approach. So if you’re having trouble financing your single-family portfolio, look to syndication. The sponsors that the syndicator will be in charge of will be getting financing for that property. And there are so many advantages to commercial lending, like interest-only periods on the mortgage, non-recourse debt, and all these other things. So if you’re building or if you’re having trouble scaling your residential portfolio, add more units to your portfolio by investing in a multi-family syndication.

5. A lack of capital

Many people want to invest in a multi-family deal. They know all the benefits that come with it. But they lack the capital to do it on their own, plus the resources, deal flow, and team to do it.

A lot of investors will invest $200,000-300,000 in a deal. But if they were to go out and try and replicate the same deal on their own, they wouldn’t be able to. They wouldn’t have the network to source the deal. They wouldn’t be able to underwrite it. They wouldn’t have the team to manage it. They wouldn’t have the experience to ride it through the whole period. And they wouldn’t have the capital up front to actually acquire the property and improve it.

So instead of taking that $200,000-300,000 investment and buying a single-family home that comes with all these disadvantages, consider syndicating instead. You already know the benefits of it. You want to do it. But you just don’t have the resources to do it on your own.

The bottom line

Multi-family real estate investing is a team sport. There are so many people who want to take advantage of all the benefits that come with it, but they can’t do it on their own. They don’t have 10 million dollars that they can easily go out and acquire property with, all by themselves. So we pool investors together so all the investors can pool their funds together and be able to take down a much larger deal that comes with more cash flow, more upside, and more stability.

Because the more units you have, the more the risk is spread around on that property and the lower is your expense to gross revenue ratios. Those are some of the many benefits.

So if you want to get involved in multi-family real estate but just lack the capital to take down a deal on your own — but yet have some money to invest — definitely consider a syndication.