5 Steps to Investing in Multifamily Syndications

Investing in your first multifamily real estate syndication, or apartment syndication, can be exciting. There is the thrill of a new deal, not to mention the many benefits of participating in a multifamily real estate including strong cash flow, stability, and tax advantages to name a few.

But the required steps to reach closing day can be a bit overwhelming for new investors. There are numbers to look at, documents to sign, structuring to put in place, and funds to transfer. Each of these steps needs to be completed to keep the investment running smoothly.

First, we are going to make the assumption that you have already decided that passively investing in multifamily real estate fits your investment and life goals. Before making any type of investment, it is crucial to ensure that it aligns to your aspirations. Second, we are going to assume you have found, vetted, and built relationships with multifamily syndicators who have then included you in their investor database; these syndicators will be the source of your future real estate investment opportunities. Third, we are going to make the assumption that you have familiarized yourself with how a syndication is structured and the roles of the general partner and limited partners.

Step 1 — Review the Deal

When a multifamily syndicator finds a multifamily investment opportunity, they will underwrite the deal to ensure it fits within their business plan then move to put the property under contract. While the multifamily property must undergo further due diligence and underwriting before closing, this is when the syndicator will start preparing marketing materials for the new investment opportunity and start contacting potential investors.

One of the biggest mistakes passive real estate investors make is not taking a closer look and underwriting the deal themselves. This is your money after all.

Relying on an experienced real estate expert’s work is sound but dig a little deeper and ask yourself questions about the investment. Do the rent increases seem reasonable given the comparable properties? Is the capex budget for renovations too thin? Is a refinance being worked into the numbers, and if so, is it realistic and conservative? Is the net operating income stable enough to support the property if the market softens? Is submarket growth being fueled by key market drivers?

The more you investigate the deal yourself, the more you will learn about the underwriting process which will help you make better real estate investing decisions.

If you are not comfortable reviewing the deal yourself, ask an experienced investor to help you through the process. The syndicator will also be able to walk you through the deal, the opportunities they see, the business plan, and key features of the property and investment.

Step 2 — Soft Commitment

Once you have reviewed the deal and have decided that it is a good fit for your portfolio, the next step is to make what is called a “soft commitment”. Essentially, you are informing the syndicator of your intention to invest and for what amount.

Some syndicators will ask you to sign a form with your details, while others have online forms through their website. While this is not an official document and is non-binding, making a soft commitment will reserve your place in the investment.

Great deals will fill up quickly. Making a soft commitment not only keeps you from missing out but also shows the syndicator that you have reviewed the property details and are serious about the investment.

Step 3 — Sign the Private Placement Memorandum (PPM)

Once you have made your soft commitment, the syndicator will forward you a copy of the private placement memorandum (PPM), also referred to as an offering memorandum (OM).

The PPM is a very important document, and it is essential to thoroughly review the PPM yourself and with your lawyer and/or accountant before signing.

The private placement memorandum covers and defines key components of the investment including:

• Disclosures
• Property details
• Proforma and projections
• Investment risks
• Investment structure and risks
• Fees (acquisition fee, disposition fee, refinance fee, asset management fee, etc.)
• Preferred returns, splits
• Subscription agreement

Every detail you need to know about the investment is included in the PPM. The PPM will outline the structure of the syndication and describe how profits are to be shared between the general partnership and the limited partnership.

Before signing, make sure every question you have is answered.

Step 4 — Wire Funds

With the PPM reviewed and signed, it is time for you and the other investors to fund the entity. The PPM outlined the entity that will own and operate the property, and that entity must be funded before the property closing date. The funds wired by the passive investors make up the equity needed by the entity to close on the property.

Every multifamily real estate syndication will have a funding cut off date. This is the last day you can wire money into the syndication account and it is especially important to meet this date.

It is a best practice to wire your funds at least a few days before the cut off date in the case of a delay at the bank or other issue with the wire.

Step 5 — Ongoing Deal Review

Your funds are in, the deal has closed, and it’s time to celebrate! Congratulations!

But the work has only just begun. Starting from day one, the syndicator’s team will work to implement the project’s business plan to improve the value of the property or apartment complex and generate the expected investment returns for the passive investors. This often includes physical improvements and renovations through capital improvements, optimizing operational inefficiencies, and improving the management of the property.

Stay on top of your investment, read the updates and keep track of what is being done. I believe that monthly updates are best, though some syndicators choose to update their investors on a quarterly basis. If you have questions, ask.

You will also start receiving your distribution cheques and, depending on the property, you may also be able to utilize tax credits from depreciation and cost segregation to reduce your tax bill.