Investing in a Multi-Family Deal: Step by Step on Syndications

Let's talk about multi-family syndications. Most people don't seem to know too much about the space but are interested in multi-family itself. First lets define syndication.


A syndication is when several investors get together to complete a real estate transaction. They all combine their skills, resources, and capital to purchase and manage a property they otherwise couldn't afford or have the know-how to run on their own.


That is what is great about syndications. A group pulls together like minded investors, vets out multiple deals and puts together an offering where we can all share in the safe, passive returns that is multi-family real estate. Even better is that it is no work at all for you once you are invested in the deal. If you want to put yourself in a position to invest in a syndication knowing the steps ahead of time can make the process easier and quicker.


1. Get Through the Basics from Multiple Syndicators

Before getting deeply involved you will receive potential deals from syndicators, you may want to reach out to multiple syndication groups and compare deals. Each group will have put together basic Offering Memorandums (OM) that describe the property in detail, speak about the team and go through the business plan. If you find the deal to be of interest, at that point you would reach out to the syndicator and move on to the next step.


2. Understand the Private Placement Memorandum (PPM)

The PPM is a document written up by the syndication attorney that explains important information about the deal and the team that put the syndication together. It also maps out how the team expects to execute the business plan. At this point if you have questions about the property, the business plan or anything else about the deal this is the time to ask.
You should also begin to do your own due diligence on the team, the market and the deal. You want to be able to trust the team you are getting involved with but many times this means you need to fact check them, especially early in the relationship. Consider calling or Googling the team, understand how they run their current properties and what they look for in potential deals, does this deal match their strengths? Look at the market, how's the population, rent and job growth? Does this match the OM put together by the syndication team? Does it match your investing criteria? Other good things to look at are the average vacancy rate of the area and the median income, among other things but this is a good place to start.
Once your done with all of that get back to the PPM and read through the entire document, highlight important information and take notes. Ask questions and understand all aspects of the document. Review each of the following sections.

The Offering Memorandum

This is a description of the property, information about the general partner (GP) and the business plan. It will be similar to what you originally saw but finalized by the attorney.

Operation Agreement

The Limited Partners (LP, the investors) and General Partners (GP, the people who put the deal together) are members of the LLC that is specific to the property. The Operating Agreement explains how the LLC will be run, who manages the LLC, the managers compensation and responsibilities, voting rights and the distribution of funds to the LPs.

Distributions

Here the types of shares that are being offered in the syndication and who will hold the different types of shares is explained. The equity splits will be explained as well as the distribution schedule.

Warnings and Disclosures

This explains all the potential risk factors such as how you can lose money and how the deal may not meet the projected returns. Of course we would never get into a deal that we don't think will go our way, however this document was created to ensure that investors are willing to accept the risk they are taking by investing in the deal. Remember, there is risk with every investment.

Other things you will want to know include the equity split, if you can sell your shares and any fees such as transaction or asset management fees. If you do see other fees you don't understand, ask the GPs or sponsors to explain what they are. If you understand and agree with how things are structured then you are ready to any sign additional documents to become part of the team.


3. Wire the Funds

Once you have read and signed all of the documents and sent them in you should then received confirmation from the sponsor. Now you can fund your share of the deal. This can be done via wire transfer or check. Once funds are verified, you will receive written confirmation that you are an investor in the deal, yay!

That is it! It's that simple. Now you will receive periodic updates when important events occur. This includes the closing of the property, monthly or quarterly updates and of course your distributions. As I am sure you can tell this is a high level overview but it should give you a good idea of how a syndication works. Feel free to comment or get in touch any way that you feel comfortable for more information on the syndication process or any other part of the multi-family investment process.