Investing Strategies for Multifamily Syndication Real Estate

There are many ways to invest in investment real estate.

You can go it alone, partner with other investors in a joint venture, or even toss $100 into a crowdfunded venture. 

Urban Equities specializes in real estate syndication for passive investors. Multifamily syndication is all we do. 

In the simplest form, a syndicate is an association of people or organizations that is formed for business purposes in order to carry out a project.  Multi family syndication is a specific type of enterprise, namely, a "private offering" sanctioned and governed by the Securities and Exchange Commission (SEC).

Under SEC rules, a private offering of securities exists any time there is one or more parties with unlimited risk and management control (a General Partner/GP or Sponsor) plus one or more parties with limited risk and no management control (a Limited Partner/LP or passive investor).  

Private Security Offerings must follow SEC rules related to disclosure and vetting of investor eligibility as sophisticated or accredited investors.  The Sponsor is responsible for following the law in all matters related to the offering.

The beauty of syndication in real estate is that passive investors have access to deals that are already underwritten, negotiated, inspected, and merely awaiting closing. In other words, Urban Equities is a Sponsor and we do all the leg work for our investors.

There is no a one-size-fits-all solution for buying and holding real estate, and there are various ways to buy and hold multifamily investment real estate.

Randy and his team believe that for accredited investors with $25,000 or more to invest but little time to participate actively, multifamily syndications are the vehicle of choice.

Many investors in real estate syndication have very limited time outside of managing their businesses, medical and dental practices, and large portfolios. They seek the diversification and income of real estate, but don't have time or interest in buying, managing and selling properties.

They need the syndication model because this method of acquiring an investment starts after all the speculative steps have been completed including finding, underwriting, negotiating, financing, and closing the deal. In a real estate syndication, the LP is a passive investor whose risk of loss is limited to their investment. The General Partner, or Sponsor, indemnifies the LP against further loss. 

If you are running your own practice or business, this arrangement allows you to focus on a simple go/no-go decision rather than juggling the countless complex and unpredictable preceding steps that often and unpredictably blow deals up forcing investors to start again from scratch. 

How does the process begin?

As an accredited passive investor, you would learn about an investment opportunity directly from a syndicator who has done all the due dilligence.

Deals are presented through a "Private Offering" announcement. Depending on the Regulation D¹ exclusion used this could be promoted through online ads, be shared by email if you have subscribed to a sponsor's deal notifications, or be described on a multi family syndication website.

By the time such an offering is made, the sponsor has already identified the property, underwritten a financial and business plan, negotiated the terms of sale, completed inspections and other due diligence, and will already be working with a lender to source and finalize the financed portion of the purchase price. 

Sponsors are compensated with a large share of profits in exchange for all the work they do identifying and underwriting the property, securing the financing, committing to the borrower covenants, qualifying for the loan, raising the equity from investors, and then managing the ongoing operation.

There is no limit on variations in ownership structure, but there are some common structures. Often the equity for the purchase, that is, the money needed for the down payment, working capital, and closing costs, are contributed by the passive investors (LPs), and this group makes up 80% of the ownership of the enterprise and the sponsor or sponsor team (GP) makes up 20% of the ownership.

In virtually all cases where a lender is involved - and in all Urban Equities transactions, the sponsor not only participates in the GP (20%) side, but also has a significant investment in the LP side. We've got skin in the game alongside you.

Most entities are formed as limited liability companies and are treated as partnerships for tax purposes.  An Operating Agreement will lays out the company's plan for waterfall distributions and payouts to investors.

Urban Equities standard plan is simple: Each quarter we distribute the available cash flow, 80% to passive investors, and 20% to the sponsor. Ownership percentages usually follow an investor's pro-rata percentage of the total LP investment but occasionally, favor is awarded to higher invested amounts.

The Sponsor usually receives a monthly asset management fee of 2% - 5% of total income.  When the property sells, the LP group shares 80% of the net profits and the sponsor receives the other 20%. 

Investor returns vary.

You know that and we're obligated to remind you. It seems obvious, but investor returns vary for reasons that aren't necessarily so obvious.

Every property is subject to unique market and environmental forces, and that alone makes every deal unique. More than that, different sponsors also plan for variant financial outcomes.

A passive investor should clearly understand the sponsor's plan prior to investing. Key elements of an investment opportunity include:

• planned time horizon
• target earnings goal

Passive investors must understand these details as well as the investment thesis, track record and deal history of a sponsor.

Some sponsors specialize in identifying 5-star properties that they intend to hold for no less than 10 years. Longer-term-hold investments like this often attract wealth-preservation investors rather than yield-sensitive investors.

Urban Equities has a different core thesis. Our core competence is strategic value add opportunities for yield-sensitive investors through opportunities we believe can be improved in a 3- to 5-year time horizon. This value add focuses on interior and exterior renovations, expansion of community amenities, and improvement of management practices.

Our benchmark for a go / no-go decision is simple. We must be confident that we can deliver a 1.7% equity multiple over the life of the investment. To say it another way, when an LP invests $100,000, we expect him to depart the investment with at least $170,000. 

1 - Securities & Exchange Commission Regulation D

Choosing the right real estate syndication team is crucial. Here are some pieces of advice to help you make an informed decision:

Research the Syndication Sponsor

Thoroughly research the track record and reputation of the syndication  team. Look at their past deals, success rates, and experience in the specific asset class or market you're interested in. Obviously, we believe multifamily communities are the best investment vehicle so if you believe you will be better served in a different asset class - and the list is long - then we will not be the manager you choose.

Understand The Investment Strategy

Ensure that the syndication team's investment strategy aligns with your own investment goals and risk tolerance. Even within a given property type, different sponsors may focus on various improvement endeavors (e.g., buy and hold, fix and flip, etc.), or quality class (e.g., new construction, B class, C Class, etc.) or expected time horizon. 

Review the Deal History

Request details about the syndication team's past deals, including the returns achieved for investors. Look for consistency in their performance and their ability to meet or exceed projected returns.

Assess Communication and Transparency

Transparency is key in real estate syndications. Evaluate how the syndication team communicates with investors and provides updates on the progress of their investments. Ensure that they are forthcoming with information and responsive to your inquiries.

Due Diligence on the Property

Examine the due diligence process the syndication team follows when acquiring properties. This should include thorough property inspections, financial analysis, and risk assessments.

Fee Structure

Understand the fee structure of the syndication, including management fees, acquisition fees, and performance fees (e.g., carried interest). Ensure that the fees are reasonable and aligned with industry standards.

Legal and Regulatory Compliance

Verify that the syndication team complies with all relevant legal and regulatory requirements. Check for any history of legal issues or complaints against the team or their entities.

Exit Strategy

Understand the syndication team's exit strategy for the investment. Knowing how and when you can expect to receive your returns or exit the investment is crucial.

Consider the Team's Network

A syndication team with a strong network of industry professionals, including property managers, lenders, and contractors, can be an advantage in ensuring the success of the investment.

Seek Referrals and References

Ask for referrals from other investors who have worked with the syndication team in the past. Hearing about their experiences can provide valuable insights.

Diversify Your Investments

Consider diversifying your investments across multiple syndication teams and deals to spread risk.

Consult with Professionals

Consult with financial advisors, attorneys, or real estate professionals who specialize in real estate syndications to get additional insights and guidance.

Remember that investing in real estate syndications carries risks, and it's essential to conduct thorough due diligence and make informed decisions. Taking the time to research and assess potential syndication teams can help you make more confident investment choices.