Due to the explosion of crowdfunding and online investment offerings, more and more people are exploring opportunities to passively invest in multifamily real estate syndications.
Real estate syndication is when a group of accredited investors pool together — or "syndicate" — their equity in order to acquire properties much bigger than they could afford (or manage) on their own. Syndication is a great avenue to balance risk by diversifying investments across geographic regions and property types.
A Sponsor, or “Syndicator,” is the firm pooling investors together. The Sponsor conducts in-depth market research, provides underwriting and due diligence reports, arranges financing and manages the closing. Sponsors have access to institutional-quality multifamily properties typically out of reach for the smaller investor.
After the property is acquired, the Sponsor continues its investment oversight as an asset manager. Either the Sponsor or a third-party firm typically deals with the day-to-day property management. The inevitable leaky pipes or complicated tenant eviction is handled by professional management — usually without the investor ever knowing about it.
Many current real estate owners and landlords dream about the freedom that a real estate syndication offers. Seasoned investors know that syndicated investments are attractive options to defer capital gains taxes, receive consistent cash flow and grow equity over the long term.
But the sudden rise in popularity has brought with it a bundle of misconceptions, common with any new investment strategy. My firm, a Sponsor of apartment investments, has a large and diverse investor base spread across the country. Many invested with us as their first Sponsor partner. Here are the most common myths investors raise when exploring syndication for the first time.
1. “I can't invest because my net worth is under $1 million.”
False. Many real estate syndications are conducted through SEC 506(c) offerings, which mandate that each individual(s) or entity in the investment be a verified accredited investor. Having a net worth over $1 million is just one of several ways to pass the “accredited” test. An individual with an annual income in excess of $200,000 ($300,000 if combined with their spouse) in each of the two most recent years may qualify to participate in the 506(c) investment offering. Trusts with total assets in excess of $5 million may also be qualified to invest.
2. “I can't communicate with the Sponsor.”
False. While this may be true with a REIT investment, Sponsors work closely with every investor. This relationship provides valuable direct contact between investor and Sponsor, from answering questions about portfolio diversity to navigating a 1031 exchange. Reputable Sponsors deliver transparent reporting to their investors from pre-investment through the hold period and eventual sale.
At our firm, communication with investors is top priority. In addition to providing monthly performance reports and quarterly webcasts with live chats, we regularly host investor social events across the country. The bottom line is: Our firm's principals invest their money alongside the investors in every deal. We want them to know that our values and long-term goals are aligned.
3. “Sponsors with a lower minimum investment amount are buying lower-grade real estate.”
False. In years past, Sponsors tended to set higher minimum investment amounts to keep investor groups small.
Today, documentation and accounting are done with virtual deal room technology allowing for electronic signatures, cloud document storage and ACH distributions. Moving from paper to the portal has drastically reduced administrative time (and countless trees). As investor groups grow, the minimum investment requirements have dropped to levels as low as $10,000 to $25,000.
Our firm's average investor group size per offering has trended from fewer than 20 to over 100 in just the past two years. We use a web-based platform to centralize CRM tools, investment performance dashboards, distribution data and document dissemination. With this newly available technology, experienced Sponsors can acquire very large real estate projects with low investment minimums to open deals up to broader participation.
4. "I’ll have no say in decision making."
Not necessarily. Sponsors who structure ownership through a Tenancy-In-Common (TIC) model will follow IRS guidelines that actually require TIC owners to participate in major decision making, such as sales, refinancings and annual budgets. Investors won’t be bothered for input on routine maintenance, but their vote ultimately controls the property.
In contrast, investments into funds, Delaware Statutory Trusts (DSTs) and REITs offer indirect or no control through voting rights. These investment structures grant control to a manager or trustee, or typically an insignificant vote in the case of a REIT shareholder.
Should you consider real estate syndication?
Syndicated real estate is gaining a loyal following for good reason — it has leveled the playing field by making ownership in investment-grade property available to individual investors. Passive investments in a range of property types and locations can be done in surprisingly few steps using sophisticated technology. Sponsors work to deliver the benefits of real estate ownership, such as monthly income and equity growth through appreciation, while investors avoid the drawbacks of hands-on maintenance and management.
Anyone contemplating a move from the stock market — or out of self-managed property — into a real estate syndication may hesitate based on limited knowledge about this unfamiliar investment process. But with a little education, an investor can review Sponsors and offerings that open doors to accessing new wealth-building avenues.
Karlin is Principal and Executive Vice President of Investors Management Group, a privately held real estate firm headquartered in Woodland Hills, Calif. IMG has transacted over $1.6 billion nationally in this cycle, with over $500 million in multifamily assets (3,000 units) currently under management nationwide. She holds an MBA from the University of Oregon.
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