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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
-
Dow Hits New Intraday High on Fed Day: Stock Market TodayNot even the most important stock in the world could keep the oldest equity index down on a significant day for markets.
-
Savings Goal CalculatorTools Want to know how much you need to save each month to reach your financial goals? Our calculator helps you build a realistic savings plan.
-
Gray Divorce Can Throw Your Retirement a Curveball: What to KnowIf you're entering retirement and going through a divorce at the same time, you've got some work to do to shore up your long-term financial security.
-
I'm a Real Estate Investing Expert: Optional 721 UPREIT DSTs Can Be the Best of Both WorldsBefore investing in any 721 UPREIT exchange, look for one that offers a straightforward, investor-friendly exit.
-
How an Expired Passport Thwarted Blackmail (and What Other Important Documents You Should Keep)An optometrist produced his expired passport to foil a blackmail attempt by the daughter of a former employee. After proving he was out of the country on the date of a forged diary entry, he took it a step further.
-
Optimize, Grow, Retain: The Power of Annual Client ReviewsFinancial advisers can use annual reviews to help enhance client outcomes, strengthen relationships and build their practice.
-
I'm a Real Estate Investing Pro: This Is What Investors Should Know About Truck Stop InvestmentsTruck stops might seem like good investments, but they can actually be a risky gamble due to unstable fuel prices, unreliable operators and coming changes in transportation. Instead, consider safer options like industrial or residential properties.
-
Don't Disinherit Your Grandchildren: The Hidden Risks of Retirement Account Beneficiary FormsStandard retirement account beneficiary forms may not be flexible enough to ensure your money passes to family members according to your wishes. Naming a trust as the contingent beneficiary can help avoid these issues. Here's how.
-
This Is How Life Insurance Can Fund Your Dreams NowBeyond a death benefit, life insurance can provide significant financial value and flexibility through 'living benefits' while you are still alive, helping with expenses like education, business ventures or retirement.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on RetirementWhile some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.
