Founder | CEO at Sterling Rhino Capital, we help people retire early through multifamily real estate investing.
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Many people choose multifamily real estate as an investment option. Within this category is the syndication deal. Whether you intend this type of investment to be your sole focus or one of several investment aims in your portfolio, there are important considerations to weigh. In my work as a real estate investor and founder of a firm offering syndicate investment deals, I’ve developed five considerations any investor should explore before making a decision.
Syndication deals typically involve a group of general partners (GPs), a syndication group, or a group of passive investors or limited partners (LPs) to buy a larger asset. Each group has a distinct role in the deal. For example, for a deal involving a multifamily apartment asset, the LPs may invest in the asset but not perform physical work in operating the asset, while the GPs handle operation, the asset search and negotiations to close the deal. GPs are incentivized to participate by the share of profits or management fees. LPs are incentivized by the opportunity to own a tangible asset and diversify their portfolio, as well as the potential for higher than average net returns.
1. What are your investment goals, and how do they align with the deal sponsor?
Many people look to investing to help with their retirement or provide income ahead of retirement age. Set your early retirement goal, or figure out your freedom number. How much would you need to live comfortably in retirement or even right now? When setting this goal, consider how many years until retirement and if you are looking for a higher payout at an exit, more cashflow upfront or a combination of both.
There are great calculators available for this online, and if you’re working with a sponsor group or investor club, the tools to calculate your needs are included.
Before making any decision, educate yourself on the type of investment you are considering. Listen to podcasts or read books on passive investing to better understand the risk associated with these types of investments. When choosing a Sponsor, hop on the phone to ask questions and get to know potential partners. Once you’ve decided on a partner, you can usually start this process by signing up on their website.
2. Vet your deal sponsor or syndication team.
When participating in a syndicated deal, you may be required to establish a relationship to follow all SEC guidelines before an offering can be presented by a sponsor group. This means you want to make sure you research the person or team you are investing with. If you are investing in larger multifamily syndication, then it is likely you are dealing with a team. This team will include but not be limited to the following members:
Sponsor: This is a team member with enough liquidity or net worth to cover the loan.
Acquisitions Manager: This team member has experience in underwriting the deal and has extensive experience with acquisitions that are equal to or larger than the one you are considering investing in.
Asset Manager: This individual has the experience to manage the property as well as the contractors that may be required for renovation. They are also typically available to step in if needed during acquisition and any management change.
Investor Relations: This is often the director of investor relations. This is the team member who will communicate with the investors throughout the entire process. They will likely go through an office manager or group of virtual assistants who also conduct data entry.
3. Establish when you will need your capital back.
In multifamily syndication, you are likely to be invested for at least five years – although your exit could be sooner. It’s important to keep in mind this is an illiquid investment, unlike the stock market. There are other real estate investments like notes and REITs you might look into, and each has its own set of pros and cons. Investing in crowdfunding sites is another option. It can give you diversification but may not produce higher returns and flexibility.
4. Consider diversifying your investment.
You can potentially invest in multiple deals, but keep in mind the minimum entry point is typically $50,000, and if accreditation is required on a deal, you could be required to invest $100,000. Investing in multiple deals gives you a chance to invest in different asset classes, including Class A, B and C multifamily, mobile home parks, storage facilities and commercial retail. You can even invest in a fund that invests in these assets rather than investing directly with a sponsor group.
5. Apply your newfound knowledge and relax.
When you’re ready to invest in a syndicate deal, you will go through a process that begins with a document called the private placement memorandum (PPM). This document outlines the deal and all the risks and returns associated with your investment.
If you have taken a new step in the process of diversifying your portfolio and impacting your financial future, have fun with the process and learn as much as you can. When researching, consider this great quote often attributed to author Stephen Covey: “Knowledge is power, but only if applied correctly.” Think about this while you educate yourself to take the leap into passive investing in multifamily real estate deals.
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