The Process of Investing in Your First Multifamily Real Estate Syndication
When it comes to investing in your typical residential real estate deals like single family homes or rental properties, most people are familiar with that fairly simple investment process.
Basically, you choose the real estate market that appeals to you, then drill down on the neighborhoods where you would like to invest in a long term investment property. The next step is to get with your mortgage broker to see what you will qualify for, then you’ll work with your real estate broker to view some single-family properties, make some offers, and voila you’re the proud owner of your first real estate investment. Straightforward, right?
However, when it comes to investing in a commercial real estate syndication, the process can be a bit intimidating especially if you’re unfamiliar with this type of investment strategy.
What is a Real Estate Syndication?
A syndication is essentially the pooling of resources (capital, expertise, track record, etc.,) between different groups of investors. The one group of investors are the passive investors or the limited partnership who are those individual investors who are looking for direct ownership in a real estate syndication deal so that they can receive passive income and obtain a portion of the equity (profits) when the multifamily property is sold. This is essentially group real estate investing.
Their sole responsibility as passive real estate investors is simply to invest passively in commercial properties like multifamily investments or office buildings or student housing, or an industrial park or a mobile home park, etc.
What Does the General Partnership Do?
The other group of investors that make up a real estate syndication is the real estate sponsors who are essentially the real estate syndication company that has located the multifamily syndication deal.
These individuals are the active investors – or the general partnership meaning they are responsible for locating the opportunity, performing all of the underwriting to make sure the deal is solid for the investors. They conduct very stringent due diligence like environmental reports, inspections, and various other in-depth analyses to make sure there are no glaring issues or potential problems with the asset.
They are also responsible for procuring all of the capital to purchase the multifamily deal – they get the debt financing with the commercial lender as well as the equity portion from all of the investors.
What Else Does the General Partnership Do?
Additionally, they are responsible for hiring the property manager and the property management company, overseeing the asset management, and all of the day-to-day operations of running an apartment complex, and they are also responsible for implementing the business plan on behalf of all of the passive investors. Additionally, they oversee the construction crews who are put in place to make significant improvements to the asset in an effort to increase the market value of the asset for all of the investors.
The active investors/deal sponsors/general partners do A LOT of work for the whole team – both limited partners and general partners.
Now, let’s explore all of the steps of investing in a passive real estate investment such as a real estate syndication, so you can invest with a great deal of confidence in your FIRST multifamily real estate syndication.
Here are the basic steps of investing in a real estate syndication:
- Know your investing goals
- Find the right fit – both the investment & the team
- Reserve a spot in the deal
- Review the PPM (private placement memorandum)
- Send in your funds
Step #1 – Know Your Investing Goals
Once you decide that a real estate syndication is an investment vehicle you want to passively invest in, the next step would be for you to determine your short-term and long-term investing goals so that you choose the best investment opportunity to meet those goals.
Decide how much capital you feel comfortable investing, the amount of time that you feel comfortable having your capital invested, look into which investments have the best tax benefits. Determine which asset classes you would like to invest in (ie multifamily properties, mobile home parks, etc), and last but not least determine if you are looking for ongoing cash flow to replace your income or if you would prefer long-term appreciation or a combination of both.
Step #2 – Find the Right Fit
Now that you have drilled down on what you want and your timeline, then find a deal that aligns with your objectives and principles. There are a variety of real estate syndication opportunities for passive investors such as ground-up developments, heavy value-add projects or you can take a more conservative approach such as a light value-add multifamily real estate syndication deal or even a turnkey syndication.
What you will want to do next is review very carefully the deal sponsor’s executive summary, their track record and the full investment summary. A great way to obtain even more information is to find out when the deal sponsors will be conducting their webinar for investors which will give you a high-level view of the asset, the real estate market, and submarket, and the success of the deal sponsor team, their projected business plan, and their projected financials.
Due Diligence
Take the time at this stage to conduct your own due diligence. You will want to ask the sponsor team any questions that are coming up for you. Make sure the business plan is sound and has a variety of exit strategies – not just one, also check to see if the underwriting was done conservatively and make sure that the market and submarket, as well as the asset class, makes sense for you to invest in at this stage in the current economic cycle.
Review if there is a preferred return for the potential investors, and what is the minimum investment requirement. Are there net worth or annual income requirements – meaning you would have to be an accredited investor to invest in the opportunity? What is the projected hold period, and are you comfortable with your capital being invested for the hold term? Last but not least what are the projected returns?
This is the point at which you are looking to NOT invest if the stars don’t align for you.
Step #3 – Reserve a Spot in the Deal
Once you have vetted the deal sponsor team and their track record, and you have found a real estate syndication that you want to invest in, then the next step would be to reserve a spot in the opportunity. You will want to make sure that you’re ready to reserve a spot at this stage because deal opportunities are on a first-come, first-served basis.
It’s not uncommon for these investment opportunities to fill within hours, which is why you will have wanted to have done your due diligence, read over all of the materials presented to you, know if it meets your objectives and timelines and then you can jump in if everything is a go.
Step #4 – Review the PPM
Okay, so you’ve decided this is the deal for you. It ticks all of the boxes. The next step is to review the PPM (private placement memorandum), and if all looks good, sign the PPM.
A PPM is an important legal document that provides you with in-depth information about the investment opportunity, the various risks involved in the real estate deal, and, what your role is as a passive investor in the deal. It’s important that you have a full understanding of this document. If anything is unclear at this point it is best to reach out to the sponsor team or seek legal advice.
When you sign the PPM you will be asked how you will want your distributions to be sent to you – either via check or direct deposit. You will also want to decide how your portion of direct ownership shares of the asset will be held. Again a good question for your real estate attorney or CPA.
Step #5 – Send in Your Funds
The final step in the process is to send in your funds for your portion of the investment. Your funds are rarely if ever wired directly to the deal sponsor team. Typically funds are wired to a 3rd party who is designated for that purpose such as a title company or an escrow company. The funds are held with the 3rd party vendor until the capital is needed for the closing and the acquisition of the asset.
In Conclusion
Having the process broken down into these simple steps, hopefully, is a little less daunting for you. Investing in real estate syndications is just like anything else, once you invested in a few deals then it will all become second nature.
Most of your efforts will be in the initial stages of determining your goals, finding opportunities that meet your goals, conducting your due diligence, and then following through with the reservation and document signing. Then, that’s pretty much it…it’s a “set it and forget it” investment after that.
You never have to worry though, if there are some aspects of the process that are still unclear or intimidating. That’s what our team is here for – to help you every step of the way.
Ready to Learn More?
The best way for you to learn more about commercial real estate syndications is to join the PCRP Passive Investor Club.
Through the PCRP Passive Investor Club, you’ll get a priority review of all the deals we offer. We’ll work with you to determine your investing goals and then present you with the best deals to meet those goals. We’ll then guide you every step of the way as you invest in those deals.
So if you’re ready to start investing passively in institutional-grade, commercial real estate in fast-growing, climate-resilient markets in the U.S., join the PCRP Passive Investor Club – IT’S FREE! – and get started on your path to EARN PASSIVELY and LIVE ABUNDANTLY!
If you would like to know more about what we do and how it may be of value to you, please reach out to us anytime. We’re always happy to help!
