Investing in multifamily properties has historically had a high barrier to entry, because of this it has normally be an investment class that was thought to be reserved for the wealthy and institutional investors such as REITs, funds, etc. Multifamily properties offer so many benefits to the investors such as cash flow, appreciation, tax benefits, an inflationary hedge and high returns with low risk. But how can the average person get involved? That leads us to syndications.
A multifamily syndication is a temporary group of people formed for the purpose of purchasing and managing a large apartment transaction that would otherwise be difficult or impossible for those involved to handle if it were them alone. Within the legal structure this group pools their money and resources to purchase the desired asset, in doing so they also share the inherent risks that come with investing and of course the returns. In multifamily syndications there are normally two groups - the GP/general partners (the syndicator) and the LP/limited partners (the investors), together they acquire the asset, manage and sell the asset all while sharing in the profits.
As a limited partner, we'll call it an LP from now on, you are investing in a property that you would probably otherwise be unable to invest in, because of lack of liquidity, experience or both. The SEC does have some guidelines to investing though, in general you must be considered either a accredited investor or a sophisticated investor and this is based on the type of real estate offering. Being an LP will allow you to gain all of the benefits mentioned above just like a large institutional investor. As an LP you are considered a passive investor, being passive you don't have to worry about the daily management (save that for the asset managers and property managers). You will receive the benefits of quarterly cash flow distributions, potential tax benefits and sheltering through depreciation, leverage, principle pay down and ideally appreciation in the assets value, the amount of money invested directly correlates to your percentage ownership in the asset and thus your returns.
Lets review all of the benefits of being a limited partner:
This is something we are always searching for with new deals and is one of the biggest advantages when investing in real estate, especially multifamily. Cash flow is generally steady and many times can be sheltered from taxes. This allows the LPs to be paid consistently throughout the life of the deal.
Because of how apartment deals are structured and run they are very predictable assets. The revenue is created from the rents paid by the tenants as well as other income generating items such as pet fees, laundry facilities, etc. A well run property will generate consistent cash flow over the long term.
The tax code is written in a way that favors income generated through real estate investing. How the code is stated a large portion of cash flow distributions are often not considered income, meaning you are not going to pay tax on it, this is because of the expenses and depreciation. Also worth noting is that capital appreciation is deferred until the asset is sold and can be deferred even farther if a 1031 Tax Deferred Exchange is used at the sale.
Forced appreciation is the increase in the value of an asset based on the deliberate or accidental actions of the investor. This is made possible by a basic dynamic of commercial real estate: its value is based on its income. Because of this if we can find ways to increase the income not only will the cash flow be better but the property will be worth more at refinance or the sale where proceeds may be returned to the LPs. These types of improvements are generally called a value add and should be part of the business plan when acquiring a new asset.
Real estate is a great hedge against inflation because it goes up with inflation. Rents, replacement costs and property values all rise when inflation occurs allowing you to balance your portfolio.
Owning a Real Asset
An apartment building is a real, tangible asset, something many are lacking in their investment portfolios.
In multifamily apartments the combination of predictable cash flow, appreciation, principle paydown, tax savings and the inflationary hedge provide great returns. These returns can be quite large and when compared to other investment vehicles can really allow you to reach your investment goals quickly.
Multifamily apartments provide investors with many benefits and with syndications even more people can realize the power they provide in growing their portfolio. Don't have the extra time, know how or desire to learn more about the assets themselves? Being a Limited Partner might just be a good option for you.