So a multifamily real estate syndication is when a group of people pool their resources (funds, time and expertise) together to invest in a multifamily asset. Instead of buying a bunch of small properties, each individually, the group of people come together and buy a larger asset, and typically share in a larger return while de-risking the overall investment.

Let’s pretend you have $50,000 for investing, beyond other savings and retirement funds. You could invest it in an individual rental property, but that would also require time to find a property, evaluate the cost-benefit analysis, negotiate the contract, do the inspections, get the loan, find the tenants and then manage the property.

But it’s likely you don’t have the time or energy (or desire!) to deal with so many obligations. This is where most people assume real estate investing is too hard and too much work, so they stop there.

Real estate syndications are the alternative that allows you to still put your money into real estate without having to actively do the work of finding or managing the property yourself. Instead, you can invest that $50,000 into a real estate syndication as a passive investor. So you contribute $50,000, maybe a friend has another $50,000 to invest, someone else puts in $100,000, along with others until you’ve raised what’s needed to close on the property.

By pooling resources, the group now has enough to buy not just a single rental property, but something bigger, like an apartment building. And as a passive investor you don’t have to do any of the work managing the property. A lead syndicator or sponsor team does the upfront work and manages the investment (i.e. all the active work) and in return, they get a small share of the profits. Additionally, a professional property management company can be hired to run the day-to-day operations. And you, the passive investor, enjoy putting your money to work to generate nice, stable returns so that you can focus your time and energy on the things you really want to do. 

When done right, real estate syndications are a win-win for everyone involved.

So How Does A Syndication Deal Work?

Ok, curiosity piqued, you’re interested in the “behind the scenes” details of a syndication to see how this all really shakes out.

First off, there are two main categories of investors who come together to form a real estate syndication:

1. the active investor(s), aka the general partners (GP’s), and
2. the passive investors, or the limited partner (LP’s)

The prior section described a team that would take care of all day-to-day management (so you don’t have to!) in exchange for a small share of the profits. That team is called the general partners (GPs). They are called the ‘active partners’ and do all the legwork of finding and vetting the property; creating the business plan; securing lender financing; putting up initial “at-risk” funds necessary to close; securing other investors for the down payment & equity; and managing the investment after closing and thereafter, until any subsequent sale. Essentially, they do the work that you would be doing as the owner and landlord of a rental property, but on a massive scale.

The limited partners (LPs) are the passive investors (others like you), who invest their money into the deal in exchange for a portion of the cash flow and/or a percentage of the asset. The limited partners have no active responsibilities in managing the asset.

A real estate syndication is designed to work best when general partners and limited partners join together and collaborate in this manner. The general partners find a great deal and put together an efficient team to execute on the intended business plan. And the limited partners invest their personal capital into the deal, which makes it possible to raise the down payment, acquire the property, and fund the renovations.

Together, the general partners and limited partners form an entity (usually an LLC), and that entity holds the underlying asset. This serves to protect the partners and investors from personal liability and formally organize the structure and responsibilities of each of the partners, along with expected compensation. Because the LLC is a pass-through entity, you also get to share in the tax benefits of direct ownership of a real estate asset.

Once the deal closes, the general partners work closely with the property management team to improve the property according to the business plan, with the intent of increasing business revenue and compounding the property’s overall value.  During this time, the limited partner investors receive regular communications as to the performance of the investment and ongoing cash flow distribution checks (usually sent out quarterly).

Depending on the business plan and strategy (such as planned renovations, improved operations or simply maintaining smooth operations), there may be refinancing events and/or a planned sale of the property. A refinancing event is similar to a home equity refinancing to leverage increased value and/or better loan terms and generates a return of capital distribution to the investors.  And the sale of a property is most often exercised to capitalize on improved property value, which also returns equity to the investors.  When these events take place, even larger payouts are distributed among the partners. And in the case of the sale of an asset, the partnership is then dissolved and team members can work to find yet another great deal.