Five Steps to Investing in Your First Multifamily Syndication

Traditional real estate investing, which often entails purchasing a home and profiting from it, is rather simple to grasp. Buy a house, renovate it, and resell it for a profit. Purchase a home, rent it out, and get monthly rent checks.

Beyond that, the lines start to blur, especially when it comes to purchasing a larger project like multifamily syndications, which are group investments in which you invest passively with dozens, if not hundreds, of other investors to buy a major asset, such as an apartment building.

Multifamily syndications are complex projects to run and manage, but as an investor passively participating in the deal, the steps to get started are simple.  Here we break down five simple steps to get started passively investing in your first multifamily syndication.

1.  Determine Your Goals

Once you've decided to participate in a multifamily syndication, think about your short- and long-term investment objectives to ensure you find investment opportunities that are right for you.

Consider how much you have to invest, how long you want to invest it for, what tax benefits you need, and if you're investing primarily for cash flow to supplement your income, long-term appreciation, or a combination of both.

Questions to ask that can help you work through this process:

·      What are my goals for investing?

·      Do I want to invest for the long or short term?

·      Do I want a lump sum payment at the end of the project or a sustained stream of passive income over time?

·      How much am I willing to invest?

2.  Find the Right Sponsor Team

Once you've decided on your investment objectives, look for a sponsor team that offers opportunities that align with your goals.

Spend time vetting the multifamily syndication sponsor team, ask them questions and thoroughly review any investment information they supply. Examine whether the project has various exit plans, whether there are indicators of conservative underwriting and whether the proposed business plan is appropriate for the asset class, submarket and current economic cycle.

Examine job and population growth market trends. Examine the minimal investment criteria and the predicted hold time and returns. Finally, ask tough questions at the investor webinar.

3.  Pick an Opportunity that Aligns with Your Goals

It's time to reserve your seat in the deal once you've identified a team you trust that has an opportunity that aligns with your goals. Deals are typically filled on a first-come, first-served basis, so you'll want to ask questions and conduct research BEFORE an offering becomes available.

Multifamily syndication investment opportunities often fill up in a matter of hours, which is why it's critical to have done your homework, established your investment amount and set clear targets. That way, when an opportunity arises, you'll be ready to seize it.

Many deals allow you to put in a soft commit, which gives the sponsor your level of interest in the deal. This can buy you time if you need to evaluate the investment information more thoroughly. But don’t delay, a soft commit isn’t an actual reservation; waiting too long may result in you missing out on the opportunity if it fills up quickly.  Soft commits are non-binding, so you can cancel it without penalty if you decide the offering is not right for you.

Deal sponsors generally distribute some form of the following materials to help investors understand investment opportunities:

·      Executive summary

·      Full investment summary

·      Investor webinar

These primary documents will provide you with a comprehensive overview of the asset, market, deal sponsor team, business plan, and predicting financials. Read more about the materials an investor receives when a new deal comes available here[RM1] . 

4.  Commit to the Deal

After deciding to invest in a deal, the first official step is to read the Private Placement Memorandum (PPM) and sign the Subscription Agreement.

The PPM is a lengthy legal document that explains the investment opportunity, the risks involved and your responsibility as an investor in great detail. Although reading legal jargon isn't fun, it’s important for you to have a thorough understanding of the risks, entity structure and how shares are being split between the sponsor team and passive investors.

Signing these documents is typically done electronically, so no need to print and mail in signed paperwork.

The final step is to wire in your funds which can be sent from a bank account, qualified retirement account or entity / trust[RM2] .   It is always important to verify the wiring instructions before the wire is sent, instructions on how to verify will be provided from the deal sponsor.  It’s also good to notify your sponsor when you’ve sent your wire so they can ensure its accounted for upon receipt.

5.  Relax and Enjoy the Returns

After you’ve completed the above steps, your next most important thing to do is relax and wait for communication from the team that the deal has closed.  As the sponsor team is busily starting to manage the multifamily syndication project, you can enjoy the fact that you’ll benefit from their hard work without doing any of it yourself:

Following that, you can expect regular communications from the team that may include:

·      Monthly updates

·      Detailed quarterly reports on the financials

·      Monthly/quarterly cash flow

·      Annual K-1 tax statement

 Conclusion

Multifamily syndications are an excellent way to diversify your portfolio beyond traditional stock and bond investments. And the advantages are many, including the generation of passive income, time freedom and tax deductions. It’s also a natural hedge against inflation because as it rises, so does the value of multifamily as well. 

And while getting started can seem overwhelming, following the five steps outlined above gives you a systematic way to invest in your first multifamily syndication.

Passive investing allows you to do what you do best, whether that’s focus on your career, raise a family, travel the world or enjoy your hobbies. Live your life by design and start taking control of your finances.We can talk you through the options for investing in multifamily syndications, simply schedule a call or join our investor list.