How Do Passive Investors Make Money In Apartment Syndications?

Real estate is a multi-dimensional asset class that gives investors multiple payouts throughout the course of the investment.  Apartment syndications, specifically, typically follow a consistent approach to developing a business plan that will pay investors at certain milestones during the course of the project.  It’s important to note that every multifamily syndication project can be unique in how it’s managed, the returns projected, the anticipated date of sale, hold period; etc; but typically speaking these projects give investors three forms of payouts. 

And while the distributions received from an apartment syndication are typically top of mind when deciding which project to invest in, it’s important to note the substantial tax benefits from real estate investing. 

Because real estate is a physical asset it can be depreciated, meaning that from an accounting standpoint the property value lowers over time due to normal wear and tear.  Depreciation from a multifamily syndication is used to offset income, thereby reducing the passive investor’s tax burden from the project’s distributions.  This article covers more on how depreciation works in apartment syndications if you’re curious. 

Now, back to how you earn money from passive investments.  There are three primary ways passive investors get paid from apartment syndications:

•     Cash flow distributions

•     Cash-out refinance

•      Profit from the sale of the property

Cash Flow Distributions

The first and most obvious way a passive investor is paid in an apartment syndication is through distributions of cash flow.  The revenue generated from the rental income, fees, laundry or other services minus the expenses and mortgage payments are split amongst the investor team proportionate to their initial capital contribution.  In other words, the bigger the amount invested, the larger your cash flow distributions will be.  The frequency of distributions varies by project and sponsor, but typically passive investors receive distributions monthly or quarterly.

After a property is newly acquired, the first distributions are not typically sent out until the 2nd or 3rd quarter after the closing.  This allows the sponsors to begin getting the property stabilized and save up cash reserves.  But after that point, passive investors consistently receive distributions throughout the duration of the project timeframe. 

Cash-Out Refinance

In the event of a cash-out refinance, passive investors get a second (and typically, much larger) payday.

A cash out refinance can occur after the property has been fully stabilized and the construction & renovation projects are complete.  By this point in the project’s business plan occupancy has increased, income has escalated and expenses have decreased (in some cases, not all), thereby increasing the asset’s net operating income. 

Higher net operating income (NOI) (NOI = income minus expenses) positively impacts the value of a multifamily asset and the loan may then be refinanced based on the asset’s newly appraised value.  Loan refinancing allows the sponsors to pull equity out in the form of cash which is then distributed to the investors.

In some cases the cash-out refinance may pull enough equity out of the deal that investors receive their initial capital contribution back and can then invest that in the next multifamily syndication.  And typically, even though the investor’s initial capital has been returned, they still have ownership stake in the project to continue earning cash distributions and receive a final payout at the sale of the property. 

Sale of the Property

Finally, passive investors get paid when the property is sold. The syndicator pays off the mortgage, short term debts, outstanding bills and taxes, then splits the profits between investors and the sponsors.  How this profit is split is different for each syndication and is outlined in the Private Placement Memorandum (PPM) that investors sign when they commit to the deal. 

Receipt of the final payout may take a few months while the sponsors ensure that all debts owed on the property have been paid before the sale distribution is made.  At that point investors can look for the next multifamily syndication deal to invest. 

Conclusion

When will passive investors be compensated for their investment in a multifamily syndication?

·      You can get monthly, quarterly, or yearly cash flow distributions.

·      The cash-out refinance typically returns investors initial capital contribution mid-way through the project’s hold period. 

·      Profits from the sale of the property are split amongst the investors and sponsors, then it’s time to look for the next deal. 

Multifamily investing has many benefits from regular cash flow, tax advantages and property appreciation to name a few.  It diversifies investors’ portfolios beyond stocks, bonds & mutual funds and is an excellent hedge against inflation. 

Have questions about how apartment syndications pay investors? Let’s talk! Schedule a call today or fill out our investor form so we can connect to answer your questions.