Multifamily Investing: Why the Quality of the General Partners is as Important as the Quality of the Deal
Although multifamily syndications could well be considered the best investment on earth, there are still risks that are important to know about before deciding to put your hard earned money on the line. As Warren Buffett says, “risk comes from not knowing what you’re doing”. This article talks about the risks of multifamily investing so you’ll be able to make more informed decisions.
What Is a Multifamily Syndication?
A multifamily asset is simply defined as a residential building with more than one family. It can be a house with living quarters for two or more families or a complex of 2,000 apartments. These assets are usually bought by a method called real estate syndications.
Purchasing an apartment complex can be too pricey and overwhelming for a single investor, but a group of people can get together and pool resources to purchase the deal and operate the asset. Real estate syndications are typically used for higher-value commercial real estate which can provide substantial returns, passive income, and tax benefits. From duplex to triplex, townhouses, and apartment buildings, there are many different options for each budget and expected returns.
Who’s Who in an Apartment Syndication
The ‘General Partners’ (GPs) organize the syndication, find the property, secure the finance, and manage the property. The GPs are also known as the sponsors, operators, or syndicators. The GPs should be a team of experienced professionals that have a solid track record of successfully operating multifamily assets. On the other hand, the passive investors or ‘limited partners’ (LPs) are the people who contribute their financial resources to the pooled investment. They receive an equity share along with the proportional profits (a.k.a. ongoing cash flow) from the investment.
The General Partners Matter as Much as the Deal Itself
Here’s an important concept: in multifamily investing, trusting the General Partners is as important as the quality of the deal.
Think about it. The contact between you and the investment are the General Partners. You have to make sure you trust in them and their experience. They will be in charge of organizing the syndication, finding the property, securing the finance, and managing the property. And most importantly, for executing the business plan for the apartment community.
So, what could go wrong? As a passive investor, you are relying solely on the GP team to deliver on the business plan for the syndication. Even if you have vetted the returns on the deal, think about these factors:
The GP is your connection with the market, as they leverage their relationships to analyze, find, vet, and acquire the asset. A solid understanding of the asset’s market is key to determining how the property will be managed and how to achieve the greatest returns possible.
The outcome of the project will be highly dependent on the GP. They make the day-to-day decisions on the property that will ultimately lead to successful execution of its business plan. A lack of experience or incompetence can create a lot of stress for the limited partners.
When you invest in syndications, a typical commitment is 5-7 years, sometimes longer. This means the liquidity is low, and if the GP is not performing, selling your position in the syndication could be difficult.
The bottom line is this: you invested in multifamily because you want passive returns on your investment. The GP team should always focus on the returns to the investor first, even if that means the GPs don’t make any money from the syndication. A good team of operators will always consider how decisions on the property will impact your returns to give you the best outcome possible. If you don’t have the peace of mind to trust your money with the General Partners, it’s better to look into someone else.
Find a General Partner That Aligns With Your Goals
While a multifamily syndication can be one of the best investments possible, knowing and trusting the General Partners is as important as vetting the returns on the deal, if not more important. It is important that a GP puts the limited partners' returns first and that the goals of the project align with the passive investor goals.
How do you find the right General Partner? Here at Titanium Investments, we have the connections to guide you into the right decision for you. You can leverage our years of experience and relationship-building with the right General Partners, so you can choose the right sponsor for your investment.
We make investing in multifamily syndications profitable and stress-free for our investors, allowing you to build the financial stability and lifestyle you’ve long wanted. If you’d like to be part of this group of investors that are tapping into the true potential of real estate investing, contact one of our expert advisors here.