Syndication refers to a group of companies or individuals pooling their resources to meet a common goal that would be very difficult or impossible to achieve individually. “Apartment syndication” is when multiple investors come together and pool their money to purchase an apartment complex. The goal of forming “Apartment syndication” is for all investors to make money.
In the earlier days, only the wealthiest could be part of real estate syndications as they could invest multi-millions in real estate properties. However, after passing of the JOBS Act in 2012, the concept of real estate crowdfunding emerged, accelerating the birth of real estate syndication.
The basics of apartment syndication
Apartment syndication is typically used to buy large apartment buildings that would not be possible for an individual to acquire. The companies or individuals involved in the apartment syndication not only pool their resources but also share the returns and risks.
The syndicator has the responsibility of raising money from passive investors or limited partners. The Sponsor is also the operator and manager of the real estate and is involved in searching for the right property apart from raising funds. Additionally, the sponsor manages the day-to-day operations of the real estate property. The passive investors provide a majority of financial equity. These passive investors are also called Limited Partners and have no responsibility in executing the business plan. Other than reviewing taxes and investor reports each year, Limited Partners have no other role to play.
The sponsor typically invests between 5 and 20% of the total equity capital required for the apartment syndicate. Then investors contribute about 80 to 95% of the capital.
Another major party involved in apartment syndications are the limited partners (LP). The LP is a partner whose liability is limited to the extent of the partner’s share of ownership. For apartment syndication, the LP is also referred to as the passive investor.
To become an investor in apartment syndication, the investor should be a sophisticated investor or an accredited investor. These are called qualified investors.
An accredited investor has an annual income of $200,000 as an individual or a joint income of $300,000 for two years or has a net worth of more than $1 million.
A sophisticated investor does not meet the requirements of an accredited investor but possesses experience and knowledge in business and financing. This type of qualified investor is capable of evaluating the risks and merits of prospective real estate investments.
Only a qualified investor can participate in apartment syndication.
The apartment syndication is structured to split the profits between the Limited Partners and the syndicator. The ratio of profit-sharing varies from deal to deal but can typically be 50:50 to 90:10 (LP:GP). Equal sharing is common with experienced sponsors. For newer GPs who are less experienced, the sharing model of 70:30 (LP:GP) is common.
-The Multifamily Team
Hi, my name is Michael Avent. I founded The Multifamily Review in 2020. I’m a Commercial Agent at Northcap Multifamily located in Las Vegas, Nevada. My vision for The Multifamily Review is to be the most trusted resource for all Multifamily Investors and Industry Professionals. We strive to offer the best and most up to date content to our readers and are always open for suggestions. Make sure you sign up to join our newsletter to stay up to date on our latest blog, ebook, and more exclusive content that’s coming your way! The Multifamily Review team and I look forward to building a deeper relationship with you!
Subscribe to our community Newsletter!