Investing passively in apartment syndications are a great option for those that want to diversify outside of the stock market but don't want to necessarily become a landlord or a house flipper. The key word here is passive. This means you are simply providing the funding and letting an expert do the work. 

In case you are new to this type of alternative investment, passive apartment syndications are when a group of general partners pool together money from private investors called limited partners and purchase an apartment building, execute a business plan to generate a profit, and then return that profit to the investors. You may also hear this called passive multifamily investing. This article will walk you through how you as an investor can actually participate in these investments and what you should expect at each step along the way. Let’s get into it.

Step 1: Learn the basics

It’s important before you put your hard earned dollars into any kind of investment, whether it be an index fund, an individual stock, a business, cryptocurrency or real estate, you understand the basics of how the vehicle works. There is plenty of information available online, from ourselves and other reliable resources, on what passive apartment syndications are and how they work. 

You don’t need to be an expert before you start investing, but you should be informed. Learn the terminology and the basics so that way you can ask educated questions along the way and properly vet future opportunities. If you don’t have the basic working knowledge of the subject, it will be much harder for you to pick up on red flags and trust your gut.

Step 2: Make the decision to invest

After you’ve gotten a foundational understanding of what is involved in syndications, you’ll be able to decide if this type of investment fits your investing strategy and your financial and lifestyle goals. For instance, if you work 50 hours a week and have no interest in being a landlord yourself, passive investments may be a great fit. On the flip side, if you want to own and operate a building yourself and want to have 100% control over decisions made, you may want to pursue actually being a general partner and purchasing a property with others yourself. If you have a partner or spouse, be sure to align with them and that they understand the basics as well so there are no surprises down the road.

Remember, savings alone is not going to help you reach your financial independence or wealth accumulation goals, especially in a high inflation environment. You should be looking for vehicles into which you can invest your money where you are making at least a higher rate of return than the rate of inflation. Doing nothing means you are actually losing money, and no one likes to lose their hard earned savings.

Step 3: Gather your funds

Investing in syndications does have a higher investment threshold than say investing in stocks or cryptocurrency - you can't just throw a couple thousand dollars in at a time. The average minimum required investment per deal is around $50K-$100K. 

This type of investment is also a long term play. You should plan on having that money tied up in the investment for 3-7 years, depending on the business plan. You should avoid using emergency funds or funds you know you might need during this time and instead look for money that you are comfortable with setting aside for growth. 

Now, you may be thinking that $50,000 is a lot of money. And it certainly isn’t something to sneeze at, but you might be surprised at where you can find the money to invest if you prioritize saving and making more money to achieve your financial goals. Read our article about building a financial plan to reach freedom for more insights. You can find lazy money to use in lots of places, including company stocks you may have received as part of your compensation, retirement accounts, or even just a savings account you may have forgotten about. Learn more about using lazy retirement funds in this blog post.

While you're gathering your funds, think about your strategy for investing. Are you trying to grow your wealth? If so, invest for equity growth, not annual cash flow. This means you won’t see a lot of cash flow coming in monthly or quarterly, but you'll get a large payout at the end of the deal based on how much value was added. On the flip side, if you're looking for more of a steady income throughout the year, perhaps to replace or supplement other income, you should consider investing as a preferred investor and getting a straight annual return. This means you'll get more money each month or quarter in distributions but won't get the big payout at the end of the project.

Step 4: Get to know your syndicator

This type of investment is all about relationships. Who you are investing with is as important, if not more important, than just the property or deal you are investing in. You and the syndicator should be viewing this as a long term relationship built on trust.

Research your operator's track record and get to know how they do business. The best way to find someone you can trust to invest with is by getting a referral from someone in your network to a syndicator that they know and trust. If you don't have a direct referral, you can also find syndicators via podcasts, webinars, and attending multifamily networking groups. Just make sure you are asking them the right questions and properly vetting them before making a decision to invest.

Step 5: Research prospective deals

Once you have a connection to a syndicator, you should start receiving emails or phone calls about investment opportunities. Each investment will contain one or more properties in a particular location, which those in the industry call a market. You don't have to be an expert or even live in the market you are investing in, but it's good to do your own due diligence and research the area to understand the opportunity. Although this article is mainly geared towards active investors purchasing their own properties, it provides some tangible tips on how you can get to know a market outside of your own backyard where you live.

A great place to start is by researching the median income of that particular zip code, the crime rates, what industries employ most people in the area, and what public transportation and retail venues are close by. If possible, take a trip to the neighborhood where the investment is located and get a feel for the area. If you have questions or concerns about the market, always be sure to bring these up with your syndicator. They should be open to having a discussion with you on any questions or concerns. If they aren’t, this is a major red flag.

Step 6: Invest

Once you have decided you want to invest in this vehicle, have a relationship with a syndicator, and have done some of your research on a prospective deal, it's time to actually put commit with your money. Deals often fill up quickly, sometimes in a matter of days to a weeks, so if you want in, you'll need to be ready to wire your funds quickly.

Be prepared to complete your paperwork ahead of actually wiring in your funds. If this is your first investment, you should read through the documents carefully (called a subscription document package, including a PPM, investor questionnaire, and company agreement) and make sure you understand how the investment works and your rights as a member of the LLC. Don’t let the amount of paperwork overwhelm or deter you from investing. Remember, it’s there to protect all parties involved and demonstrates a legal contract. You wouldn’t want to invest in something without that, right?

Step 7: Receive distributions and communications

This is the fun part - sit back and watch your money work hard for you instead of you working hard for it! 

You should expect that it will take about 6 months or so before you see your first distribution. Sometimes it can happen earlier, depending on the business plan for the property, but typically it takes some time for the team to take over operations and start implementing the cost savings or value add projects that will drive your returns.

Regular communications are a sign of a good syndicator. Expect monthly or quarterly communications on how the project is going and the financials, depending on what was committed to in the beginning of the project. You will also get a K-1 tax form annually from your syndicator so that you or your CPA can properly account for your investment in your tax preparation. If you invested through a retirement account, you will also receive a fair market valuation form to be used for reporting.

Investing in a new vehicle can be overwhelming, but with the proper education, guidance, and partnerships, it can also be extremely rewarding. Passive investing in apartment syndications allows you to diversify, take advantage of unique tax benefits, and potentially make much higher returns than you can through other vehicles. Best of all, you keep more of your most valuable asset - your time. 

If you are interested in learning about how to build a plan for financial independence through multifamily investments, schedule a free one on one consultation with us today.

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