Before you dive into an investment, it’s important to understand what you’re investing in and how it works. You don’t necessarily need to be an expert. What you do need is to research the basics, educate yourself on the risks and benefits, and learn from others who have invested in that vehicle before so you can learn from them.

At EZ FI U, our main area of expertise is multifamily apartment syndications. This blog is intended to cover just that. We want to share our expertise with you so you can become educated and make informed decisions. We’ll discuss what the terms “multifamily” and “syndication” mean, what syndications actually are, how they are regulated, as well as offer a high-level overview of what it means to invest in apartment syndications. 

What does the term “multifamily” mean?

Whether the property accommodates two families or 25, the term “multifamily” is used to identify a property such as a building that is divided into multiple units to accommodate separate living spaces. Depending on how many units the building holds, the property may be considered residential or commercial. 

The rule of thumb is that a property with up to four units is considered residential, while anything with five units and above is a commercial property. Commercial properties can include industrial buildings, condos, hotels, special purpose buildings, and, in our case, multifamily properties with over five units. This matters because there are different processes for how you buy and sell commercial properties vs. residential properties like your home, including loans, insurance, and valuation. 

What does “syndication” mean?

By definition, syndication is the transfer of something for control or management by a group of individuals or organizations. 

Let’s break that down. 

When it comes to real estate investing, a syndication is an opportunity for passive investors to get a “piece of the pie” on large-scale, commercial investment projects that they might not otherwise have the means to acquire. Alone, you may only be able to afford a duplex, but together, you can afford a 5 story apartment building! A group of managers pool together the investors' money to purchase the property. This could be an apartment complex, a mobile home park, or even a self-storage building. A real estate syndication is controlled by a group of managers (called general partners) who oversee the day-to-day operations, while passive investors are involved primarily from a financial standpoint. The key here is that when you invest as a limited partner or passive investor in a syndication, you aren’t doing the heavy lifting day to day.

How are syndications regulated?

Multifamily syndications are regulated by the securities law under the SEC (U.S. Securities and Exchange Commission) and can fall into one of two exemption categories - 506b or 506c. These exemptions determine who can participate in the syndication as an investor as well as how the investment can be advertised.

Investments that fall under the 506b exemption are open to any investor, both accredited and non-accredited, as long as they invest the minimum amount. However, 506b projects are limited in the way that they can be advertised and capped out at 35 non-accredited investors. 

506c properties are limited to only accredited investors, which requires the individual to either have a net worth that exceeds $1,000,000 (excluding the value of their primary residence) OR earn an annual income of at least $200,000. 

Take a look at our article that provides a more detailed explanation of the differences between 506b and 506c.

Who is involved in a multifamily syndication?

The four main players involved in a multifamily syndication team include general partners, limited partners, property management companies, and lenders. 

The general partner is in charge of managing the project from start to finish. Their responsibilities include finding potential deals, analyzing investment opportunities, securing necessary funds from lenders and investors, and executing the business plan once the property is purchased. 

Limited partners do not deal with the day-to-day operations of the project. LPs pool together the money needed to purchase and renovate the property but do not interact with the tenants or deal with maintenance issues. They are involved primarily from a financial standpoint and share in a portion of the profits once the property is sold.

Third-party property management teams are often hired to help with daily operations. Repairs and renovations, as well as tenant relations, are usually handled by the property management team. 

While a large chunk of the finances is derived from the pooling of funds between LPs, it is not uncommon to still need to call on a bank or lender to complete the project in its entirety. Finding the lender and securing proper funding is the responsibility of the general partner. 

Bird’s eye view of the investing process

Management perspective:

A general partner begins by seeking out properties for sale, then analyzing the numbers to ensure there is a profit to be made and that the deal makes sense. This process is called underwriting. 

From there, they begin to build a team of property managers and other general partners and then form an LLC, which is necessary to purchase an investment property. 

Simultaneously, the general partner is generating a business plan that they will present to potential investors when it comes time to raise money. 

Once the property is under contract, it’s time to raise the funds. The GP advertises the property on appropriate networks, welcoming passive investors to get involved with the deal. 

It’s show time! 

With the property purchased and funds raised, it’s time to execute the business plan, which can include renovating units, adding new amenities, and creating ways for tenants to feel comfortable and happy in the building.

After a set period of time, the GP will sell or refinance the property and return the profits to all participating investors, then rinse and repeat the process with another investment.

Passive investor perspective: 

For the passive investor, the process is a lot more straightforward. Once they’ve decided to invest, they look for a syndicator that shares common goals. Conversations about goals, plans, and expectations, as well as available investment opportunities, help guide passive investors to the investment that best suits their needs. 

Once they’ve decided on a syndicator and decided to invest in a particular deal, they simply send over their share of the money and become a limited partner in the LLC which owns the property. Passive investors then receive regular updates about how the investment is performing and payouts as the business plan is executed. 

Check out our other blog for a full look at the step-by-step guide on how to invest passively.

There are countless ways to invest in real estate. As an investor, it’s up to you to take the time to research what is the best path for you. Look at opportunities and evaluate how much time, money, and energy it will require of you to succeed and reach your goals. Be honest with yourself about the expectations before jumping in. If one opportunity isn’t a right fit for you, there are dozens more to choose from.  

For more information about passively investing with us, schedule a free one-on-one consultation with our team today. 

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