Apartment syndication is when a group of investors combines financial resources to purchase an apartment building.
This group also executes the plan on how to proceed with the project’s completion if the building is not yet constructed.
It can be a good way for people to make investments without needing considerable capital. This article discusses apartment syndication, explaining how it works.
How does Apartment Syndication Work?
You can have a more thorough understanding of apartment syndication by learning how it works.
Here’s a detailed explanation.
There Are Two Types of Parties Involved
Apartment syndication requires two major parties. These parties can consist of an individual or a group of people.
Therefore, apartment syndication is a transaction between the sponsor and the investors.
The Syndicator or General Partner (GP)
A key party in apartment syndication is the general partner (GP), sponsor, or syndicator.
This person or party is responsible for gathering investors and raising funds for the property purchase.
The Limited Partners (LP) or Passive Investors
The other investors who contribute to buying the property are limited partners (LP) or passive investors.
Typically, they do not have control over how the project will go.
Only Specific Investors Can Become Passive Investors in Apartment Syndication
Anyone cannot become a passive investor, unfortunately. You must first be a sophisticated investor or an accredited investor.
A sophisticated investor is one who has experience and knowledge in business matters and finance. As a result, they can effectively evaluate the returns and risks of investing in projects.
Sophisticated investors do not meet the criteria to become accredited investors.
Therefore, an accredited investor is one who has an annual income of $200,000 at least for the last two years. They can also have a joint income of $300,000 for the same number of years.
An accredited investor can also be someone who has a net worth of over $1 million.
The Syndicator Handles the Entire Business Plan, and the Passive Investors Contribute Capital
As indicated above, the syndicator and the passive investors have unique roles in the apartment syndication process. The syndicator performs several more duties than a passive investor.
You can learn about these duties by reading what goes into the process of making apartment syndication a possibility.
The Syndicator Researches the Viability of a Project before Gathering Investors
The syndicator first determines in which property to invest. Therefore, they will perform considerable research on different properties in various neighborhoods.
The purpose of this research is to ensure that people will actually choose to stay in the newly-constructed apartments.
The Syndicator Gathers the Passive Investors
Syndicators also partner with real estate brokers and property management companies. Doing so ensures that they can effectively secure a deal when they find a workable one.
Before securing the deal, however, the syndicator gathers passive investors. This can be through verbal and written communication.
Typically, syndicators also perform a detailed assessment of the finances required for a project. Therefore, they already know how much investment they’ll need from LPs.
When gathering passive investors, they may also need to present the business plan. Passive investors likely will not participate in a specific apartment syndication project if the plan does not seem profitable.
Therefore, along with their business plan, the syndicator must perform their due diligence. The purpose of that is to ensure that the business plan is indeed viable.
This way, they can also secure the confidence of their passive investors.
The Passive Investors Provide the Capital Necessary to Purchase the Property
The passive investors provide the capital necessary to fund such a project. However, syndicators also take on loans from a mortgage broker or lender for debt financing.
This is because the entire amount to purchase the property may be too high for passive investors to cover.
The syndicator also determines how the money is returned to the lender in collaboration with the passive investors.
Considering passive investors contribute financially, they do not have any say in the business plan. They also do not perform any duties with arranging aspects related to the execution of the plan.
Syndicates Also Contribute to Some of the Cost of Purchasing the Property
It’s important to note that syndicators also put in a percentage of the equity investment for an apartment syndication project. Passive investors typically prefer that GPs do so.
This is because syndicators also have a stake in the project in that case. As a result, they may be more thorough with their due diligence and be willing to maximize profits for everyone.
That also helps instill passive investors’ confidence in the syndicator’s actions for such a project.
While syndicators may also contribute to the equity investment, it’s significantly lower than LP’s contribution.
Passive investors typically contribute between 80% and 95% of the entire equity investment. On the other hand, the syndicator contributes between 20% and 5% of the amount needed to buy the property.
Therefore, the only role passive investors play in apartment syndication is to fund the project to the best of their abilities. In return, they own specific shares of the property in which they invested.
The Syndicator Executes the Business Plan
When a deal is available, then the syndicator executes the business plan. Therefore, they are responsible for arranging all aspects related to the process.
They also must ensure that the property construction project is completed within appropriate deadlines.
Therefore, they must work closely with construction teams to ensure that everything goes to plan.
In addition to that, the syndicator is also responsible for asset management. Therefore, they must ensure that every resource is utilized to execute the plan in the best possible way.
All of this is to get the passive investors the best possible returns on their investment.
While executing the plan, the syndicator also consistently maintains communication with the passive investors. Maintaining investor relations is also essential for potential future projects.
When Apartment Syndication Is Typically Considered
Apartment syndication is usually considered by syndicators when building large-scale apartment complexes.
These include apartment buildings that would otherwise be too expensive to afford by one party.
Apartment syndication is also considered when creating a community of apartment buildings.
Such projects require considerable amounts of funding. Therefore, it can be too much for one party to bear.
Therefore, the resources are pooled, and every investor can profit from the project. Of course, the project must be successful for that to happen.
How Syndicators and Passive Investors Make Money from Apartment Syndication
The exact deal within apartment syndication projects varies from one to the other.
So, a syndicator may even charge passive investors initial fees to be a part of the project. Here’s what you should know.
How Syndicators Make Money from Apartment Syndication
As mentioned above, syndicators also make money from apartment syndication by charging fees. One of these fees is the consulting or acquisition fees.
This amount of money is paid by passive investors to the syndicator for securing the deal of the project.
The fee charged varies based on the scope of the project. The experience of the syndicator can also affect the fee amount. Typically, the amount is between 1% and 5% of the property’s purchase price.
This fee is a one-time and upfront payment.
Another type of fee syndicators may charge is the asset management fee. This amount of money is paid by passive investors to the syndicator for handling all aspects of the project.
Like with the acquisition fee, this amount is also affected by the syndicator’s experience. Another factor that affects the fee amount is the work put into creating and executing the business plan.
Some syndicators may settle on a profit split instead of the fees. In that case, the profit split may be higher than if they charge the aforementioned fees.
Also, experienced syndicators can bargain for a higher split in their favor.
How Passive Investors Make Money from Apartment Syndication
Passive investors typically make money in two ways. One is that they receive a quarterly or monthly income from their shares of the property.
If a passive investor owns one or more apartments in the building, they can earn passive income through rent. This form of income will only be possible if they put the apartments for rent.
On the other hand, passive investors can also earn money by simply selling the shares of the property. So, if they own one or more apartments, they can sell them to potential buyers.
As a result, they may be able to sell those apartments at a higher price than the amount they invested. Therefore, they can make money off their investment quickly in that situation.
That said, it may be a good idea to hold on to the shares of the apartment building. This is because you can continue to earn passive income from it.
Also, if the property is in a good location, it may have high demand. As a result, it may always have people paying rent to live in it.
However, this option may not be feasible if you need the return on your investment right away. Earning passive income is typically more desirable if you can wait for long-term returns.
Why Become a Passive Investor for Apartment Syndication Projects?
If you plan to invest in something, becoming a passive investor for an apartment syndication project may be worth considering.
That said, you must be an accredited investor or sophisticated investor.
Here are some reasons why you may want to become a passive investor.
You Can Earn Passive Income
As mentioned above, passive investors can earn considerable passive income from apartment syndication projects. You can earn more with more shares.
The benefit of passive income is that you don’t have to do anything to earn money.
It Doesn’t Involve Much Work
Other than maintaining communication with the syndicator, you don’t need to do much work for this project.
Therefore, you can earn money and focus your time and energy on other projects.
Property Value Typically Appreciates
Property typically appreciates in value. If you look at real estate markets in different parts of the world, you’ll see a considerable increase in value over the past few years.
Therefore, as the value appreciates, you’ll earn more passive income from your property investment.
It’s Easy to Diversify Your Investments
If you plan to make multiple investments in the future, apartment syndication projects make that easy.
You can invest in various apartment syndication projects in various real estate markets.
Diversifying your investments is typically a good idea. This is because one asset won’t affect your overall investment portfolio.
Some Things to Keep in Mind If You Plan to Become a Passive Investor
Keep the following in mind if you plan to become a passive investor.
Consider Working with Experienced Syndicators
Some syndicators may hold their shares in the property for a long time. However, some may opt-out of it soon after completion.
Therefore, they may sell their share of the property, depending on the conditions of the real estate market.
If you plan to become a passive investor in an apartment syndication project, it’s best to learn as much as you can about the syndicator.
Ideally, you should invest in a business plan with a syndicator with a successful history with such projects.
So, those who typically have a quick strategy may work on another project after completion. If that syndicator has had successful projects in the past, consider working with them.
Don’t Be the Sole Passive Investor for an Apartment Syndication Project
It’s also worth noting that you alone can be a passive investor in an apartment syndication project. However, there’s less risk if you partner with multiple passive investors.
Consider this example: you’re the sole passive investor who contributed 80% of the purchase price. In this example, the project is not as successful as expected.
In that case, you would lose a larger percentage than you would if there were other passive investors.
Thus, it’s better to invest in more than one project without putting in all of your money in one project.
Other articles you may also like: