Have you always wanted to invest in multifamily real estate but do not know where to start or do not have the time, education, or other resources to even know where to start?
Guess what? You are not alone. There are hundreds of people out there that do not know where to begin.
This article provides a quick look at one way to help you diversify your portfolio, take action, and start enjoying all the benefits of investing passively in multifamily real estate without much time or experience.
What is syndication?
Syndication is a structure or entity created between a sponsor and investors (like you) for the sole purpose of pooling money together to fund the acquisition of an investment property or other venture. Investing in multifamily syndication means you passively invest alongside other investors with one person or business, responsible for finding, funding, running, and ultimately selling the property.
The sponsor is also responsible for all of the accounting and distributions to the investors. You may hear it commonly referred to as a “passive real estate offering,” “private placement,” or “syndication.” All of that is jargon for investing your money with a sponsor while the sponsor does all the work.
You will hear sponsors commonly referred to as the General Partner or GP. The term GP was a carry-over from when limited partnerships for private offerings were the preferred method. Sponsors or investment firms are essentially the ones who arrange the syndication.
Sponsors have several motivations for putting syndications together. Some do not have a lot of money, but they have the time and experience required to put deals together. Others leverage their own money and others to scale their real estate activities while providing good returns for both themselves and their group of investors. While others have grown financial service businesses that focus on “alternative” investments, such as multifamily real estate, to serve their client’s desires to diversify their portfolios like a bank or wealth management firm would for conventional investments.
The Book Answer and So What
Investopedia defines syndication as “a temporary alliance of businesses that joins together to manage a large transaction, which would be difficult, or impossible, to effect individually.”[1] Simply put, it is a way for individuals to pool their resources and shared risk to invest in something they could not do independently. At its core, syndication is about trusting a sponsor to manage the money you and others invest effectively and provide you with a solid return.
It must be mentioned that there are sponsors who, in the past, have either committed fraud or, more commonly, got in way over their head by taking unacceptable risks, poorly underwrote a deal, or failed to manage the asset properly after purchase. Any one of these can result in a bad deal or, worse, mess up an outstanding deal.
Therefore, you must invest with a sponsor or firm that you know and entrust with your money. To do this, you must adequately screen them! If you take one thing away from this article, this is it – do your due diligence on the people or firm you invest with your hard-earned money!!
Would you buy any random car off the street or shop around until you found one that you liked, met all the criteria you were looking for in a vehicle and was in good working order? Finding a good sponsor is like shopping for a car; you have to find one that you trust, aligns with your values, and has targeted returns that you are looking to receive.
Simple questions about background, experience, and references (not family or other firm members) will go a long way in screening your potential sponsor. As you get educated on multifamily real estate, you can also take it a step further and be able to ask about other principles like those discussed in an earlier article, “Why Invest in Multifamily Real Estate.”
In sum, syndication is a great way to passively invest in multifamily real estate by pooling your money with other like-minded investors and sponsors who you trust! Please remember that all investments carry some level of risk. The key to successful investing is to minimize risk through continuing to educate yourself and knowing who you are investing with.
Like all of our educational content, it is our hope each article helps you build a strong foundation to make an informed decision and begin (or continue) to enjoy all the benefits that multifamily investing has to offer. This article intended to provide an overview of what a syndication is, but if it helps even just one investor avoid making a costly mistake that sets them back years in achieving their financial dreams, then writing it was well worth it.
[1] https://www.investopedia.com/terms/s/syndicate.asp
Do You Want To Learn More?
RIZE Equity is a private multifamily investment firm, and we work with accredited investors to help them achieve their long-term investment goals through high-quality multifamily investments in the Southeastern U.S. If you would like to learn more about our investment strategy, we invite you to visit our website at www.rizeequity.com and schedule a free no-obligation appointment with us.
About the author: Sean Cullen is the founding partner and Director of Operations at RIZE Equity Group LLC, a privately held real estate investment company that helps current/former professional athletes, veterans, and business professionals create generational wealth through smart multifamily investments.
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