Throughout its history, real estate investing has offered some of the most consistent and steady returns on investment. It’s an especially attractive option for those who like to invest in tangible assets and don’t like the roller coaster known as the stock market. One of the smartest and most popular types of real estate investing is in multi-family properties – by definition, properties in which more than one family live.
A single investor can choose to buy a multi-family property (such as investing in an apartment building) and run it on their own or hire a property manager. This is known as taking an active role in your investment. Another option for investing in apartment buildings and similar properties is through multi-family real estate syndication. In a syndication, a professional real estate investor organizes a group of investors to buy the real estate as a partnership or LLC. In this way, the individual investor can take a passive role in their investment and profit from it without the hassle of managing the property, collecting rents or dealing with tenants and repairs.
Why multi-family property syndication is a smarter strategy than investing as a single owner
When you’re the sole owner of a property, not only do you have to contribute a significant down payment for its purchase, but you also must carry the remainder of the financing and 100% of the financial risk. This ties up a lot of cash and leaves you exposed to calamity. You’ll also have to deal with leaking pipes at 2 AM, uncooperative tenants, rent collection, repairs, parking lot resurfacing, roof repairs, and hundreds of other expenses. Of course, you also stand to profit handsomely if the building appreciates in value, not to mention the monthly cash flow you’ll receive from rent payments. Play your cards right and you could do very well.
For the investor seeking less risk and less involvement, passively investing in multi-family properties through real estate syndication is very attractive. This type of investment also offers the opportunity to invest in larger properties and more properties than they could handle as a single investor. While the individual investor in a syndication doesn’t control how the property is managed, they also don’t have the headaches – no banks, no tenants, no 3 AM phone calls about the plumbing. If the organizer of the syndication has done their job well, the passive investor never needs do anything more than cash their quarterly dividends check.
Syndication also reduces the overall risk in your real estate portfolio. For instance, instead of investing $500,000 in one property, that amount could be distributed across 5 properties, balancing your risk and reward. This also spreads your risk geographically, as localities are subject to fluctuations in housing demand and weather events.
How a real estate syndication works
In this type of multi-family real estate investment, the professional investor who organizes the syndication identifies a property to invest in. They’ll check the condition of the building and the surrounding property, the rents being paid, study the demographics for the building’s local market, determine if the building needs upgrades or repairs, and generally predict how much the syndicate would profit on the property or not. The syndicator will also arrange financing for the property if they decide to move forward. In multi-family real estate syndication, every party except the organizer of the syndicate takes a passive role in the investment – once an investor wires their funds to the bank, they collect the quarterly returns and their portion of the eventual sale of the property.
Unlike single family housing, the value of multi-family housing is based on its net operating income – the tenants’ rents – and not on the local property values which are subject to fluctuation. The organizer of the syndicate can increase the building’s net operating income and grow return on the investment through improving the property, raising rents and reducing inefficiencies.
The tax benefits of real estate syndication
When a real estate syndication is organized as an LLC or Limited Partnership, investors may be able to take advantage of various tax deferments for the length of the investment such as write-offs for interest payments and expenses, and the building’s depreciation. This could reduce your tax exposure on the investment to zero even if you’ve earned substantial quarterly returns. Once the property is sold, investors pay taxes on the gains or use a 1031 exchange to roll their investment income into another multi-family real estate investment.