Just like the rest of the world, the multifamily syndication space has been impacted by the volatility in the market, the rising interest rates, and the continued ripple effects of COVID-19 through unemployment, more people working from home, migration patterns, and more.
Now, perhaps you’re here because you currently invest in a multifamily syndication or even multiple syndications. Or maybe you’re here because you have ridden the stock market roller coaster for far too long and are ready to shift your money to more stable assets through real estate investing.
Either way, in this article, we’ll dive into exactly what a multifamily syndication is, why investing in a real estate syndication can be a great way to grow your wealth, how investors should prepare for what’s to come, and how to navigate the long-term impact of COVID-19 on the multifamily syndication space.
What Is A Multifamily Syndication?
Let’s start with the basics. Syndication in real estate, in its most basic form, refers to a pooling of resources. A multifamily syndication, then, essentially means that a group of investors pools together their money to purchase an apartment building together.
Rather than having to do all the legwork of finding and managing a rental property on your own, when you invest in a multifamily syndication, you pool your money together with dozens, and sometimes hundreds, of investors to purchase an apartment community together.
How Does A Multifamily Syndication Work?
Think of a real estate syndication deal like an airplane ride. There are two basic groups of people on the plane – the General Partners (GPs) and the Limited Partner Passive Investors (LPs).
The General Partners are the real estate syndicators. They are essentially the pilots of the plane. They are the Sponsors and Operators of the real estate syndicate, meaning that they do all the heavy lifting for things like:
- Finding and underwriting the deal
- Securing the financing for the deal
- Negotiating with the seller
- Completing the due diligence
- Finding and educating investors
- Managing the renovations on the property
- Working with the property management team
- Executing on the business plan
- Communicating with the investors
General Partners actively syndicate real estate and have a very active role throughout the lifecycle of a real estate syndication deal. They are critical in the acquisition phase of the deal, as well as the ongoing asset management. They work directly with the property management team to ensure that everything is going according to plan and that investors are getting their projected returns.
You as the Limited Partner Passive Investors, on the other hand, have a much more passive role in a syndication deal.
Limited Partners are the passengers in the back of the plane. You invest your money to buy a seat on the plane, but then you get to sit back and do whatever you want – read a book, take a nap, etc.
If the plane encounters turbulence, if an engine breaks down, or if any other surprises pop up, it’s the pilots’ job to figure out a solution and keep the plane on track.
As a Limited Partner Passive Investor in a real estate syndication deal, you get to invest your money into a stable and growing asset without having to put in the time and work needed to manage the asset yourself.
You don’t need to deal with the property management team, pore over financials, or review tenant applications. All of that is done for you by the General Partners, meaning you get to sit back and enjoy your cash flow every month.
Multifamily Syndication vs. The Stock Market
Over the last several months, we’ve seen some of the biggest drops in the stock market that we’ve seen in decades. What this means for those of you who have money invested in the stock market is that you likely saw a big chunk of your net worth vanish into thin air overnight.
Stock Market Investing
When you invest in paper assets like stocks, there are no physical assets to back up your investment. On top of that, the stock market is susceptible to the ups and downs of the economy, meaning stock market investors have very little control over their investments.
Multifamily Syndication Investing
With a real estate syndication deal, on the other hand, even if all else fails and every last tenant moves out of your apartment building, you still have the value of the property and the land to fall back on.
Plus, with a value-add multifamily syndication deal, you are investing in a property that has significant growth potential. Through renovating the property, you can bring the rents up to market value and thus drastically increase the value of the property, independent of the swings of the economy.
This often leads to a win-win for both the investors in the deal, as well as the local communities, which are revitalized in the process.
Why Invest In A Multifamily Syndication?
When you put your money into a savings account or invest in the stock market, your money works for you in just one way. When you invest in a real estate syndication deal, however, your money works for you in multiple different ways.
#1 – Cash Flow
One of the main benefits of investing in a real estate syndication is purely passive ongoing cash flow. What this means for you is that for each syndication deal you invest in, you create a new stream of passive income for you and your family, bringing you one step closer to financial freedom.
#2 – Leverage
Another huge benefit to apartment syndication is leverage, which comes in many forms in a multifamily syndication. Obviously, there’s the leverage through borrowing money to purchase the property.
In addition to that, you’re also leveraging the capital of other investors in the group, as well as the skills and experience of the General Partners, allowing you to get into an investment opportunity that otherwise might not be accessible to you on your own.
#3 – Equity & Appreciation
A big benefit for investors in real estate syndications is equity, which typically increases over time. In addition, through investing in a value-add multifamily syndication, you get to take advantage of forced appreciation through renovating the property and increasing the overall income of the property, thus drastically increasing the overall value.
#4 – Tax Advantages
And of course, we can’t forget taxes. The tax advantages of cost segregation and accelerated depreciation are huge reasons why many investors love multifamily investing. You get to enjoy ongoing cash flow in real life while showing losses on paper, thus helping to decrease your overall tax burden.
Dig Deeper: A Closer Look At Multifamily Asset Classes
How Has COVID-19 Affected Multifamily Syndication?
Now that you know how real estate syndications work and the benefits that they could provide on your path to financial freedom, the big question is whether now is the right time to invest in an apartment syndication, given everything that’s going on with COVID-19.
The truth is, we have only seen the tip of the iceberg as far as the full ripple effects of COVID-19.
COVID-19 Recession Ripple Effects On Multifamily Syndication
Here are the COVID-19 ripple effects to expect in the coming months and years:
- Unemployment surges
- Government stimulus
- Stimulus money dries up, leading to loan defaults
- Loan defaults lead to bank REOs
- Foreclosures and other heavily discounted properties hit the market
As you can see, we are only in the early phases of this recession. As unemployment has surged, the government stimulus packages have swooped in to the rescue, providing some temporary relief.
In the next phase, as the stimulus money starts to dry up, we’ll likely start to see more and more tenants unable to pay rent.
Eventually, this will lead to more multifamily owners (many of them mom and pop owners or less experienced operators) defaulting on their loans. Once that happens, we’ll then start to see a wave of bank REOs (real estate owned properties).
This is when the best deals will start to flood the market. That means that if you’re a passive investor, now is the best time to educate yourself. And if you’re a syndicator, now is the best time to prepare your investors for what’s to come.
Should You Invest In A Multifamily Syndication?
Now, what does all this mean for you, especially as it relates to the rest of this year and beyond?
It means that now is the best time to get started in educating yourself and doing your due diligence to see if real estate syndications are right for you. You should continue to evaluate potential real estate syndication opportunities with strict criteria and view them through the lens of your investing goals.
In many cases, the underwriting assumptions that were used even just a few months ago are no longer relevant, so be sure to stress test deals to check for things like:
- Low breakeven occupancy (Breakeven occupancy refers to how low can the occupancy get while still being able to cover the mortgage and expenses. The lower the better.)
- Make sure each multifamily syndication you invest in has relatively low leverage, high reserves, a strong and experienced General Partnership and property management team, and multiple backup plans
Beyond that, be patient. There are already signs that good deals may start to come on the market, but don’t rush into anything. If you’re a Limited Partner Passive Investor, now is the best time to get your funds ready and educate yourself so that you’ll be ready to invest when the best deals hit the market.
And if you’re a General Partner or thinking of putting together a multifamily syndication of your own, now is the best time to focus on growing your investor base so that you’ll have capital ready when those deals hit the market.
Further reading: What Happens To Real Estate In A Recession And When You Should Buy
Ready To Get Started In Real Estate Syndications?
If you’ve decided to get off the stock market roller coaster and finally get into real estate, now is the best time to educate yourself.
Start by joining the Goodegg Investor Club, where you’ll get access to exclusive members-only content to help you on your journey to financial freedom.
You can also see our current and upcoming investment opportunities on our Open Deals page.
And if you’re syndicating your own deals, apply for the Real Estate Accelerator, where we’ll teach you everything we know about how to successfully raise private capital, scale your business, and do more and bigger real estate deals.