FAQ
A real estate syndication is where a group of people pool their resources to purchase real estate – often a large property like an apartment building – which would otherwise be difficult or impossible to achieve on their own.
One of the most famous syndications is the purchase of The Empire States Building, which was purchased by Helmsley & Malkin in 1961 for $65 million from 3,000 small investors, many of whom paid only $10,000 for a single share.
A real estate investment syndicate is typically open to “accredited investors”. The Securities and Exchange Commission (SEC) defines an accredited investor as someone who has an annual income of $200,000 (or $300,000 joint income) or a net worth of at least $1M—not including your primary residence. Visit the SEC website for additional information and resources.
Some syndication offerings, such as the ones designed as “506(b)” offerings – are open to unaccredited investors. Many multifamily syndications are 506(b) offerings, which means they are open to unaccredited investors, but these investors have to be “sophisticated”.
Equally important to being “sophisticated”, the investor needs to have a pre-existing “substantive relationship” with the deal sponsor (i.e. the partner or partners who are presenting the opportunity). While the SEC doesn’t specifically define what “substantive relationship” means, it provided clues in this letter to a company called “Citizen VC”.
- Vet the integrity of the sponsor and their team
- See if their overall investment strategy fits with your goals
- Fully understand the specific investment they are raising money for
- Learn more about the market where a potential investment is located.
In a perfect world, the answers to most of these questions will be found on the GP’s website and/or in their offer package. In fact, I would hesitate to invest with a team that doesn’t provide the vast majority of this information upfront. But use this section as a guide to help you understand what additional questions you may need to ask and how to make an informed investment decision.
At Virtuous Capital we specialize in investments in multifamily and industrial properties.
- The Legal Entity
- Equity Splits
- Preferred Returns
- Control and Voting Rights
- Return of Principal
- Sponsor Fees
The nature of being an LP is that you are limited, both in liability and control. Limited liability means you can only lose the principle you invested in the multifamily deal, and you are protected by the SEC in the case of a lawsuit or a loss of the building.
Typically, LPs have no real involvement in the day-to-day operations of the multifamily property, and all decisions are made by the GP.
LPs almost always have the opportunity to vote on anything that may reduce their rights in any way. And sometimes they can vote over a refinance or sale. The Operating Agreement breaks down the rights of the LPs and GPs, so be sure to read it carefully.
The best way to learn about multifamily investment opportunities is to get on the syndicator’s email list.
Step # 2: Express interest via soft commit
If you’re interested in the opportunity, the next step is to fill out a short form telling us how much you’d like to invest in the multifamily syndication.
Step # 3: Register on the investor portal
The Portal allows us to communicate with you securely through the rest of the process.
Step # 4: Satisfy the minimum requirements
Next, we double-check that you are either an accredited or sophisticated investor.
At this point, you promise a specific amount of money to the multifamily syndication deal.
Once you looked through the legal documents, you sign them online via DocuSign.
Step # 7: Wire the money into the escrow account
Once you’ve signed on the dotted line, you receive the wiring information and send your funds to the escrow attorney. Congratulations, you are an LP in a multifamily syndication deal!
Step # 8: Wait until closing
Now, you sit back and relax. And wait for the syndication deal to close. This usually takes between 30 and 45 days, depending on the deal.
- Cash flow distributions
- Cash-out refinance
- Sale of property
There are several ways to access capital for real estate deals. You can use bonds and stocks, cash savings, lines of credit, self-directed IRA, and QRP.
There are 5 main reasons investors might consider a real estate syndication over the stock market or other investments:
Below-Average Risk: When the housing bubble popped in 2008, the delinquency rates on Freddie Mac single-family loans soared, hitting 4% in 2010. By contrast, delinquency on multifamily loans peaked at 0.4%. So, if you’re looking for a recession-proof way to invest your money, there is no better option than apartment building investing.
Above Average Returns: As I describe in the Special Report “What’s the Best Investment: The Stock Market or Real Estate”, the average stock market return over the last 15 years was 7.04% but after fees, inflation, and taxes that return becomes a paltry 2.5%. On the other hand, multifamily syndications routinely return average annual returns of 10% and above. That’s compounded (i.e. without volatility) and after fees, inflation, and yes, even taxes.
Passive Income: Unlike stocks and bonds, multifamily syndications generate cash flow for its investors from the income generated by the property.
Extraordinary Tax Benefits: Because of the magic of “bonus depreciation”, your investment income is taxed at a much lower rate than any other investment (in fact, you may actually show a taxable loss that can be used to offset other passive income!).
Inflation Hedge: As inflation increases, so does the value of the property – the perfect hedge against inflation.
With our current tax laws, investing in U.S.-based real estate syndications – especially multifamily apartment buildings – is the BEST passive investment on the planet.