Syndications are an accessible way to get into the real estate game.
The average person likely feels their chances of owning a multifamily property like an apartment building is next to impossible. However, syndications put this reality within reach for anyone who wants to diversify their investment portfolio to include multifamily assets.
This article provides a crash course in apartment syndications. You will learn how they work, who the key players are, the difference between 506b and 506c opportunities, and how you can get involved in apartment syndication.
How an Apartment Syndication Works
Simply put, a syndication is when a group of investors come together to pool their money and purchase a piece of real estate. Because their money is pooled, investors can buy a property that would be out of reach had they tried to purchase it independently.
The General Partner (GP), also known as the syndicator, is responsible for raising funds through accredited investors and non-accredited investors, also known as Limited Partners (LP), to obtain the capital needed to purchase apartment buildings. These partners then share in the returns the property generates. We will talk more about these roles in the next section.
Syndications are an excellent option for investors who want to participate in multifamily real estate investing but don’t want to do any of the heavy lifting involved with the day-to-day operations. Limited Partners share in the returns while going about their daily lives.
The Key Players in an Apartment Syndication
The General Partners (GP)
The GP may be a single person or a team of people responsible for the day-to-day tasks of running a multifamily project from start to finish. As the managing partner, they interface with all stakeholders throughout the project to ensure things run as smoothly as possible.
The Limited Partners (LP)
The LP, or investor, has limited liability. Because their role is limited, they do not have a say in the creation or execution of the business plan. Their role is strictly to provide the capital needed to make the initial purchase, monitor their returns, and file taxes on their income each year. They only communicate with the GP and receive regular investor reports.
It is also important to know the difference between accredited and non-accredited investors.
Accredited Investors – Must have an individual income of at least $200,000 (or $300,000 combined with their spouse) or a net worth of at least $1,000,000, excluding the value of their primary home of residence.
Non-Accredited Investors – Do not meet the above criteria but may still qualify as a Sophisticated Investor with the knowledge and experience to analyze the pros and cons of capital investment opportunities.
Property Manager
While a property management company may offer additional services, its primary role is to manage the apartment community and follow the GP’s business plan. The management company will assist in building community culture by hosting events for tenants, implementing marketing strategies, and supporting the apartment development’s rental rate through market research and analysis. They communicate with the GP and contractors to ensure the safety and functionality of the apartment building.
Commercial Real Estate Agent
The commercial real estate agent is responsible for searching a specific market to source multifamily real estate deals. Some agents will list the deal on-market, creating an offering memorandum. While others will offer a deal off-market to a specific GP they have developed a relationship with.
Real Estate Attorney and Securities Attorney
Apartment syndications must include a real estate attorney and a securities attorney to create and review all the contracts involved. The four contracts required for apartment syndications include the purchase and sale agreement, operating agreement, private placement memorandum, and subscription agreement.
506c Vs. 506b: What’s the Difference
A critical difference between 506c and 506b offerings is that 506c allows syndicators to advertise the deal to the public while 506b does not.
For a GP to offer a 506c opportunity, they have to ensure that each passive investor is accredited through a third party, which will need to see tax returns, bank statements, and a signed written verification of net worth from a certified accountant or lawyer.
For a GP to offer a 506b opportunity, they cannot advertise to the general public. However, they can offer the deal to sophisticated investors who can self-verify that they have the knowledge and experience to make sound investment decisions. The GP must also prove they had a previously established relationship with investors before the deal to ensure they did not solicit to the general public. This can be done through newsletter subscriptions and email correspondences.
How to Get Involved with an Apartment Syndication
Not an accredited investor? No problem.
You can do several things now to find the perfect apartment syndication for you. Follow these tips so you can make an informed decision when you invest.
- Talk to neighbors, friends, and family
If you are curious about investing your money in real estate but need more confidence to talk to strangers about it, start with your inner circle and learn more about what they have tried and if they have ever considered apartment syndications. If you spark mutual interest, you can start researching together and find opportunities that meet your needs and interests.
- Learn about syndications
Get your hands, ears, and eyes on as much information as possible. There is a lot of information out there about apartment syndications, from podcasts and blogs to books and downloadable guides. Find the best media options for you and soak it all in. This will help you formulate questions when you are ready to investigate your options further.
- Study different investment firms
The most important decision you will make as a passive investor is which investment firm to work with. Take the time to learn about your shortlist of syndication firms and make sure they align with your vision and needs. Finding the right syndicator for you will make the process seamless and comfortable. You want to place your hard-earned money in trusted hands and thoroughly research your options.
- Talk to syndication pros
Talking to people who have been in the games is a great way to gain insight into investing in apartment syndications. You can reach out to people in social media groups, follow the pages of industry pros and interact with their posts, or reach out to firms directly and have your questions answered. Every pro was once a beginner too, and they will likely share some wisdom with you.
Do you have questions about investing in multifamily opportunities with Height Capital?
Contact us today, and we’d be more than happy to discuss them with you!