Wonder if multifamily syndication is a good option for you? Think of multifamily syndication as an alliance where multiple individuals pool their equity to buy a sizeable multifamily asset. Usually, multifamily syndications have two parties: the multifamily syndicator (GP) and passive investors (LPs). You can also reference a multifamily syndicator as a deal sponsor.
The responsibilities of a syndicator are the following:
- Finding the multifamily property with the highest Return on Investment (ROI) opportunity
- Subsidizing the deal
- Sourcing equity
- Arranging finances
- Streamlining the transaction until closing
- Asset managing the property through the hold period
Once you acquire the multifamily property, the sponsor team will operate the asset until sale. The passive investor’s role is to bring equity, collect passive income and a portion of the appreciation from the property, and receive a return upon the asset’s sale. You do not have to collect rents, take out the trash, deal with tenant issues, or do other time-consuming tasks. You are passive but also get the benefits of ownership. Knowing these roles is essential when investing and understanding real estate syndication splits.
Knowing Important Investment Strategies
A straight split is one of the easiest multifamily splits to understand and refers to the property’s net cash flow and profits divided between the limited partners (passive investors) and the GPs (deal sponsor). Often, you will see 70/30 and 80/20 splits between the LP and GP. Multifamily syndications are a great feature in the win-win scenario for both passive investors and syndicators.
Preferred returns within multifamily syndications are more typical. A preferred return is a percentage return given to passive investors at the sale of the property before the sponsor can receive a penny. You will commonly see preferred returns ranging from 6%-8% in many multifamily offerings.
The multifamily syndication will break out into a split following the preferred return, where your multifamily offering is outlined in a structured way. Consider preferred returns as a safety net to passive investors who build trust and accountability with a deal’s sponsor.
Understanding the Waterfall Structure
When a property is sold, LPs and GPs are paid through a share of the multifamily asset’s equity distributions with the waterfall structure strategy.
Usually, an investor bases the waterfall structure on a return hurdle to advance to the next part of the waterfall. In multifamily syndications, there can be several different waterfalls within a deal. As you add more layers, the waterfall structure will become more challenging.
Think of a waterfall as a tiered wedding cake. Starting at the bottom, as each layer is fulfilled, the money split jumps to the next layer. The higher returns are at the top of the cake.
It is essential to ask questions regarding fees and splits to ensure the multifamily investment opportunity aligns with your investment standards. Contact our team at Colony Hills for more information.