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What Is Multifamily Syndication?
In multifamily investing, syndication is a process in which multiple investors combine capital to purchase a multifamily property. In most cases, real estate syndication deals are structured in the form of either limited liability companies (LLCs), or limited partnerships (LPs) — in which the sponsor maintains the role of a general partner, and each participating investor receives a role as a limited partner — and sometimes as joint ventures.
Syndication is an often desirable method of acquiring or developing multifamily properties, due to a wide array of benefits for investors. Even so, it is not always a perfect option and does have a few drawbacks worth considering. In this article, we explore some of the most notable advantages and disadvantages of multifamily syndication.
Advantages of Multifamily Syndication
When it comes to multifamily syndication, one of the greatest advantages for investors is also the most obvious. Investing in a group format, at its most base level, means less upfront capital required from each participating entity since the costs are assessed and fairly distributed among the group. In that same breath, the risk is also typically shared between participating parties, lessening the impacts of unforeseen negative situations that may occur over the life of the syndication for each individual member of the group.
That said, the less obvious benefits of multifamily syndication run much deeper. For example, joining as a member of a syndication can be an easily accessible entry point to multifamily investment for industry beginners. Furthermore, even for seasoned investors, the group format of syndication allows some borrowers to join in on deals that they simply couldn’t undertake on their own.
Well-planned syndication can provide unparalleled opportunities to make some of the industry’s biggest deals, regardless of the financial shortcomings of any participating entity. Additionally, through syndication, members can comfortably own a reasonable stake in multiple projects, control more units, and ultimately be able to achieve economies of scale through the control of more units. Syndication allows investors to scale operations much quicker and more securely.
From a profit standpoint, syndication is an entrepreneurial goldmine, as syndications generate fees and cash flow from each deal, and members are compensated for their stake in each investment. If more deals are undertaken by the syndication, these returns are able to grow at substantial rates — becoming a formidable revenue stream for the syndicator and enticing passive income for participating limited members.
Disadvantages of Multifamily Syndication
While syndication does present some interesting advantages to investors, it still has its share of potential drawbacks, many of which are less obvious to potential investors — but worthy of serious consideration. As an illustration of this point, the most obvious advantage that investing as a group presents can also present its biggest potential problem. While the syndicator may be able to rely on multiple sources of capital to make an investment, it also means that they are held responsible for meeting the expectations of the participating entities involved. Simply put, the manager of the syndication typically has to answer to the investors involved and is expected to make good on the expected returns and fee payouts.
As a limited partner in such a scenario, the issue is more of a lack of control. The investors in a syndication must rely on and trust the control persons to act in the best interest of the syndication, which may not always be the case. With multifamily assets, in particular, there are many unplanned instances where decisions must be made regarding the use of cash flow, and what may have been a simple decision for a single investor must now be discussed and agreed upon by everyone involved in the deal.
Another disadvantage that runs parallel to one of syndication’s biggest advantages regards equity, and, by extension, returns. Pooling capital is a great way to afford a larger investment, but the more investors involved, the less equity each investor actually has in the project. A syndicated deal may not be as worthwhile as simply investing as a single investor in a deal, and in many cases, it isn’t until a syndication has multiple deals under its belt before the limited partners really see the most desirable returns. In some cases, syndication is just another tool of the fix and flip strategy, where the real profits occur when assets are offloaded, and profits can be split between the investors.
With all of the above in mind, it is also worth noting that syndication is a complex process, and can be quite a headache to create and maneuver. Getting any one group of people to agree on anything can be tough, but when you throw in legal documentation, raise capital, and determine how profits are to be shared, there is a recipe for a potential nightmare.