How I Started Investing in Multifamily Syndications: Part 1
Experienced multifamily analyst (but newbie multifamily investor) Jeff Hamann shares how he got his start in syndicated investments as an LP, along with his process for finding opportunities.
I'm no stranger to the multifamily real estate sector, yet investing in my first syndication hasn't necessarily been easy (or stress free).
I decided to write this series of blog posts to walk you through my process, the challenges I've faced (and am facing), and how I've overcome them.
In short, if you're interested in actually investing in a multifamily syndication as an LP — e.g., for passive income — this series is for you. I'm glad you're here.
If you're interested in learning how to run your first (or next) multifamily syndication as a GP, however, your absolute best resource is Janover Connect's syndicator guide to multifamily investment.
Why Multifamily? Some Background
Before we begin, some context is necessary: For the last seven years, I've been deeply involved in everything multifamily.
I've meticulously researched properties, sales transactions, and financing terms.
I've written tens of multifamily market reports for the likes of Yardi Matrix.
I've broken major industry news and interviewed top-level executives at some of the country's largest investment and development firms while working for Multi-Housing News.
Hell, I even ran a short-lived podcast.
And since joining Janover a couple years ago, I've kept a close eye on what's been happening to the sector to provide educational and trend insights for you on Multifamily Loans.
Why Choose to Invest Now?
I decided that if I were going to invest in something, it might as well be something I know extremely well. I'd tried my hand at trading stocks, but honestly? Most of it was too volatile for me, and I never felt comfortable with the large knowledge gap I had. It's for some people, sure; it wasn't for me.
Even so, it might seem odd to get into multifamily right now — right as many leading investors are projecting pain, and many armchair economists are forecasting a huge wave of mortgage defaults.
First of all, I vehemently disagree that we're facing the end of days because of some loan defaults.
There are, of course, a decent number of investors that took overleveraged, variable-rate loans in the year leading up to the start of the rate hikes. I won't deny that. Those borrowers are almost definitely going to feel some pain.
But everyone else?
To my mind, we're just seeing the return to a more "normal" multifamily market after a couple wild years — as I wrote extensively about earlier this year. Rent growth is slow, expenses are creeping up faster than anyone would like, but at the end of the day, multifamily properties are, by and large, generating a profit.
Determining How to Invest
Once I'd decided on investing in multifamily, I had to figure out the how. This wasn't as tricky as you might imagine, though it definitely threw some challenges my way.
There were two main issues I encountered as I began to look at opportunities:
- I'm not an accredited investor, and
- I don't live in the United States anymore.
Accredited Investor Test
If you're not overly familiar with the terminology, "accredited investor" has a very clear definition according to the SEC. In a nutshell, you need to have:
- Income of more than $200,000 per year for the past two years (or $300,000 with a spouse), and
- Net worth of more than $1 million, excluding your primary residence.
If you don't meet this criteria, there are also some professional alternate criteria (e.g., you need a Series 7, Series 65, or Series 82 license, for example), but those weren't relevant in my situation.
If you don't qualify as an accredited investor, I learned you're not completely out of luck — but you do have to look a whole lot harder.
Rule 506(c) Syndications = 🙁
See, many syndications are handled under Rule 506(c) — this means an investment opportunity can be marketed anywhere, really. Social media, TV, websites, it's all fair game. However, 506(c) investors must all be accredited.
That meant for me, the easy pickings weren't viable.
Rule 506(b) Syndications = 🥳
There's another rule you can raise capital under: Rule 506(b). This one is for accredited investors, too, but there's a key difference: Up to 35 non-accredited investors are also allowed to participate.
However, with a 506(b) deal, it really can't be widely marketed. You won't find 506(b) opportunities by looking at syndicator websites, social media, and the like. Instead, these usually are open to non-accredited investors through the referrals and networking.
Thankfully, after a while in the industry, a network is something I've got. Nothing too fancy, mind you, just my presence on LinkedIn…but it turns out I'm connected with quite a few multifamily syndicators.
I did some DM outreach on LinkedIn, and a few folks happened to cold DM me as well. This is how I managed to find a few different opportunities — and eventually found one I decided to move forward with.
Investing From Outside the U.S.
The fact that I live outside the U.S. was also a potential complication — or so I thought, at least. Turns out, the syndicator I opted to go with wasn't bothered, provided I was a U.S. citizen or green card holder. I'm a U.S. citizen, so no issue there.
Of course, that does mean that taxation on my returns may come to be an issue. To that end, I enlisted the aid of a CPA who's extremely familiar with syndications and their tax ramifications.
My first call with him is tonight, though, so I'll leave the tax side of things for a future post.
What's Next in Part 2?
In the next part of my series, I've detailed how I look at syndicators' offering memorandums, and the key details I focus on (and requested more information about) in conducting my own due diligence.
If you don't know much about offering memorandums, check out Janover Connect's fantastic guide on what should be included in each one — and why.