You might have come across several articles online talking about syndication and multifamily real estate, its benefits, and why you should definitely invest.
However, it is hard to really find a good source for people without prior experience in real estate to get started. It seems there simply isn’t one place for them to go to, that had the necessary info to help them understand the correct questions to ask, research to do, and things to think about.
That’s why the sole purpose of this article is to provide you with the information you need to make informed decisions when becoming a passive investor in apartment syndication deals.
This quick guide can be divided into two main sections:
First, you need to determine if passively investing in apartment syndications is a strategy that aligns with your investment goals. For that, there are important questions you should consider before taking your first steps.
Second, you need to figure out what your ideal passive investment is! There are different kinds of apartment syndications in which to invest, so be sure to have a clear picture of what you expect from your investment and follow the most effective strategy available for you!
You also need to know your terminology. Our free Know Your Lingo ebook is the perfect companion piece to this guide. In it, you will find 80+ terms and definitions that every person should at least study if they’re serious about investing
Without further ado, let’s get started!
What is the goal and what do you want?
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Before going any further, it’s important to establish your goals and what role you’d like to have in the investment. You need to determine if you want to be an active or passive real estate investor.
Active investors find, qualify and close deals on apartment buildings using their own capital and overseeing the business plan through its successful execution.
Passive investors place their capital into apartment syndication that is managed in its entirety by a general partner.
If you want to know if becoming a passive real estate investor is what you really want, there are three questions that you should consider:
- Are you busy with your full-time job and other activities but still want to invest in apartments?
- Do you want to receive the benefits of owning a large apartment building but you don’t have enough capital and/or experience to acquire one by yourself?
- Would you allow someone to make business decisions on your behalf?
If you answered “yes” to all three, passively investing in apartment syndications is for you.
If you answered “no” to the first two, maybe you need to know more about real estate investing or a bit more business expertise, but passive investing may still be the route for you. However, if you answered “no” to the third question, you shouldn’t be a passive investor, because the general partner and their team have 100% control over the business plan.
If you responded affirmatively to the questions and you want to eventually become an active apartment investor, passively investing in a few deals can give you the much-needed experience and expertise to achieve it. You will learn the process of property acquisition, management, and disposition, as well as having your involvement in apartment deals on your resume, which will be helpful when you start transitioning to active investing.
If you like your full-time job or want to enjoy your retirement, passive investing is definitely for you.
Your Ideal Passive Investment
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Now that you’re sure that passive investing is the way to achieve your financial freedom and independence, you have to decide which type of apartment syndication works best for you. There are two types of syndication to consider:
- Distressed property: Any property that is under foreclosure or being sold by the lender. Normally the economic occupancy rate is below 85% and likely much lower, due to poor operations, tenant problems, outdated interiors or amenities, mismanagement, deferred maintenance, and more. It is common for a distressed property to be sold below market value.
- Value-add property: A stabilized apartment community that needs corrective action to reach its full potential value, which means making improvements to the operations and the physical property through exterior and interior renovations to increase the income and/or decrease the expenses.
Still can’t decide? Let’s quickly break it down like this:
If you want a greater return potential with a greater risk, distressed apartment syndications are for you. They offer little to no ongoing cash flow and a higher potential profit at the end with a higher risk.
On the other hand, if you want a medium to high return with a lower risk, value-add apartment syndications offer passive investors a medium to high ongoing cash-on-cash return and medium to high potential profit at the end of the business plan with a lower risk.
I Know My Goals And Thow To Achieve Them. What’s Next?
You need to find an all-star team to partner up with. It is probably one of your most important tasks as a passive investor. Of course, to ensure you and the general partner are aligned in terms of business goals and the types of deals you’re willing to invest in, you have to start a frank and open conversation, with them.
We, for example, are a national multi-family investment firm focused on major metropolitan statistical areas that demonstrate consistent rent growth, low vacancy, and a growing real GDP. In our case you would want to ask the right questions like how returns work, expected cash flow, the major risk of a project, the minimum investment and how often would you get paid.
This also applies to every syndication or other multi-family investment firm you might go to, so be sure to do some groundwork first and find all the answers that will make you feel more secure when deciding to invest in a project.
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