The 3 Main Apartment Syndication Accounts

The 3 Main Apartment Syndication Accounts

Real estate investing can be a great type of investment to add to your portfolio regardless of the level of risk you want to take on. Among the most effective forms of real estate investing is apartment syndication, which is commonly referred to as multifamily syndication. This investment occurs when numerous investors pool their money together to purchase larger apartment buildings that would be difficult to manage as an individual investment.

Through apartment syndication, each investor takes on a share of the risks and rewards associated with the investment. If you’re involved with asset-managing this type of investment, you’ll be tasked with controlling several different bank accounts, all of which you should understand before getting into multifamily syndication. The following provides a detailed guide on the three main apartment syndication accounts you’ll have.


1. Operating Account

The primary bank account that you’ll be dealing with in a multifamily syndication is an operating account. All of the revenues that are collected when managing the property go into this account. The potential collected revenues include rents, security deposits, and any fees that tenants are required to pay. These fees can include carport rental fees, pet fees, valet fees, and application fees. All money that tenants pay will go into the operating account, which makes this account relatively easy to manage.

Keep in mind that money also comes out of this account for any expenses that are incurred while managing the property. Some of the expenses that must be paid when managing a rental property include ongoing maintenance and repair work, taxes, insurance, and property management company fees. Because the operating account contains all revenues, it should be the account that you use to pay investors, which could be done on a monthly, quarterly, or annual basis.

Since the operating account is a bank account, payments can be made via check or direct deposit. No matter which system you use, it’s important that payments are made smoothly and without issue to keep investors satisfied. Before opening this type of account, it’s highly recommended that you place an upfront fund into the operating account, which is designed to cover any unexpected expenses that occur in the first few months of owning and managing the property.

After one year of managing the property, you should have more than enough revenues collected in the operating account to cover unexpected costs while also paying investors right away. If a boiler in the apartment building happens to malfunction in the first month after the property has been purchased, the costs associated with repairing or replacing the boiler would need to come out of the operating account even if you don’t have enough funds in there. As such, investor payments would likely be delayed. You can avoid this issue altogether by raising extra capital upfront and placing it into the operating account. This fund should be anywhere from 1%–5% of the building’s total purchase price.


2. Capital Account

When you’re managing this type of investment, the other account you receive alongside the operating account depends on the type of loan you obtain, which means that there are essentially two accounts that you’ll hold when asset managing an apartment building. If you apply for an agency loan, you could receive a capital account. This account is available when securing a Fannie Mae or Freddie Mac loan. It’s also important that renovations aren’t included in what the loan covers.

If you need to perform renovations on the property, the costs associated with these investments would come out of your capital account. Once your contractor completes the job they’ve been hired for, they should be paid from this account. Keep in mind that your capital account should be funded by your investors when you need to make renovations and pay for other capital expenditures.

This account is necessary because investor money can’t be placed into an operating account. When investors wire funds to you, all of these funds should be placed into your capital account, after which you can pay yourself while also paying for the loan and any closing costs. All additional investments will remain in the capital account until they need to be used for renovations.


3. DACA Account

The third and final of the syndication accounts that you can have when managing this type of investment is a DACA (Deposit Account Control Agreements) account, which occurs when you obtain a bridge loan or similar loan program that provides coverage for renovations. In this situation, the lender you partner with may task you with creating a DACA account. When you open this type of account, all of the rents you collect each month should first be placed into the DACA account before you send them to your operating account. While this might seem like a hassle, many lenders allow funds to be transferred from the DACA account to the operating account on the same day.

This requirement is put in place because lenders may not want the money you collect from rents to go directly to you in the event that there’s an issue with the renovations. When lenders provide you with money for renovations, they will have requirements for the debt-service coverage ratio alongside additional timeline requirements and occupancy requirements.

Let’s say that you’re required to complete renovations in a specific period of time. If so, your lender will have a professional inspector come to your property to make sure that the renovations are being completed according to plan. In the event that you aren’t meeting the debt-service coverage ratio requirements or the timeline requirements, you will likely go into a “cash management” phase, which means that your lender will take money from your DACA account to cover the costs associated with the issues that arose.

If the money were to go directly into your operating account without first going into a DACA account, it would be more difficult for the lender to collect the money they’re owed. You will then need to meet the necessary requirements before you can get out of “cash management” and start receiving your money again.


Final Thoughts

These are the three types of syndication accounts that you could have when involved with asset managing a deal. With this information in hand, you should be able to avoid making the mistake of paying investors from your capital account or covering renovations with your operating account.


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Syndication Expert Theo Hicks Walks Through Apartment Turnovers

If your business is apartment investing, you know good tenant relationships are critical to long-term success. Not only do you want to retain responsible renters, but you need a smooth process for turning over apartments when they move out. This step may sound simple, but its management affects your finances, tenant retention, and your reputation.

Syndication School instructor and Joe Fairless Best Ever Show podcast host Theo Hicks takes a turn in the guest chair to discuss apartment turnovers. He talks about inspecting a rental unit and organizing your information for efficient results. He shares his process and a free handy checklist that you can use in your inspections.

About Theo Hicks

Theo Hicks is a syndication expert who co-hosts the Joe Fairless Best Ever Show and the Apartment Syndication School education series. He also co-authors the Best Ever Weekly Newsletter and Blog, which presents strategies for passive investing, active investing, and managing commercial properties.

Joe and Theo recognized the need for quality guidance on getting started in apartment investing and syndication. Theo hosts free podcast courses that include worksheets and other documents for your business use. He also runs a private program for investors seeking mentorship on investing in commercial properties.

Trained in chemical engineering, Theo purchased his first multifamily property in 2015 and never looked back. His passion is the intersection of personal development and success. Here, he shares tips for smooth rental unit turnovers.

Turning Over an Apartment

If you’ve ever moved into a residence with some damage or broken fixtures, you know how frustrating it is. Sometimes, a management company or owner walkthough of a vacated property is too cursory and misses needed repairs. You want to do better for your apartments, and there are practical reasons why.

Protect Your Investment

First, you want to provide a high-quality residence for your tenants. Not only is it the right thing to do, but they will thank you by taking better care of the property. They will also stay longer, which lowers your costs and supports a stable neighborhood and property value.

Theo stresses that happy tenants help preserve your reputation. Active investing means your name is out there. People tend to write reviews when they have complaints rather than compliments. In today’s online world, your apartment complex could be reviewed on several websites and easily found in searches by prospective tenants. Business associates and vendors also check your reputation as part of due diligence. You want to model how to manage apartment investing well.

Dive into the Details

Each vacated apartment merits a detailed inspection. Theo advocates using a template checklist to standardize your process and ensure you don’t overlook anything. The list should have columns for noting any damage above normal wear and tear. You can deduct these items from the tenant’s security deposit.

If you find damage, you want to note whether it is a repair or replacement item. You will end up with an itemized list of what is ready for cleaning, what needs replacement, and what needs repair. This approach simplifies matters for your maintenance manager or vendors, such as the cleaning company.

Master Inspection Checklist

Theo cautions that you want to use a written checklist for each walkthrough. If you have done several of them, you may be tempted to rely on memory. However, it’s too easy to miss a small repair item that a new tenant will spot immediately.

If you focus on passive investing, you likely rely on a property manager or another owner to handle walkthroughs. Consider following up with them to ensure they are using a written process and documenting each turnover carefully.

Theo presents an overview of what to address for each section of your apartment. The below shows you the work scope you can expect, leaving full details to the checklist.

Outside and Mechanical

Theo recommends starting with the outside of your property and noting any issues. This is good practice regardless of whether a tenant has just moved out, as you can catch maintenance needs before they become serious. Also, check the unit’s patio, balcony, or yard for disrepair or landscaping needs.

Check the mechanical systems inside the unit, including HVAC and water heater. If the building has central HVAC, make sure heat and air are working in the apartment.

Laundry Facilities

The interior laundry room is a frequent site of water leaks and clogged connections that pose a fire hazard. If your building shares a laundry room, you can take the opportunity to do a spot inspection.

  • Washer and dryer operate normally.
  • Hardware connections are intact.
  • Hoses don’t have cracks or clogs.
  • There are no signs of water leaks, such as stains or warped flooring.

Interior Fixtures

Check fixtures such as lights that are common to all rooms. You want to ensure they work and don’t present a safety hazard.

Now is an excellent time to check walls and other surfaces, which can hide issues at first glance. Inspect walls, ceilings, baseboards, and flooring for cracks, nicks, stains, and holes. Look for mold or mildew that may need treating or indicate hidden water damage.

  • Light fixtures, bulbs, and switches work, are in good cosmetic condition, and are secured.
  • Electrical outlets work and are undamaged and securely fastened.
  • HVAC vents open and close. Air ducts are clear.

Entryway and Livingroom

Check the entryway interior and exterior for missing or broken items. The door should close smoothly, lock securely, and be free of damage or warping.

  • Windows open smoothly and stay in position. Glass is set securely in the frame. Locks work and are tightly installed.
  • All windows have screens in good condition.
  • Blinds and other window coverings operate smoothly and are in good condition.
  • Smoke alarms are present and operating.
  • If carbon monoxide detectors are installed, they work.

Kitchen and Bathrooms

These rooms are time-consuming to inspect because of heavily used fixtures and appliances. In addition to daily wear and tear, these areas also contend with moisture and heat.


You want to inspect and test each appliance even if it looks in good working order. Check the condition of each cabinet. Sometimes tenants don’t report minor maintenance issues.

  • The oven and broiler work on all settings and heat to correct temperature.
  • Range elements are intact and heat promptly and to correct temperature.
  • Range hood has a filter and working light and fan.
  • Refrigerator and freezer are operating at correct temperatures.
  • Refrigerator and freezer lights work. Shelves and bins are intact.
  • Ice maker and water dispenser operate without clogs. Replace the water filter.
  • Garbage disposal works.
  • Sinks and faucets function with no leaks or clogs.
  • Dishwasher works on all settings and doesn’t leak.
  • Microwave operates normally. Have it tested for leaks.


You want to physically inspect each fixture to ensure it is working correctly and securely anchored. In Theo’s experience, escutcheons tend to loosen. An escutcheon is the metal plate covering the hole where plumbing pipes exit the wall. It can look intact but fall from the wall when touched.

  • Toilet is free of clogs and flushes without running.
  • Shower turns on and has expected water temperature and pressure.
  • Faucets have hot and cold water and operate without leaks.
  • Sinks drain properly.
  • The vanity has no damage.
  • Cabinets doors and drawers work.
  • Mirrors are intact.
  • Tile is free of mold, mildew, and damage.
  • Escutcheons are intact and well secured.


Bedrooms and areas such as dining rooms have few fixtures and are straightforward to inspect.

  • Doors open properly, lock from the inside, and are free of damage.
  • Closet doors work and are in good condition.
  • Closet fixtures such as racks, rods, and shelving are intact and well-secured.
  • Hardware functions properly.
  • Mirrors are intact and anchored.

Take Final Inventory

Now that you’ve gathered your walkthrough information, it’s time to take inventory for your next steps. Do you need to make any repairs or replacements before renting this unit? The answer is likely yes, even with normal wear and tear.

At this point, you can quickly generate a list of replacements and repairs, by room or system, to give to your maintenance manager or vendor. After they address all items, the unit is ready for cleaning and a final walkthrough.

When you do the final walkthrough, try to see the apartment through a new tenant’s eyes. What’s your first impression? As Theo says, you should think, “Wow! I want to live here for a long time!”

If you standardize your turnover process, you’ll have happier tenants and better profits. Success lies in the detailed work behind an immaculate apartment.

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Bruce Petersen Mentors You on Syndication

Many real estate investors are eyeing syndication as a lucrative next step. If you’re thinking about sponsoring a passive investing partnership, syndicate expert Bruce Petersen has hard-earned wisdom for you. Bruce is the founder and CEO of Bluebonnet Asset Manager LLC and Bluebonnet Commercial Management, focusing on multifamily property investing and management. He’s also the author of “Syndicating Is a B*tch”. A recent guest on the Joe Fairless Best Ever Show podcast, Bruce discusses the power of mentorship and other tips to make your launch into syndication a success.


About Bruce Petersen


Bruce is a late-blooming entrepreneur who found syndication after 20 years in retail. At 43, burned out from 100-hour weeks, he took a break to evaluate what to do next. After researching real estate, he found an excellent mentor, a relationship that changed the course of his life. His mentor was a buyer’s broker for multifamily properties. Soon Bruce had purchased his first syndication property, which yielded an impressive return. He was hooked.


Since then, Bruce and his wife Stephanie, who serves as CFO, have acquired multifamily properties in Texas. Their goal is to provide an exceptional living experience for tenants from all walks of life. Bruce also serves as a mentor and educator. He recently released “Syndicating is a B*tch”, a book that tells the raw truth about syndication’s difficulty and challenges.


Find the Right Mentor


If you’ve considered a formal mentor but think it’s too costly or sensationalized, Bruce has some advice. His mentorship with the multifamily broker catalyzed his success more quickly and professionally than he could have achieved alone. Why reinvent the wheel when experts have already created it? Your effort will net a higher return if you leverage their knowledge and experience.


Bruce notes that mentorship has gotten a bad rap in the business due to hucksters who hype themselves as gurus of a lavish investor lifestyle. These people are not mentors. Good mentors walk the walk, are successes in their field, and have verifiable track records. They are honest about what they offer you and don’t overpromise.


Mentorship Is Cost-Effective


Most mentors charge for their services. If you balk at this, says Bruce, consider the cost of a college education. People often spend $50,000 or more as undergraduates and $200,000 or more with graduate or professional school. Then there’s the opportunity cost of four to 12 years of lost endeavors and income. Ultimately, many people end up in jobs they dislike or didn’t prepare for.


In contrast, the right mentorship can teach you how to run a lucrative business you’ll enjoy. Syndication is hard and full of unforeseen challenges. If you’ve never done it before, you’ll encounter obstacles you’re not prepared to manage. A mentor will coach you on all aspects of the business and slash your learning curve to self-sufficiency. Bruce’s bottom line: “You do need a mentor. Don’t do this alone.”


Find Your Investors First


Bruce notes that many new investors ask if they should find property or raise financing first. Though you may be eager to hunt for the ideal multifamily, he advises starting with the money. It’s too easy to get to the table without your financing locked. Think about it: This happens all the time with primary residential purchases. Syndication has significantly more risks and variables.


Meanwhile, you’ve tied up the property for one or two months, and people will remember that. If you withdraw from a deal at the last minute due to a lack of funds, word will spread that you can’t deliver. You’ll be just another enthusiastic greenhorn who didn’t prepare.


Raise Twice the Money You Think You Need


According to Bruce, you should raise at least twice as much financing as you think your property will cost and preferably three times as much. For example, if you’re targeting a $500,000 cash property, plan on raising $1 million to $1.5 million.


Over raising can be a tough sell to prospective investors but will likely save the deal. You should assume at least half of your pledged investors will bail. Some may have personal situations arise, while others may get cold feet. Build this likelihood into your financials, and it won’t derail your plans.


If you’re contemplating your first deal, consider these typical costs in your estimate:


  • Down payment
  • Closing costs
  • Rehabilitation costs not covered in the loan
  • Operating expenses


Then double or triple that total to arrive at your investment target.


Get Out There


Real estate investors are like successful salespeople: They need good personalities. You are selling potential investors on your opportunity, but you are selling them on you most of all. If they don’t like you or smell an ethical rat, they’re gone.


Bruce describes how he told one excited man at a syndication event to find another venture. Why? Though the man could finesse spreadsheets and was motivated, he was a self-described jerk and misanthrope. According to Bruce, that’s a deal-breaker.


You don’t need to be an extravert, but you do need to meet people and have them like you. Bruce found the investors for his first deal from a meetup group he started. He had no experience or even a job, but the members got to know him over many months.


If running groups doesn’t suit you, there are many existing ones to join. Bruce suggests attending events from experts such as Joe Fairless, Jake and Gino, and Michael Blank to network with like-minded people.


You’ll also learn a tremendous amount by immersing yourself in the world of passive investing. Many groups and events feature free or low-cost training in webinars, videos, books, and more. Simply by interacting with people, you will learn from their experiences and stories. They, in turn, will learn from you.


Lead With Your Best Self


Here are Bruce’s straightforward tips for networking success. If you’ve dealt with pushy colleagues who were all flash, you know these bear repeating:


  • Be genuine
  • Dress the part
  • Present dignity and confidence
  • Keep your ego in check

Know Who You Are


When you watch Bruce captivate a large audience, you might assume he can command any networking situation he encounters. The truth, he says, is that he’s an introvert who dreads working a room. Having to start small talk with strangers leaves him frozen and awkward. Instead, he lets his wife engage people, and then he joins the conversation. On the flip side, Bruce is a natural on stage, whereas his wife avoids it.


The takeaway is to know who you are, play to your strengths, and manage your weaknesses rather than pretend they don’t exist. Networking is the backbone of real estate investing, so if certain social situations make you uncomfortable, don’t avoid them. You could be leaving valuable contacts and information on the table. Instead, find a way to adapt gracefully.


Present Yourself Professionally


Dress the part, as strangers will remember your first impression. Bruce is not a fan of the image of the “millionaire next store” in cheap clothes. Instead, he suggests dressing at or above your means to project confidence and professionalism.


This attention to presentation doesn’t mean overspending to achieve an image. Such overreach financially sabotages your goals and ultimately undermines your self-confidence. However, you do want to appear you belong in the room. Some creative shopping can net you a well-priced and polished wardrobe. Don’t forget other basics such as professionally printed business cards, quality accessories, and a clean car.


Be Honest About Your Experience


Many people wonder how to present themselves to potential investors if they have no experience. If you lack experience, say so. You want to be transparent, Bruce notes, but confident. Every investor out there started somewhere.


You should offer people a solid idea of the type of property you plan to purchase and why. Have your elevator speech ready just as you would for a traditional job. For example, “I’m targeting a 30 to 50-unit multifamily property in Raleigh, built between 2000 and 2010.” As the conversation continues, you can explain why.


Be mentally prepared for rejection. Some potential investors won’t like your inexperience, your approach, your personality, or your shirt. That’s their prerogative, so stay calm and move on. When starting out, Bruce once had a man laugh in his face. Bruce expressed his understanding and politely excused himself to meet others in the room.


Is Syndication Right for You?


The syndication investor lifestyle isn’t for everyone. You need confidence, good people skills, and an entrepreneurial spirit. You should also have grit and the humility to learn from others. In this business, you will encounter shockers you couldn’t make up. As Bruce notes, we are living in an era of black swans, so expect more of those, too.


Bruce points out that there are many ways to make excellent money. You don’t have to choose syndication or even real estate. However, if you decide syndication is for you, then leverage the quality resources available to create your roadmap.

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Debunking a Common Myth About Apartment Insurance Rates

A common practice when underwriting multifamily apartment deals is to assume a stabilized insurance expense equal to the T-12 insurance operating expense. In other words, the assumption is that the insurance premium paid by the current owner will remain the same after acquisition.

This practice was indeed correct for the past five to ten years. However, according to commercial insurance expert Bryan Shimeall, who was interviewed on the Best Real Estate Investing Ever podcast, this is no longer a safe assumption.

Due in part to the onset of coronavirus, as well as to the increase in the number of people entering the commercial real estate investment realm, insurance rates are rising fast.

Towards the end of 2019, the insurance market transitioned from a soft market to a hard market. 

In a soft market, insurers are competing for apartment investors, resulting in more competitive rates. Therefore, when underwriting deals, apartment operators were assuming the T-12 insurance rate would remain the same after acquisition, or even potentially decrease. 

However, in a hard market, the opposite is true and apartment investors are competing for insurers. As a result, insurance rates are rising. 

The magnitude of the increase is geographically driven. According to Bryan, an apartment investor should expect between a mid-single-digit and up to a 20% increase in the insurance rate when underwriting deals.

He also said that insurance companies are pickier about the types of apartments they will insure, as well as offering non-renewing insurance policies. If an apartment qualifies for insurance, there is no guarantee that it will continue to receive the same rate, the same coverage, or any coverage at all once the initial contract has expired.

Now that you know about these recent changes to insurance rates, what changes should you make when underwriting apartment deals?

The most important thing you need to do is have a conversation with your real estate insurer. If you do not have one, you need to find an insurance company or broker that specializes in real estate.

Ask the insurer about the insurance rate increases in the market you invest in.

Another important factor besides geography that is driving the rate increases are the history of losses. Bryan says it is more important than ever to provide your insurer with the history of losses as soon as possible.

Once you know you are serious about a deal, email the listing broker (if on-market) or the owner (if off-market) and request a copy of the history of losses for the apartment. 

Your insurer will need accurate and complete information about the history of losses at the property to provide an accurate insurance quote. Without the history of losses, the insure will generate a quote based on a clean history.

If your insurer obtains the history of losses report that isn’t clean, the insurance rate will be higher. Depending on the type of losses, the insurer may decide to not provide insurance at all. 

The worst-case scenario is your insurer receives the history of losses and won’t provide insurance on the apartment after you’ve invested tens of thousands of dollars into due diligence. Another bad scenario is the new insurance quote is significantly higher than your original projections and you need to back out of the deal or renegotiate a new purchase price.

Therefore, to avoid canceling contracts and wasting thousands of dollars, do not assume an insurance rate that is the same as the current insurance rate. Instead, have a conversation with your insurer prior to submitting a contract to understand the projected rate increase in the market. Then, obtain a history of losses as soon as possible so that your insurer can provide you with the most accurate quote before you have progressed further into the due diligence period.

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How to Create a Compelling Property Management Incentive Program

As an apartment syndicator, your most important team member is their property management company. The property management companies main responsibilities are to manage the day-to-day operations and implement your business plan.

However, what if – due to market conditions or lack of skill on the part of the property management company – the your net operating income projections aren’t being met? Occupancy is low. Collections are struggling. Rental premiums aren’t being met.

One strategy to turn operations around, or to avoid operational challenges all together, is to create a property management incentives program.

Why Create an Incentive Program?

An incentive program creates an alignment of interest between you and the property management company. The better they perform, the more money you, and your investors, and they make.

What is an Incentive Program?

An incentive program is an agreement between you and the property management company in which the property management company is given an objective, and if they complete the objective, they are rewarded.

Two Types of Incentive Programs

Incentive programs fall into one of two categories. 

  • Type 1: Incentive programs that begin at acquisition and end at sale. 
  • Type 2: One-off incentive programs that end after a fixed amount of time.

Examples of Type 1 Incentive Programs

The most obvious and common is a program in which the objective is to effectively manage the property and the reward is a property management fee equal to a percentage of the collected income. Plus, they aren’t fired.

Other objectives are investing their own money in the deal, acting as a loan guarantor, or bringing on their own investors. The reward for all three is more equity or cash flow.

You can also create type 1 incentive programs for key performance indicators, or KPIs. For example, the objective is to grow total revenue by a certain % each year. Or maintaining or exceeding a specified occupancy rate. 

Just make sure the objective results in alignment of interest. For example, a bad objective is to grow the occupancy by a certain percentage each year, because there is a maximum occupancy rate. Once they achieve high-90’s, it will become impossible for them to achieve their objective without first sabotaging occupancy so that they can then increase occupancy again to receive a reward.

Examples of Type 2 Incentive Programs

Type 2 incentive programs are used when you want to target a specific KPI that is underperforming. For example, if occupancy drops below 90%, you can create an incentive program. The objective is to achieve a specified occupancy rate within a specific time frame (i.e., achieve 95% occupancy within two months). 

Once the desired objective is achieved, they receive a reward and the incentive program expires.

Type 1 vs. Type 2 Incentive Programs

Both incentive programs can be beneficial.

The type 1 incentive programs create alignment of interest from the start. Whereas the type 2 incentive programs can be used during the business plan to improve a specific lagging KPI. 

However, you need to be careful and mindful when creating incentive programs. For example, if you set an occupancy-based type 1 incentive program (i.e., maintain 95% occupancy), the management company can accomplish this goal by offering unnecessary concessions to increase occupancy. Or for a “number of new leases”-based incentive program, the management company can let in unqualified renters to inflate the number of new leases.

Therefore, type 2 incentive programs are the ideal option for KPI-based objectives. If a KPI is lagging, target it with an incentive program. Whereas the type 1 incentive programs are ideal for non-KPI-based objectives, like effectively managing the property, investing in the deal, etc.

Other Best Practices

The objective of the incentive program needs to be realistic and attainable. For example, an objective to raise occupancy from 85% to 100% in two weeks is too unrealistic. A good strategy to ensure that the incentive program is practical is to plan a brainstorming session with key members of the property management team and discuss objectives and rewards.

Also, be creative with the rewards. They can be financial based, like a gift card or bonus. However, other reward ideas are dinners with you or someone in your company, an extra paid vacation day, a free education or training course, a special trophy or plaque, etc. 

Lastly, the best incentive programs do not punish property management companies for failing to achieve the objective. If they miss the mark on an incentive program, don’t reduce their management fee. However, this doesn’t mean that you NEVER punish (i.e., fire) a property management company

Overall, incentive programs are a great way to create extra alignment of interests with your property management team and can help you target specific KPIs that are lagging behind.

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1031 Exchange: The Rules

As the owner of investment properties large and small alike, there’s a vehicle available in which you can actually continuously invest into larger properties and delay the capital gains expenditure that is due to reveal itself at some point. This vehicle is called a 1031 Exchange.


According to the United States Internal Revenue Code (26 U.S.C. § 1031), a 1031 Exchange allows a taxpayer to defer the assessment of any capital gains tax and any related federal tax liability on the exchange of certain types of properties. In 1979, federal courts allowed this code to be expanded to not only sell real estate but also to continuously purchase within a specific timeframe with no liability assessed as that time.


In addition, these exchanges must be utilized for productive use in business or investment. Prior to 2018, properties listed under the code included stocks and bonds and other types of properties. However, as of today, the 1031 Exchange only includes real property which makes this excellent for investors.


1031 Exchange Rules Explained 


There are 7 primary 1031 Exchange rules which require a deeper study: 


  • Like-kind property 
  • Only for Investment or Business Intentions
  • Greater or Equal Value Replacement Property Rule
  • “Boot” is denied
  • Same taxpayer rule
  • 45 day identification window 
  • 180 day purchase window


1031 Exchange Rules Explained 


Like-Kind Property


According to the IRS, each property must be utilized in trade or business for investment purposes. Keep in mind that property used personally, like personal residences or second homes, will not qualify for the 1031 Exchange opportunity. 


However, real property, most commonly known as real estate, does include land and anything attached to the land or anything built upon it, or an exchange of such property held primarily for sale does not meet the requirements for the utilization of a like-kind exchange.


Only for Investment or Business Intentions


To meet the criteria for a 1031 Exchange, the real estate must be utilized for investment or business purposes only. The investment vehicle must be property that is not considered a primary residence but is used to generate income and profits through appreciation and that can take advantage of certain tax benefits.


For example, real property identified for investment purposes can be any property that is held for the production of income, whether it be a rental for leasing option, or if the value increases over time (capital appreciation). In order for it to meet the criteria for the tax deferral, the property must be held strictly for either investment or business use.


Greater or Equal Value Replacement Property Rule


The greater or equal value replacement property rule identifies a limitless amount of properties as long as their combined value does not exceed 200% of the originating, or previously sold property. In addition, this rule also includes the acquired properties to be valued in the neighborhood of 95% or higher of the property that is being exchanged for.


“Boot” is denied


The term boot is where money or the even exchange of items considered to be “other property.” If it is determined that a taxpayer does receive boot, that booted exchange or a portion of will become taxable.


Rules of Thumb for the Boot Offsetting Provisions:

if the seller receives replacement property of the same or higher value than the net sale price of the property previously sold, and in addition, the seller spans all of the proceeds from the acquisition on the property being replaced, then that exchange does meet the criteria to be totally tax deferral. If the seller follows these guidelines, then there is no consideration of this being considered “cash boot” received and either took on new mortgages in addition to the previously dissolved mortgage or the seller gave the “cash boot” to reconcile any received “mortgage boot.”


The Same Taxpayer Rule


It is mandatory under the same taxpayer rule that the seller who previously owned the property that was sold must be the exact same person, via tax identity, who takes over ownership of the property being replaced. The question is why? The answer is because if the taxpayer changed their identity, based on tax law, then there would be no continuous action of the tax. Therefore, the proceeds are subject to become taxable.


45 Day identification Rule


Under the 1031 exchange code, the taxpayer has a 45 day window from the date of the sale of the previously owned property to identify the replacement property. The 45 day window is commonly referred to as an identification period. This process must be done in writing with the authentic signature of the taxpayer.


When identifying the replacement property, remember the following suggestions:

  • Any real property as long as it is being considered for business or investment purposes may qualify. The property can be located anywhere in the continental United States. In addition, in 2005 there were certain temporary regulations that were allowed for rental real estate to be purchased in Guam, and the Northern Mariana Islands, and also in the US Virgin Islands.
  • The property must be clearly identified with a physical street address or legal property description, and in some cases, specific unit addresses are mandatory.
  • In the process of identification, the property may be changed or additional real estate can be added by 12 midnight on the first 45th day of your identification window. Keep in mind that there are two rules that must be remembered and they are the 3-Property Rule and 200% Rule. Sometimes, revoking your original identification may be required while you are in the process of making a new one.
  • If there is any property purchased within the window of the 45 day rule then there is no formal identification needed, however, keep in mind to take the identification of other properties in consideration.
  • Purchasing replacement properties from relatives should be given careful scrutiny.


180 Day Purchase Rule


When completing a 1031 exchange, the 180 Day-Purchase Rule mandates that the replacement transaction must be completed within 180 days or six months in total. Regardless, the rule always applies. This means that conveyance of title must be completed by this date. If you ever decide to participate in an apartment syndication, please adhere to this rule.


Executing a 1031 Exchange


Example 1: Assuming that a taxpayer has decided to invest into a multifamily unit and he has decided to sell it. To the taxpayer’s surprise, the property generated $300,000 in gains, and after closing, the net proceeds were $300,000. With the taxpayer staring at a capital gain tax liability of 200,000 in taxes (federal capital gain tax, depreciation recapture, state capital gain tax, and net investment income tax) after the property sells. Only $100,000 in net equity is available to be reinvested into another property.


Example 2: If the same investor chose to complete an exchange, the investor would have had to have identified the new replacement product being a multifamily unit within 45 days and invests the entire 300,000 into the purchase of the replacing property with no capital gains due.


For an investor, a 1031 exchange is an excellent opportunity. When you decide to invest in properties, it is natural to migrate to larger units, specifically multifamily properties.


As you continue development and growth in this area, you may even want to consider becoming an apartment syndication investor. This will allow you to pool resources from other sources that will facilitate the overall growth of your portfolio and investment profile. Understanding the 1031 Exchange can generate large revenue and save taxes.

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apartment complex near grass

The Pros of Passively Investing in Syndication Deals

You’re bound and determined to make more money as a commercial real estate investor in the coming months. The problem, though, is that you may have shied away from apartment investing, which can be a huge boon to your real estate business.

Your reasons for not diving into apartment investing? “I don’t have enough money.” Or, “It’s just too complicated to figure out and handle on my own.”

The great news? You can overcome both of these obstacles simply by investing in other people’s apartment syndication deals.

Here’s a rundown on 3 reasons why you should invest in apartment buildings through syndication opportunities.

1. Reduce Your Risk

One of the biggest reasons to invest in apartments via a reputable syndicator is that the risk associated with the investment will be dispersed among every investor. You won’t be held liable for any decisions that the syndication’s managing members make regarding the funds. As a result, you can essentially adjust your capital to a more comfortable risk level when you invest in other people’s syndication deals.

2. Invest Passively 100%

Another major reason why you should invest in apartment buildings is that you will reap the returns while being totally removed from these assets, including the operational and management perspectives. In other words, you can make money through passive investing and have more free time to focus on the things you enjoy.

That’s because the general partner will assume responsibility for every aspect of the deal, including locating profitable properties and managing property managers. You’ll simply pay your syndicator a portion of your deal-related cash flow/appreciation and enjoy a steady stream of income.

3. Gain Access to Huge Investment Opportunities

Finally, with syndication deals, you can invest in assets worth millions of dollars or even hundreds of millions of dollars—something you might have trouble doing with your own capital. Pooling your funding with fellow investors basically exposes you to an asset class that otherwise might be out of reach for you. And, of course, these larger investments are likely to have larger payoffs.

Start Taking Advantage of Apartment Syndication Opportunities

If you’re passionate about the idea of making money in the commercial real estate market, you can’t go wrong with pursuing apartment syndication deals. Of course, if you’re not familiar with the process of investing in other people’s deals, or if you’ve hit a roadblock with a particular deal, you may end up losing out on a huge, potentially lucrative opportunity.

Fortunately, I have extensive experience with apartment syndications, and I know firsthand how excellent they can be. For this reason, I am excited to share with you how to capitalize on these deals every time. For instance, I discuss in my Best Ever Apartment Syndication Book how to complete your very first deal step by step.

Get in touch with me today to find out more about why syndication deals make sense and how you can use them to grow your bottom line in the months and years ahead. Moreover, if you’re already an accredited investor, you might be interested in investing in one of my lucrative apartment deals. If you dream of becoming a passive investor, please reach out to me.

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Apartment Syndication School

Apartment Syndication School

Welcome to the Syndication School

We created the Syndication School to provide you with a FREE apartment syndication education so that you have the tools to launch your own investment empire.
Each week, we will release two podcast episodes that focus solely on apartment syndications. For the majority of episodes, we will offer you a FREE resource, which will be available for download below.

Series #1 – Why Apartment Syndications?

In this first series, we will discuss the benefits and drawbacks of the syndication strategy so that you can determine if it is the ideal investment for you.

In part 1, we will define what an apartment syndication is, as well as compare and contrast raising money vs. using your own money to buy apartments. We will also discuss the difference between being a passive investor or active sponsor in apartment syndications.

In part 2, we will compare and contrast syndications to other popular real estate strategies, including single-family rentals, smaller multifamily properties, REITs, and development.

Series #2 – Are You Ready to Become an Apartment Syndicator?

In the second Syndication School series, we will discuss the two main requirements before you are ready to start your apartment syndication business.

In part 1, we cover the first requirement – the experience.

In part 2, we cover the second requirement – the education.

Free Resource:

  • Click here to download your FREE Master the Lingo presentation, which has a list of over 80 apartment syndication terms, including the definitions and real-world examples, that you need to memorize and know how to immediately calculate before you are ready to become an apartment syndicator.

Series #3 – How to Break Into the Apartment Syndication Industry

In this Syndication School series, we will discuss the 9 creative ways to break into the business of apartment syndications after meeting the experience and educational requirements.

In part 1, we cover strategies 1 to 4.

In part 2, we cover strategies 5 to 9.

Series #4 – Tony Robbins’ Ultimate Syndication Success Formula

In this Syndication School series, we will discuss the first two steps in Tony Robbins’ Ultimate Success Formula and how to apply those steps to your syndication business.

In part 1, we cover step one of Tony Robbins’ Ultimate Success Formula – Know Your Outcome.

In part 2, we cover step two of Tony Robbins’ Ultimate Success Formula – Know Your Why.

Free Resources:

  • Click here to download your free resource, the Annual Income Calculator. The Annual Income Calculator is a spreadsheet that automatically calculates how much equity you need to raise from passive investors in order to achieve your 12-month apartment syndication goal.
  • Click here to download your free resource, Tony Robbins Goal Setting Exercise. Watch the 35-minute goal setting video by Tony Robbins and complete the four-step goal setting exercise for your apartment syndication business.

Series #5 – How to Select a Target Apartment Syndication Investment Market

In this Syndication School series, we will discuss the process of selecting a target investment market for your apartment syndications.

In part 1, we introduce the concept of a target market and the overall process of selecting a target market.

In part 2, we cover the process of selecting 1 or 2 target markets.

Free Resources:

Series #6 – How to Perform an In-Depth Analysis of Your Target Apartment Syndication Market

In this Syndication School series, we will discuss the process of performing a more in-depth analysis of a market after selecting 1 or 2 target investment markets (which was accomplished during Series #5).

In part 1, we re-introduce Joe’s Three Immutable Laws of Real Estate Investing and discuss an exercise that accomplished the goal of understanding a target market on a neighborhood-level.

In part 2, we discuss other strategies to implement to also accomplish this same outcome.

Free Resources:

Series #7 – The Power of Your Apartment Syndication Brand

In this Syndication School series, we will discuss the process of creating your unique apartment syndication brand.

In part 1, we discuss why you need a brand as an apartment syndicator, how to select a target audience, and how to create the first three components of your brand.

In part 2, we discuss the fourth component of your brand: the website.

In part 3, we discuss the fifth component of your brand: the company presentation.

In part 4, we discuss the sixth and final component of your brand: thought leadership platform.

Free Resources:

Series #8 – How to Build Your All-Star Apartment Syndication Team

In this Syndication School series, we will discuss the process of building your apartment syndication team.

In part 1, we discuss who your core and secondary team members will be, how to find prospective team members and the process of hiring team members #1 and #2 – partner and mentor.

In part 2, we discuss the process of hiring team member #3 – property management company.

In part 3, we discuss the process of hiring team member #4 – real estate brokers.

In part 4, we discuss the process of hiring team members #5 – #7 – attorneys, a CPA, and a mortgage broker – as well as what order to hire the team members in.

Free Resource:

Series #9 – How to Raise Capital from Passive Investors

In this Syndication School series, we will discuss the process of raising capital from passive investors.

In part 1, we discuss how to overcome any fears you have in regards to raising money from passive investors.

In part 2, we discuss the differences between the various types of money-raising structures.

In part 3 and part 4, we discuss ways to find passive investors.

In part 5 and part 6, we discuss the process of initially approaching and conversing with interested investors.

In part 7 and part 8, we discuss how to be prepared to respond to the 49 most common questions asked by passive investors.

Free Resource:

Series #10 – How to Structure GP and LP Compensation

In this syndication school series, we will discuss how to create compensation structures for the GP and LP.

In part 1, we discuss how to structure the GP compensation.

In part 2, we discuss how to structure the LP compensation.

Free Resource:

Series #11 – How to Qualify an Apartment Deal

In this Syndication School series, we will discuss how to qualify an apartment deal using a three-step evaluation process.

In part 1, we discuss step 1 of the apartment deal evaluation process – setting your initial investment criteria.

In part 2, we discuss step 2 and step 3 of the apartment deal evaluation process – underwriting and due diligence.

Series #12 – How to Find Your First Apartment Syndication Deal

In this Syndication School series, we will discuss how to find your first apartment syndication deal.

In part 1, we discuss the distinction between on-market and off-market deals.

In part 2, we discuss how to find on-market and off-market deals from real estate brokers.

In part 3, we discuss how to find off-market deals via direct mailing campaigns.

In part 4, we discuss 9 more ways to find off-market apartment deals.

In part 5, we discuss one real-world case study for how a syndicator found an off-market deal.

In part 6, we discuss two more real-world case studies for how a syndicator found an off-market deal.

Free Resource:

Series #13 – Breaking Down the Apartment Financials

In this Syndication School series, we will discuss the three pieces of information you need to underwrite a deal.

In part 1, we discuss the rent roll.

In part 2, we continue our discussion on the rent roll.

In part 3, we discuss the T-12.

In part 4, we continue our discussion on the T-12.

In part 5, we discuss the OM.

In part 6, we continue our discussion on the OM.

Free Resources:

Series #14 – How to Underwrite a Value-Add Apartment Deal

In this Syndication School series, we will discuss the eight-step process of underwriting a value-add apartment deal.

In part 1, we discuss steps 1, 2, and 3 of the underwriting process.

In part 2, we discuss ways to add value to apartment deals.

In part 3, we discuss step 4a of the underwriting process – setting assumptions.

In part 4, we discuss step 4b of the underwriting process – setting the remaining underwriting assumptions.

In part 5, we discuss step 5 – determining an offer price.

In part 6, we discuss step 6 – performing a rental comparable analysis.

In part 7, we discuss step 7 – confirming the rental comps over the phone or in-person.

In part 8, we discuss step 8 – visiting the property and market in person.

Free Resources:

Series #15 – How to Submit an Offer on a Syndicated Apartment Deal

In this Syndication School series, we will discuss the process of submitting an offer on a syndicated apartment deal.

In part 1, we discuss how to create a letter of intent.

In part 2, we discuss what happens after you submit a letter of intent.

Free Resource:

Series #16 – How to Secure Financing for an Apartment Syndication Deal

In this Syndication School series, we will discuss the process of securing the financing (i.e., debt) for your apartment syndications.

In part 1, we discuss the types of debt and financing available.

In part 2, we discuss the first two most common financing programs.

In part 3, we discuss the other common loan programs and what you need to provide to the lender to secure financing.

In part 4, we discuss how to select the ideal apartment loan.

Free Resource:

Series #17 – How to Perform Due Diligence on an Apartment Syndication Deal

In this Syndication School series, we will discuss the process of performing due diligence on your apartment syndications.

In part 1, we discuss the first 5 due diligence reports.

In part 2, we discuss the last five due diligence reports.

In part 3, we discuss how to interpret the results of the first 4 due diligence reports.

In part 4, we discuss how to interpret the results of the last 6 due diligence reports.

Series #18 – How to Secure Commitments From Your Passive Investors

In this Syndication School series, we will discuss the process of securing financial commitments from your passive investors after putting a deal under contract.

In part 1 and part 2, we discuss how to create an investment summary.

In part 3, we discuss how to create an email to notify your investors about your new deal.

In part 4, part 5, and part 6, we discuss the process of a successful new investment offering conference call.

In part 7, we discuss the last step in the process of a successful new investment offering conference call and how to follow-up afterward.

In part 8, we discuss how to finalize investor commitments by sending the correct legal documentation.

Free Resource:

Want to learn how to build an apartment syndication empire? Purchase the world’s first and only comprehensive book on the exact step-by-step process of completing your first apartment syndication: Best Ever Apartment Syndication Book.

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Joe Fairless