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What Every Passive Investor Should Know About Apartment Syndication Deals and Income

Last Updated: 3/12/19

Apartment syndication is becoming an increasingly popular real estate investment strategy for many reasons. Being a passive investor who is involved in apartment deals gives you the flexibility and freedom to use your time to pursue other ventures while still generating income.

While this is definitely a trending strategy today, apartment syndication is by no means simple. Learning the ins and outs of investing is crucial to becoming a successful real estate investor, particularly when it comes to closing deals. Here’s what every passive investor should know about apartment syndication:

The Basics

To start, gain a brief overview of apartment syndication from the perspective of a passive investor. Your role during an apartment syndication deal is to provide the general partner (GP) with capital to invest in the purchase of apartment complexes. This investment is similar to other investments in stocks or bonds but typically offers a much better return.

Essentially, you help fund the deal, which does not require that you be actively involved in the day to day management of the project. Most apartment syndications will require a minimum investment amount, so it is important to do your research and know exactly how much you are able to invest. Additionally, how often investors are paid depends on the general partner and overall business strategy. However, most investors are typically paid on a monthly or quarterly basis.

How to Make Money

There are two kinds of passive income investments when it comes to apartment syndication. You would be either an equity or debt investor. There are advantages to both investment types and which option you choose depends on your financial goals and risk preference. For equity investments, a passive investor is able to make money through 2 different aspects: preferred returns and profit splits.

  • Preferred Returns
    A preferred return is defined as “the threshold return that limited partners receive prior to general partners being paid”. This amount is typically between 2-12% per a year, depending on the investment.
  • Profit Splits
    Profit splits involves sharing the profit of the investment between general partners and passive investor or limited partners (LP). This could mean a 50/50 split or 80% to the LP and 20% to the GP. Typically most deals will involve a mix of both preferred returns and profit splitting.

For debt investments, a passive investor makes money from interest payments. The interest rate is typically set by the general partner and will vary depending on the deal structure. Debt investors will also usually get their investment capital back before the apartment syndication is complete and the property sold.

Becoming an equity or debt investor depends on your individual investment goals. All passive income investments are different and will require you to thoroughly research and review the deal in order to determine if it will make sense for you financially.

Types of Apartment Syndications

Every passive investor interested in apartment syndication should be aware of the two key types of deals that are available: a distressed property or value-add property. Each property type has its own specific opportunities and risks. A distressed property is defined as a non-stabilized apartment complex. This type of property likely suffers from poor operations, problems with tenants, outdated facilities, and more, which all contribute to an economic occupancy rate that is lower than 85%.

In comparison, a value-add property is defined as a stabilized apartment complex that is well maintained but is either outdated or operating inefficiently. This type of property is stable with an economic occupancy rate that is more than 85%.

Know the Business

Regardless of what deal you are considering as a passive investor, it is always important to know how the real estate business works. This includes understanding both the opportunities and risk associated with a particular apartment syndication deal. Take the time to really analyze and discuss the benefits of the deal with the general partner before making any decisions.

Some key terms to know and study:

  • Accredited Investor
  • Net Operating Income (NOI)
  • Cash Flow
  • Breakeven Occupancy
  • Internal Rate of Return (IRR)
  • Profit and Loss Statement
  • Exit Strategy

Here is a full list of important terminology, with definitions and examples, that will help when reviewing any apartment syndication.

Every general partner should be open and transparent when it comes to any potential risks involved with the deal. Every investment has risks, so don’t believe anyone that tells you otherwise.

Having experience in the real estate business, and particularly apartment syndication, is incredibly valuable when looking for new passive income investments. Be sure to discuss with the general partner all of the previous deals they have worked on and how they performed based on the business plan. This will give you an idea of the level of risk, particularly if the rest of the team is inexperienced.

The Bottom Line

When it comes to passive income investments it is important to work with the right group of investors and general partners in order to make sure that you are meeting your financial goals. Part of being a passive investor is giving your control to other partners who ultimately make decisions on how your money is invested. Having the right team of people will limit the amount of risk in your investment.

For more information about this type of investment, check out my comprehensive passive investor resources!

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