Resources for Passive Investors

If you're an accredited passive investor looking at and/or investing in apartment syndication deals, then this page is just for you.

I recently had a conversation an investor of mine, and they asked me where they could go to learn more about investing in apartment syndication deals...

(Awkward pause)

I didn’t have a good answer for them. There simply wasn’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... Until now.

The sole purpose of this page is to arm you with the information you need to make informed decisions when becoming a passive investor in apartment syndication deals.

I have hundreds of accredited investors and have had thousands of investor conversations. The information below was created based on that experience.

For your convenience, the page is categorized into three sections:

First, to determine if passively investing in apartment syndications is a strategy that aligns with your investment goals, I have a couple of questions for you to consider.

Second, so you can be well versed with what everything means, I define all of the apartment syndication terms, along with some examples of how the terms are used by active and passive investors.

Third, to qualify the opportunity so that you protect your hard-earned money, I give you questions to ask to qualify a specific deal, the market in which the deal is located, and the general partner and the team that will implement the business plan.

Let’s get started.

Knowing Yourself and Your Goals

Before looking at apartment deals or general partners, it’s important to know yourself, what type of role you’d like to have in the investment, and what your goals are. This starts by determining if you want to be an active or passive real estate investor.

Active vs. Passive Investing

Active Investing: The finding, qualifying and closing on an apartment building using one's own capital and overseeing the business plan through its successful execution.

Passive Investing: Placing one’s capital into an apartment syndication that is managed in its entirety by a general partner.

To determine if becoming a passive real estate investor is the ideal strategy for you, answer yes or no to the following three questions:

  1. Are you busy with your full-time job and other activities but still want to invest in apartments?
  2. Do you want to receive the benefits of owning a large apartment building but you don't have the capital and/or expertise to acquire one by yourself?
  3. Are you comfortable with someone making business decisions on your behalf?

If you answered "yes" to these three questions, passively investing in apartment syndications aligns with your investment goals.

If you answered "no" to the first two questions, passive investing may still be the route for you, because you require an educational foundation and past real estate or business expertise prior to becoming an active apartment investor. But 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 answered "yes" to these three questions but you're goal is to eventually become an active apartment investor, passively investing in a few deals can help you bridge the gap from where you're at to where you want to be from a time commitment, expertise, and experience perspective. You will learn the apartment acquisition, management and disposition process in addition to having your involvement in apartment deals on your resume, which will be helpful when speaking to brokers and lenders when you transition to active investing.

If you have no desire to ever be an active investor and you like your full-time job or want to enjoy your retirement, passive investing is for you.

What is Your Ideal Passive Investment?

Assuming that passively investing in apartment syndications aligns with your investment goals, the next step is to determine the type of apartment syndication you will invest in.

There are two main types of apartment syndications in which you can invest: distressed and value-add.

  1. Distressed property: A non-stabilized apartment community, which means the economic occupancy rate is below 85% and likely much lower, due to poor operations, tenant problems, outdated interiors or amenities, mismanagement, deferred maintenance, etc.
  2. Value-add property: A stabilized apartment community with an economic occupancy rate above 85% and has an opportunity to be improved by adding value, which means making improvements to the operations and the physical property through exterior and interior renovations in order to increase the income and/or decrease the expenses.

Click here for 27 ways general partners can add value to apartment communities.

Distressed apartment syndications offer little to no ongoing cash flow and a higher potential profit at the end with a higher risk. Therefore, your ideal passive investment are distressed apartment syndications if you want a greater return potential with a greater 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. Therefore, your ideal passive investment are value-add apartment syndications if you want a medium to high return with a lower risk.

Important Terminology

An accredited investor is a person that can invest in securities (i.e. invest in an apartment syndication as a limited partner) by satisfying one of the requirements regarding income or net worth. The current requirements to qualify are an annual income of $200,000 or $300,000 for joint income for the last two years with expectation of earning the same or higher or a net worth exceeding $1 million either individually or jointly with a spouse.

Click here for FAQs about accredited investors answered by the Securities and Exchange Commission (SEC).

An apartment syndication is a temporary professional financial services alliance formed for the purpose of handling a large apartment transaction that would be hard or impossible for the entities involved to handle individually, which allows companies to pool their resources and share risks and returns. In regards to apartments, a syndication is typically a partnership between general partners (i.e. the syndicator) and the limited partners (i.e. the investors) to acquire, manage and sell an apartment community while sharing in the profits.

A sophisticated investor is a person who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.

The general partner (GP) is an owner of a partnership who has unlimited liability. A general partner is also usually a managing partner and active in the day-to-day operations of the business. In apartment syndications, the GP is also referred to as the sponsor or syndicator. The GP is responsible for managing the entire apartment project.

The limited partner (LP) is a partner whose liability is limited to the extent of the partner’s share of ownership. In apartment syndications, the LP is the passive investor and funds a portion of the equity investment.

Capital expenditures, typically referred to as CapEx, are the funds used by a company to acquire, upgrade and maintain an apartment community. An expense is considered to be a capital expenditure when it improves the useful life of an apartment and is capitalized – spreading the cost of the expenditure over the useful life of the asset.

Capital expenditures include both interior and exterior renovations.

Examples of exterior CapEx are repairing or replacing a parking lot, repairing or replacing a roof, repairing, replacing or installing balconies or patios, installing carports, large landscaping projects, rebranding the community, new paint, new siding, repairing or replacing HVAC and renovating a clubhouse.

Examples of interior CapEx are new cabinetry, new countertops, new appliances, new flooring, installing fireplaces, opening up or enclosing a kitchen, new light fixtures, interior paint, plumbing projects, new blinds and new hardware (i.e. door knobs, cabinet handles, outlet covers, faucets, etc.).

Examples of things that wouldn't be considered CapEx are operating expenses, like the costs associated with turning over a unit (i.e. paint, new carpet, cleaning, etc.), ongoing maintenance and repairs, ongoing landscaping costs, payroll to employees, utility expenses, etc.

Operating expenses are the costs of running and maintaining the property and its grounds.

For example, here are operating expenses for a 216-unit apartment community:

Payroll ($239,790)
Maintenance ($65,397)
Contract Services ($82,837)
Turn/Make Ready ($43,598)
Advertising ($32,699)
Admin ($32,699)
Utilities ($190,742)
Mgmt Fees ($65,788)
Taxes ($280,825)
Reserves ($54,000)
Insurance ($49,048)
Total Expenses ($1,137,424)

Debt service is the annual mortgage paid to the lender, which includes principal and interest. Principal is the original sum lent and the interest is the charge for the privilege of borrowing the principal amount.

For example, a 24-month $11,505,500 loan with 5.28% interest amortized over 30 years results in a debt service of $60,977 per month.

Net operating income (NOI) is all revenue from the property minus operating expenses, excluding capital expenditures and debt service.

For example, a 216-unit apartment community with a total income of $1,879,669 and total operating expenses of $1,137,424 has a NOI of $742,245.

Capitalization rate, typically referred to as cap rate, is the rate of return based on the income that the property is expected to generate. The cap rate is calculated by dividing the property’s net operating income (NOI) by the current market value or acquisition cost of a property (cap rate = NOI / Current market value)

For example, a 216-unit apartment community with a NOI of $742,245 that was purchased for $12,200,000 has a cap rate of 6.1%.

Price per unit is the cost of purchasing an apartment community based on the purchase price and the number of units. The price (or cost) per unit is calculated by dividing the purchase price by the number of units.

For example, a 216-unit apartment community purchased for $12,200,000 has a price per unit of $56,481.

Cash flow is the revenue remaining after paying all expenses. Cash flow is calculated by subtracting the operating expense and debt service from the collected revenue

For example, here is the cash flow of a 216-unit apartment community:

Total Income $1,879,669
Total Operating Expense $1,137,424
Debt Service $581,090
Asset Mgmt Fee $40,195
Cash Flow $120,960


Closing costs are the expenses, over and above the price of the property, that buyers and sellers normally incur to complete a real estate transaction.

Examples of closing costs are origination fees, application fees, recording fees, attorney fees, underwriting fees, credit search fees and due diligence fees.

Financing fees are the one-time, upfront fees charged by the lender for providing the debt service. Also referred to as a finance charge. Typically, the financing fees are 1.75% of the purchase price.

For example, a 216-unit apartment community purchased for $12,200,000 will have an estimated $213,500 in financing fees.

The operating account funding is a reserves fund, over and above the price of the property, to cover things like unexpected dips in occupancy, lump sum insurance or tax payments or higher than expected capital expenditures. The operating account fund is typically created by raising extra money from the limited partners.

The equity investment is the upfront costs for purchasing an apartment community, which includes the down payment for a loan, closing costs, financing fees, operating account funding, and the various fees paid to the general partner for putting the deal together. May also be referred to as the initial cash outlay or the down payment.

The sales proceeds are the profit collected at the sale of the apartment community.

For example, here is a how the sales proceeds is calculated for a 216-unit apartment community purchased at $12,200,000 and sold after a five year value-add business plan:

Exit NOI $1,134,723
Exit Cap Rate 5.9%
Exit Price $19,232,593
Closing Costs ($192,326)
Remaining Debt ($10,711,909)
Sales Proceeds $8,328,358

The internal rate of return (IRR) is the rate, expressed as a percentage, needed to convert the sum of all future uneven cash flow (cash flow, sales proceeds and principal pay down) to equal the equity investment. IRR is one of the main factors the passive investor should focus on when qualifying a deal.

A very simple example is let’s say that you invest $50. The investment has cash flow of $5 in year 1, and $20 in year 2. At the end of year 2, the investment is liquidated and the $50 is returned.

The total profit is $25 ($5 year 1 + $20 year 2).

Simple division would say that the return is 50% ($25/50). But since time value of money (two years in this example) impacts return, the IRR is actually only 23.43%.

If we had received the $25 cash flow and $50 investment returned all in year 1, then yes, the IRR would be 50%. But because we had to "spread" the cash flow over two years, the return percentage is negatively impacted.

The timing of when cash flow is received has a significant and direct impact on the calculated return. In other words, the sooner you receive the cash, the higher the IRR will be.

The cash-on-cash (CoC) return is the rate of return, expressed as a percentage, based on the cash flow and the equity investment. CoC return is calculated by dividing the cash flow by the initial investment.

For example, a 216-unit apartment community with a cash flow of $330,383 and an initial investment of $3,843,270 results in a CoC return of 8.6%

Equity Multiplier (EM) is the rate of return based on the total net profit (cash flow plus sales proceeds) and the equity investment. EM is calculated by dividing the sum of the total net profit and the equity investment by the equity investment.

For example, if the limited partners invested $3,843,270 into a 216-unit apartment community with a 5-year gross cash flow of $2,030,172 and total proceeds at sale of $6,002,116, the EM is ($2,030,172 +$ 6,002,116) / $3842,270 = 2.09.

The market rent is the rent amount a willing landlord might reasonably expect to receive, and a willing tenant might reasonably expect to pay for a tenancy, which is based on the rent charged at similar apartment communities in the area. Market rent is typical calculated by performing a rent comparable analysis.

The gross potential rent (GPR) is the hypothetical amount of revenue if the apartment community was 100% leased year-round at market rental rates.

For example, here is how the GPR is calculated for a 216-unit apartment building:

Unit Type # of Units Bed/Bath Market Rent
A1 48 1x1 $737
A2 96 1x1 $796
B1 72 2x1 $990
GPR $183,072

The gross potential income is the hypothetical amount of revenue if the apartment community was 100% leased year-round at market rates plus all other income.

For example, a 216-unit apartment community with a GPR of $183,072 and monthly other income of $14,153 from late fees, pet fees and a RUBS program has a gross potential income of $197,225 per month.

Loss to lease (LtL) is the revenue lost based on the market rent and the actual rent. LtL is calculated by dividing the gross potential rent minus the actual rent collected by the gross potential rent.

For example, a 216-unit apartment community with a GPR of $183,072 and with an actual rent of $157,270 has a LtL of 14%.

Bad debt is the amount of uncollected money a former tenant owes after move-out.

Concessions are the credits (dollars) given to offset rent, application fees, move-in fees and any other revenue line time, which are generally given to tenants at move-in.

A model unit is a representative apartment unit used as a sales tool to show prospective tenants how the actual unit will appear once occupied.

An employee unit is a unit rented to an employee at a discount or for free.

The vacancy rate is the rate of unoccupied units. The vacancy rate is calculated by dividing the total number of unoccupied units by the total number of units.

For example, a 216-unit apartment community that has 17 vacant units has a vacancy rate of 7.9%

Vacancy loss is the amount of revenue lost due to unoccupied units.

For example, a 216-unit apartment community that has 17 vacant units that rent for an average of $777 per unit per month has a vacancy loss of $158,508 per year.

Effective gross income (EGI) is the true positive cash flow of an apartment community. EGI is calculated by the sum of the gross potential rent and the other income minus the income lost due to vacancy, loss-to-lease, concessions, employee units, model units and bad debt.

For example, if a 216-unit apartment community has a gross potential rent of $2,263,624, loses $158,454 due to vacancy (7% vacancy rate) and $159,362 in credit costs (loss-to-lease, concessions, employee units, model unit, bad debt, etc.) and collects $177,462 in other income, then EGI is $2,123,235.

The economic occupancy rate is the rate of paying tenants based on the total possible revenue and the actual revenue collected. The economic occupancy rate is calculated by dividing the actual revenue collected by the gross potential income.

For example, a 216-unit property charges, on average, $847.11 per month per unit. Each month, a total of $3,025.50 is lost due to various concessions. There are 17 vacant units which could be rented for a total of $13,204.50 per month. Monthly bad debt is $4,595.58.

The physical occupancy rate is 92%: 199 occupied units / 216 total units.

The economic occupancy rate is 86%.

Current revenue = $1,945,808 = [($847.11 * 216) – $3,025.50 concessions – $13,204.50 vacancy loss - $4,595.58 bad debt] * 12 months.

Current revenue / total possible revenue = $1,945,808 / (216 units * 847.11 * 12 months) = 86%.

Breakeven occupancy is the occupancy rate required to cover the all of the expenses of an apartment community. The breakeven occupancy rate is calculated by dividing the sum of the operating expenses and debt service by the gross potential income.

For example, a 216-unit apartment community with $1,166,489 in operating expenses, $581,090 in debt service and $2,263,624 in gross potential income has a breakeven occupancy of 77.2%

The physical occupancy rate is the rate of occupied units. The physical occupancy rate is calculated by dividing the total number of occupied units by the total number of units.

For example, a 216-unit apartment community with 199 occupied units has a physical occupancy rate of 92%.

The gross rent multiplier (GRM) is the number of years the apartment would take to pay for itself based on the gross potential rent (GPR). The GRM is calculated by dividing the purchase price by the annual GPR.

For example, a 216-unit apartment community purchased for $12,200,000 with a GPR of $183,072 per month has a GRM of 5.6.

A rent premium is the increase in rent after performing renovations to the interior or exterior of an apartment community. The rent premium is an assumption made by the general partner during the underwriting process based on the rental rates of similar units in the area or previously renovated units.

The debt service coverage ratio (DSCR) is a ratio that is a measure of the cash flow available to pay the debt obligation. DSCR is calculated by dividing the net operating income by the total debt service. A DSCR of 1.0 means that there is enough net operating income to cover 100% of the debt service. Ideally, the ratio is 1.25 or higher. An apartment with a DSCR too close to 1.0 is vulnerable, and a minor decline in cash flow would result in the inability to service (i.e. pay) the debt.

For example, a 216-unit apartment community with an annual debt service of $581,090 and a NOI of $960,029 has a DSCR of 1.65.

The interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of their funds.

An interest-only payment is the monthly payment on a loan where the lender only requires the borrower to pay the interest on the principal as opposed to the typical debt service, which requires the borrower to pay principal plus interest

The London Interbank Offered Rate (LIBOR) is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. LIBOR serves as the first step to calculating interest rates on various loans, including commercial loans, throughout the world.

A bridge loan is a mortgage loan used until a person or company secures permanent financing, which are short-term (6 months to three years with the option to purchase an additional 6 months to two years). They generally have a higher interest rate and are almost exclusively interest-only. Also referred to as interim financing, gap financing or swing loan. The loan is ideal for repositioning an apartment community.

permanent agency loan is a long-term mortgage loan secured from Fannie Mae or Freddie Mac and is longer-term with lower interest rates compared to bridge loans. Typical loan term lengths are 5, 7 or 10 years amortized over 20 to 30 years.

A prepayment penalty is a clause in a mortgage contract stating that a penalty will be assessed if the mortgage is paid down or paid off within a certain period.

A refinance is the replacing of an existing debt obligation with another debt obligation with different terms. In apartment syndication, a distressed or value-add general partner may refinance after increasing the value of a property, using the proceeds to return a portion of the limited partner's equity investment.

Appreciation is an increase in the value of an asset over time. There are two main types of appreciation: natural and forced. Natural appreciation occurs when the market cap rate “naturally” decreases. Forced appreciation occurs when the net operating income is increased (either by increasing the revenue or decreasing the expenses).

Appreciation is one of the factors included in the Three Immutable Laws of Real Estate Investing. Click here to learn more about all three laws and their importance when investing in real estate.

Ration Utility Billing System (RUBS) is a method of calculating a tenant’s utility bill based on occupancy, apartment square footage or a combination of both. Once calculated, the amount is billed back to the resident, which results in an increase in revenue.

Property and neighborhood classes is a ranking system of A, B, C, or D given to a property or a neighborhood based on a variety of factors. These classes tend to be subjective, but the following are good guidelines:

Property Classes

  1. Class A: new construction, command highest rents in the area, high-end amenities
  2. Class B: 10 – 15 years old, well maintained, little deffered maintenance
  3. Class C: built within the last 30 years, shows age, some deferred maintenance
  4. Class D: over 30 years old, no amenity package, low occupancy, needs work

Neighborhood Class

  1. Class A: most affluent neighborhood, expensive homes nearby, maybe have a golf course
  2. Class B: middle class part of town, safe neighborhood
  3. Class C: low-to-moderate income neighborhood
  4. Class D: high crime, very bad neighborhood

Preferred Return: the threshold return that limited partners are offered prior to the general partners receiving payment.

Distributions are the limited partner's portion of the profits, which are sent on a monthly, quarterly or annual basis, at refinance and/or at sale.

The subject property is the apartment the general partner intends on purchasing.

Underwriting is the process of financially evaluating an apartment community to determine the projected returns and an offer price.

A pro-forma is the projected budget of an apartment community with itemized line items for the income and expense for the next 12 months and 5 years, which is an output of the underwriting.

For example, here is a five year pro-forma for a 216-unit apartment community:

Rental Income table

The rent roll is a document or spreadsheet containing detailed information on each of the units at the apartment community, along with a variety of data tables with summarized income.

Here is a portion of the rent roll of a 216-unit apartment community:

The profit and loss statement is a document or spreadsheet containing detailed information about the revenue and expenses of the apartment community over the last 12 months. Also referred to as a trailing 12-month profit and loss statement or a T12.

Here is a portion of a T12 for a 216-unit apartment community:

The exit strategy is the plan of action for selling the apartment community at the end of the business plan.

The rent comparable analysis is the process of analyzing similar apartment communities in the area to determine market rents of the subject apartment community.

The submarket is a geographic subdivision of a market.

For example, Richardson, Carrolton and Arlington are submarkets of the Dallas-Fort Worth market.

A metropolitan statistical area (MSA) is a geographical region containing a substantial population nucleus, together with adjacent communities having a high degree of economic and social integration with that core, which are determined by the United States Office of Management and Budget (OMB).

The acquisition fee is the upfront fee paid by the new buying partnership entity to the general partner for finding, analyzing, evaluating, financing and closing the investment. Fees range from 0.5% to 5% of the purchase price, depending on the size of the deal.

The asset management fee is an ongoing annual fee from the property operations paid to the general partner for property oversight. Generally, the fee is 2% of the collected income or $250 per unit per year.

The property management fee is an ongoing monthly fee paid to the property management company for managing the day-to-day operations of the property. This fee ranges from 2% to 8% of the total monthly collected revenues of the property, depending on the size of the deal.

The refinancing fee is a fee paid for the work required to refinance the property. At closing of the new loan, a fee of 0.5% to 2% of the total loan amount is paid to the general partner.

The guaranty fee is a fee paid to a loan guarantor at closing. The loan guarantor guarantees the loan. At closing of the loan, a fee of 0.25% to 1% of the principal balance of the mortgage loan is paid to the loan guarantor.

The private placement memorandum (PPM) is a document that outlines the terms of the investment and the primary risk factors involved with making the investment. The four main sections are the introduction, which is a brief summary of the offering, the basic disclosures, which includes general partner information, asset description and risk factors, the legal agreement and the subscription agreement

Questions to Ask the General Partner

Finding an all-star team to partner up with 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 ask the right questions. Please click here to discover what you should be asking a general partner before you decide to join them on a deal.

Investment Strategy FAQs

Once the deal is closed, the general partner (GP) should send consistent updates on the status of the deal. You may receive updates once a month, which is what my company does. However, some GPs provide quarterly updates. Others provide annual updates. And some don’t provide updates at all. The best update frequency will depend on your preference.

In regards to the information included in the update, this varies from GP to GP. Our monthly reports include occupancy rates, updates on the number of renovated units, details on our rental premiums and how they compare to our projections, capital expenditure updates, relevant updates on the market and resident events. Each quarter, we provide a link to the apartment’s financial statements, which include the T12 and the rent roll.

Overall, you want to know the status of the business plan and how the rents compare to the projections.

General partners should NEVER guarantee a return. If they do, run! Any return offered, like a preferred return, should be a projection, never a promise.

Ideally, the general partners projected returns exceed the preferred return offered. That way, if they don’t achieve the projected returns, they still distribute the full preferred return. If the actual returns end up being lower than the preferred return, the process is that which was agreed to in the PPM. Generally, the preferred return will accrue until it can be paid with the sales proceeds.

Similar to the question about “what happens if the project fails?”, if the general partner (GP) says there are no risks, they are either lying or inexperienced.

The three risk areas associated with apartments are the deal, the market and the team. Therefore, ask the GP about the risks associated with these three areas and what they are doing to mitigate them.

You should also determine if they are following the Three Immutable Laws of Real Estate Investing, which are the laws that must be followed in order to mitigate risk, especially in a down economy.

Before investing in a deal, the general partner (GP) should provide you with the projected timeline, which includes the hold period and the exit strategy of the project. Generally, that is 5 years, and the GP will require you to keep your capital in the deal until the deal sells.

This varies. But if there is a process for pulling your money out of the deal, it will be outlined in the PPM. The process usually entails you selling your shares to another party with the written consent of the general partner.

Generally, the general partner (GP) will make money via the acquisition fee, ongoing asset management, equity ownership in the deal and whatever else they decide to charge. All of the fees they charge should be listed in the PPM.

After determining which fees they charge, ask them why. They should only charge fees based on the value they provide to the deal. If they can’t explain what value they are providing for each fee, then they shouldn’t be charging that fee.

Click here to learn the seven most common fees the GP may charge.

Ideally, the general partner (GP) has their own funds in the deal because there is an extra level of alignment of interests. If you lose money, the GP loses money. If the GP doesn’t invest in the deal, they aren’t exposed to the same risks as you. Additionally, the GP investing in the deal signals to you that they are confident in the deal and the projected cash-on-cash return and IRR, or whichever return factor they base their investment decision on.

The distribution frequency varies and depends on the preference of the general partner and what their team is capable of doing from an administrative standpoint.

The typical frequencies are monthly, quarterly or annually. My company found that the majority of our investors preferred monthly distributions, so that’s what we decided to do. So, we aim to distribute the preferred returns on a monthly basis and any profit above and beyond the preferred return is distributed every 12 months. Most likely, you will receive a your monthly, quarterly, or annual distribution 30 to 45 days after the end of the period. For example, if you receive monthly distributions, you would receive the distribution for March at the end of April.

Then, you will receive your initial equity investment plus profits from the sales proceeds at the end the sale.

Most general partners (GP) will have a minimum investment. The more experience they GP has and the larger the project, the higher the minimum.

You want to know what the minimum investment is so that you can determine if you are financially capable of investing in the deal.

The maximum amount of money the GP will likely allow you to invest is typically 19% of the total equity investment. Anything greater than 19% and the passive investor is underwritten by the lender, and they usually don't want that happening.

If the syndication is a 506b offering, you don’t need to submit your financials. If it is a 506c offering, you will.

Most passive investors will invest in their own name, while others will create an LLC and invest through that. From my experience, the breakdown is 70/30 (own name/LLC). I recommend asking your CPA for the best approach that fits your particular situation.

Most general partners accept investments through a SD-IRA.

SD-IRA, which stands for self-direct IRA, allows you to invest your tax-advantaged retirement dollars into alternative investments that a standard IRA will not, one of which being apartment syndications.

If you are investing with a SD-IRA, make sure you work with a custodian who has experience with investing SD-IRAs in to syndications or real estate investments to ensure that you are in adherence with the IRS tax code.

Most likely, the general partner is either selling private securities to the limited partners under Rule 506(b) or 506(c). One key difference is that 506(c) allows for general solicitation or advertising of the deal to the public, while 506(b) offerings do not. But the other difference is the type of person who can invest in each offering type. For the 506(b), there can be up to 35 unaccredited but sophisticated investors, while 506(c) is strictly for accredited investors only.

If the general partners are doing a 506(c) offering, they must verify the accredited investor status of each passive investor with a 3rd party, which requires the review of tax returns or bank statements, verification of net worth or written confirmation from a broker, attorney or certified account. The accredited investor qualifications are a net worth exceeding $1,000,000 excluding a personal residence or an individual annual income exceeding $200,000 in the last two years or a joint income with a spouse exceeding $300,000.

If the general partners are doing a 506(b), they are not required to verify the accredited investors status with a 3rd party – the passive investor can self-verify that they are accredited or sophisticated. However, some general partners, us included, only work with accredited investors even though they do 506(b) offerings. In addition, for the 506(b) offering, to prove that the general partners didn’t solicit the offering, they must be able to demonstrate that they had a relationship with the passive investor before their knowledge of the investment opportunity, which is determined by the duration and extent of the relationship.

As a passive investor, why the deal was difficult or the worst isn’t as important as how the general partner handled it.

So, a more relevant question is “tell me how you handled your worst syndication/most difficult deal?” Were they able to preserve their investor’s capital? Were they able to turn the deal around and still distribute a return?

If the general partner sold their shares in a deal before selling the property, you want to know why.

The reason why you want to invest with a GP who also invests in their own deals is because of the alignment of interests – if the deal doesn’t perform, they don’t make money (or they make less money). Once a GP sells their shares, that alignment of interests is gone.

Usually, the general partner (GP) will put you on their private email list.

If they already have a deal under contract, you can ask them for an investment summary, for the information to the conference call or a recording of the conference call.

Click here to learn the five step process the GP will likely follow to secure investor commitments for a deal.

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Determine what percentage of their investors have come back to invest in a second deal. A general partner's (GP) retention rate is a great indicator of the GP’s track record of meeting and/or exceeding the projected returns.

However, keep in mind that if the GP is just starting out and has only completed a handful of deals, their retention rate may be lower because their passive investors haven't receive their capital back yet to invest in another deal.

As a passive investor, you need to have a high level of confidence with the individuals that make up the general partner (GP), as you are entrusting them with your capital. One way to determine the character of the GP is to determine if their family and friends invest in their deals.

Friends are much more subjective than family. So, ask them about their relationship with the people who are investing in their deals. How long have they known them? How did they meet? How has their relationship evolved over time? Maintaining and growing relationships over an extended period of time with people who trust them enough to invest in their deals speaks volumes to the GP's character.

Similar to friends and family who are also investors, you want to understand the general partner’s relationship with the investors who they’ve known the longest. How long have they known them? How do they know them? How long have them been an investor?

Accredited investors who've known the GP for a long-time and still trust them enough to invest in their deals is a fantastic sign. If they continue to come back deal after deal, that is because the GP is meeting and/exceeding the return projections, preserving their investor’s capital, and is an effective communicator – all characteristics of a trustworthy GP.

On all tax related questions, always consult with your accountant. But generally, passive investors are attracted to real estate because of depreciation. Most likely, the depreciation will be greater than the distributions paid out each year, which can reduce or even eliminate your tax bill until you receive your profits from the sale proceeds at sale.

Determine if the general partner passes the depreciation on to the limited partners, because not all do.

Click here to learn about the five main tax factors that impact passive apartment investors.

The type of financing is determined on a case-by-case basis. Generally, if the general partner (GP) will perform renovations, they will get a short-term, preferably interest-only, loan, and then refinance into a permanent loan once the renovations are completed. However, the more experienced GP can secure better loan terms, even forgoing the short-term loan and getting long-term permanent agency debt that includes the capital expenditure costs.

Click here to learn about the different types of apartment debt and financing.

Interest-only payments provide additional cash flow for distribution as opposed to paying down the principal. For example, a $10,000,000 loan at 4% would have I/O annual payments of $400,000. If the loan was amortizing, the same loan would have annual payments $572,898. I/O payments, in this example, provide an additional $172,898 available to distribute to limited partners (LPs). Although the general partners (GPs) will ultimately need to repay the full loan amount, it is preferred to receive the additional cashflow along the way.

This is due to the fact that the time value of the additional cash flow received throughout the hold helps increase returns rather than receiving a larger distribution at the sale. Additionally, in the event that there is a catastrophic macro level event where a property loses significant value and the GP is unable to pay back the loan when it becomes due, it would be more impactful to have received the additional cash flow along the way.

Different lenders offer different options in terms of floating rates vs fixed rates. A lot of this depends on where the lenders are getting their money from and how they need to price it in order to get the returns they are looking for. Many of the longer term lenders (such as Fannie and Freddie) offer fixed rate debt since they tie their loans to treasuries. Since these lenders have priced their loan with the expectation for the loan to be in place for a long period, there is usually a high prepayment penalty if the general partner (GP) wanted to sell or refinance the loan early. Most of the shorter term lenders will offer floating rates tied to the 1 month LIBOR. Since the loan is tied to a shorter term security, the floating rate loan offers a lot of flexibility to sell or refinance the loan without a large prepayment.

The pros and cons of this is really property specific. At a high level, they are both good options, however, the GP will typically choose a floating or fixed rate to match the specific business plan for the deal. For deals that will be drastically improved overtime, a floating rate loan makes the most sense since it provides ultimate flexibility to sell or refinance the deal upon completion of the business plan. For deals that will be improved (but not as drastically), longer term fixed rate debt is a better option. Although it is difficult to refinance the fixed rate debt early in the hold, the GP can secure supplemental loans to capture some of the value that was created from the implementation of the business plan.

Generally, there are two ways to find apartment deals, on-market and off-market. Ideally, the general partner is sourcing off-market deals, as there are a variety of benefits to finding apartment deals off-market compared to on-market. Off-market deals are less competitive with more opportunity for negotiation, which typically means better purchase terms, which means better cash-on-cash returns.

As long as the general partner (GP) performed adequate due diligence on the asset and has a team that can execute the business plan, the project shouldn’t fail. And by fail, I mean that you don’t receive your preferred returns and/or initial equity investment at the sale. However, like any investment, failure is always a possibility. Therefore, the purpose of this question is to determine 1) their plan of action if returns dip below projections and 2) what they are doing to address the three risks (deal, team and market) associated with apartment syndication.

If the GP responds with “well that’s just not going to happen,” then that is a sign that they aren’t taking the real risks seriously.

In addition, ask to see their sensitivity analysis, which determines the returns based on changing certain variables like the rent premiums, exit cap rate, purchase price, interest rate, occupancy rates, etc.

When you invest in a syndication as a limited partner, you have limited liability. If the general partner is sued, you are not personally liable. However, a settlement or fine may impact your returns.

Additionally, a lawsuit may suggest a character flaw in the GP

If the GP has been sued, ask why, what the result was, and what policies they’ve implemented to minimize the chances of being sued again

The general partner (GP) should have a contingency or operating fund to cover shortfalls. If the project requires renovations, ask the GP how much they’ve budgeted as a contingency. A good rule of thumb is 10% to 20% of the renovation budget.

Ask them how much upfront money they’ve budgeted to cover potential shortfall like unexpected dips in occupancy, unexpected maintenance issues, lump sum tax or insurance payments, etc. A good rule of thumb is 1% to 3% of the purchase price.

Finally, ask them how much money they are budgeting annually to a reserves account. A good rule of thumb is $250 to $300 per unit per year (i.e. a 100-unit apartment community should save $25,000 to $30,000 as reserves for ongoing shortfalls).

If the GP does not budget for these contingencies, they may have to come back to you asking for additional capital, which will reduce your return on investment.

The money you invest in the deal goes towards a variety of costs associated with purchasing an apartment community. These include the down payment for the loan, financing fees, renovation costs, general partner fees charged for putting the deal together, contingency or operating account funds and costs associated with performing due diligence.

The PPM will have a "Sources and Uses" section that outlines all of the uses of the equity investment.

This process will vary from general partner (GP) to GP. If you were to invest with my company, we will notify you of a new opportunity and invite you to a conference call in order to provide you with the specifics on the deal. If you are unable to attend the conference call, no problem. We always record the calls and send the audio file out the next day.

After the conference call, if the deal meets your investing goals, you will verbally commit to the deal.

Then, you will be required to sign documents to finalize your commitment, which include a private placement memorandum (outlines structure of and the risks associated with the deal), an operating agreement (outlines the GP and limited partner responsibilities and ownership percentage), a subscription agreement (outlines the number of shares you own of the LLC that owns the apartment community) and an accredited investor qualifier form (where you state that you meet the accredited investor qualifications). We will also have you fill out a direct deposit form so that you will automatically receive your distributions.

Once you’ve finalized your commitment, you just wait for us to close the deal.

This is our process, but other GPs may have a different process.

Click here to learn more about how the GP secures commitments for their deals.

Some general partners will notify all of their passive investors at the same time, while others may notify their “preferred investors” first. Ideally, all investors are notified at the same time and commitments are taken on a “first-come, first-serve” basis to be fair to everyone, which is what my company does.

The main difference between the cash-on-cash return and internal rate of return metrics is time. If the limited partners receive monthly distributions, quarterly distributions, or annual distributions, the cash-on-cash return remains the same (it equals the total distribution for the year divided by the initial equity investment), but the internal rate of return is different for all three distribution frequencies, because internal rate of return accounts for the time value of money.

Click here for more details on both return metrics, including how to calculate each, the different variations of each, and why they are relevant to limited partners.

It depends on how the general partner structures the investment. You will be able to find the specifics in the PPM usually under a section titled “Distributions of Distributable Cash” and/or “Allocations of Profits, Gains and Losses.”

The typical investment is structured such that the limited partners are offered a preferred return based on their capital account, which starts off equal to the amount of the initial equity investment, and the remaining profits are split between the limited and general partners. For this structure, the preferred return is typically considered a return on capital and the profits above the preferred return are considered a return of capital. Other distributions that can be considered return of capital are supplemental loan proceeds, refinance proceeds, and sales profits.

Other general partners may consider all of the above as return of capital, others may consider all of the above as return on capital, and others may fall somewhere in-between.

Any return of capital reduces the capital account, which means the preferred return distribution is also reduced.

Specific Deal FAQs

For value-add apartment syndications, the majority of owners are selling because they’ve reached the end of their business plan. But, some owners may sell because they are distressed in some form or because they originally purchased the property for cash flow and didn't make any value-add improvements.

The combination of the costs associated with purchasing the property and the capital expenditure costs should be lower than the value of comparable properties in the area. That difference is free equity, which will increase the sales proceeds.

If the acquisition plus capital expenditure costs are equal to or higher than comparable properties in the area, the general partner is paying too much for the property and your profits at sale or equity returned at refinance will be reduced.

The going-in cap rate is based on the purchase price and the current net operating income. You want to know the going-in cap rate so you can compare it to the cap rate in the market. A going-in cap rate that is higher than the market cap rate is a good sign, because that means the property is purchased below market value.

If the general partner's business plan is distressed or value-add, the cap rate isn’t as important because the net operating income is lower than what it should be at purchase. If that is the case, you want to know the stabilized cap rate and how it compares to the market cap rate, with the former being higher than the latter as the ideal scenario.

Understanding the quality of the major systems is important for the general partner (GP) to determine an exterior capital expenditures budget. Additionally, if the major systems are in bad shape, this is a risk factor and should be addressed with a contingency budget.

Ask them if they or someone on their team inspected these major systems themselves. The only way to know the true state of the major systems is for the GP to see them with their own eyes, as opposed to trusting the owner or the real estate broker broker.

The hold period is the amount of time the general partner plans on holding onto the deal. This will let you know how long your capital will be locked into the deal.

The general partner (GP) shouldn’t just provide you with an overall capital expenditures (CapEx) budget. You want to know how much money is budgeted to each project.

Also, you want to know how they calculated the CapEx budget. More specifically, you want to know if the GP assumed the CapEx costs or if they are based on bids from contractors who inspected the property. The latter is more accurate than the former.

Finally, you want to know what portion of the CapEx goes towards a contingency fund. The contingency should be 10% to 20% of the total CapEx costs.

If the year 1 income projections are different than the actual trailing 12-month financials (T12), you want to know why.

The revenue is based on market rents, loss to lease, vacancy loss, bad debt, concessions, employee and model units and other income. So, if any of these line items differ from the T12, you want to know what the general partner (GP) based those assumptions on and whether or not those assumptions were approved by the property management company.

If the GP is a value-add investor, then the T12 will always differ from the year 1 projections because the market rents are being increased.

A conservative annual gross potential income growth factor is between 2% to 3% after stabilization. This factor is the projected natural growth in revenue.

Some general partners (GP) will base this factor on historical rent growth, which may be lower or higher than 2% to 3%. Rent growth factors 4% or higher are aggressive and if you run into such a case, the GP should have ample evidence to prove why they’ve assumed a higher number.

If the year 1 expense projections are different than the actual trailing 12-month financials, you want to know why the general partner made those assumptions and if they confirmed them with their property management company. This applies to all apartment syndication investment strategies.

You want to know if the annual tax assumption is based on what the current owner is paying or if it is based on the purchase price. The latter is the correct approach.

The tax assumption can be calculated by finding the tax rate on the county’s auditor site and multiplying it by the projected purchase price.

A conservative annual expense growth factor is 2%, which is what my company uses. This factor is the projected natural growth in expenses and should be relatively similar to the annual gross potential income growth factor.

A general partner should save $250 to $300 per unit per year in reserves. This is in addition to the upfront operating account funding.

This is to cover ongoing shortfalls or unexpected capital expenditure projects. If they don’t have a reserves budget and a shortfall occurs, they may be coming to you for extra capital.

First and foremost, you want to know if the general partner has already secured debt financing or if they are still working on assumptions. If it is the latter, the projected returns may change once debt is secured.

Next, you want information on the interest rate. Is it locked in or is it floating (meaning it could change)? If it is the latter, did they purchase a cap on the interest rate? If the interest rate is floating and/or a cap wasn't purchased, a increase in interest rates will negatively impact the return projections.

Finally, you want to know if it is a short-term loan or a permanent loan. If it is the former, ask them what refinance assumptions they used (i.e. interest rate, loan amount, etc.) and why they made those assumptions. Also, determine the length of the short-term loan and if they can purchase an extension.

Click here to learn more about how the different types of debt and financing for apartment syndications.

For distressed and value-add deals, your largest profit will be realized at the sale of the apartment at the end of the business plan. So, you need to know what assumptions are being made to calculate the sales proceeds.

These assumptions include the exit net operating income, exit capitalization rate (is it higher or lower than the purchase cap rate, with the former being the conservative approach), the closing costs and the remaining debt.

To remain as conservative as possible, we assume that the market at the sale will be worse than at purchase.

First, we calculate the in-place or going-in cap rate, which is based on the purchase price and the in-place net operating income. To calculate the exit cap rate, we add 20 to 50 points (i.e., 0.2% to 0.5%) to the in-place cap rate. This protects our return projections during a downturn, and significantly improves the actual returns if the market remains the same or improves.

The relevant return factor is based on your investing preferences. The general partner (GP) should calculate returns using factors like cash-on-cash return, internal rate of return and equity multiple. You may have return goals for one, two or all three of these return factors. You must determined all of the assumptions the GP made when calculating these returns in their underwriting, and your decision to invest is based on these assumptions and the projected returns.

Team FAQs

You want to know what percentage of the passive investors are returning investors and what percentage are first-timers.

Because return investors have already passively invested in at least one deal, having a large percentage of return investors signals that you are dealing with a high-quality general partner (GP). However, if the GP has only completed a handful of deals, they may not have many return investors because the return investors haven't received their initial capital back yet.

Determine how many deals they have completed and how those deals actually performed when compared to the projected returns.

If the general partner (GP) has had past deals that underperformed when compared to the projections, it isn’t necessarily a deal breaker. A good follow up question would be “what processes have you put in place to reduce the likelihood of an underperforming deal?”

I would also take into consideration if a GP hasn’t successfully taken a deal full cycle. While this can be offset by an experienced team, there is still more risk when going with a GP without a proven track record.

Click here to learn about the four things to look for when qualifying the GP.

This is a question you would want to ask during your first conversation with a general partner. If they have a deal under contract, ask them some of the questions I outlined in the “Specific Deal FAQ” section. You will have a better understanding of their business plan when they explain it for an actual deal than for a hypothetical deal.

Also, if they currently have a deal under contract, ask them how much capital they have left to raise. Maybe, this can be your first passive investment.

A satisfactory response to this question will vary from investor to investor.

Based on my experience with passive investors, the reasons they decide to invest in my deals are because of alignment of interest, transparency and trust.

We show alignment of interest by placing our asset management fee in second position to the preferred return, which means we don’t get paid until our investors get paid. Additionally, we invest our own capital in the deal.

We are transparent with our passive investors, providing detailed monthly email recaps on the status of our business plan. We also pride ourselves on our responsiveness. When an investor sends us an email, we typically reply within hours, not days.

Finally, we build trust with our passive investors through a thought leadership platform. I host a daily real estate podcast, and whenever I jump on a call with a prospective investor, most of them tell me that they feel like they’ve already talked to me because of the podcast.

These are a few examples of how general partner (GP) differentiate themselves but the reasons why you invest with one GP over another (assuming the projected returns are equal) are based on your personal preferences.

You want to know that your money is in good hands, and the general partner (GP) is one of many people that are responsible for the success of the deal.

Usually, the GP is actually more than one person. There are multiple partners who have different responsibilities. So, you want to know who all the business partners are, how they met, what unique skillsets they bring and how each partner complements the other.

Another important team member is the property management company. Their responsibility is to manage the operations on a day-to-day basis. The property management company should have prior experience managing apartment communities. In fact, they should be actively managing apartment communities that are, preferably, in the same submarket. Ask for the historical information of the property management company (i.e. how many units do they manage, how long have they been in business, has the GP worked with this company in the past, etc.)

The GP and the property management company are the most important members of the team, so gaining an understanding of their background and experience is a must prior to entrusting them with your money.

Click here to learn the 8 questions to ask in order to qualify the GPs team.

Most general partners will create a LLC and purchase the property with the LLC. As a limited partner, you will then purchase shares of that LLC.

The apartment will be managed by a professional property management company that is either a 3rd party or owned by the general partner (GP).

Regardless of who the property management company is, you want to know about their past experience. Determine how many properties they manage overall and how many properties they manage in the GP’s target market.

If it is a 3rd party management company, determine how many of the GP’s previous deals were managed by them and the success of those deals (i.e. how did the actual returns compare to the projected returns?).

General partners with one management company are able to streamline most aspects of the syndication process, because they are using the same point person for everything. The same company is confirming the underwriting and capital expenditure projects, managing the due diligence, and managing the deal. Financial reporting and performance tracking are consistent across all deals. All issues are resolved through the same point person. Additionally, if one property in the GP’s portfolio isn’t a good fit for a resident, the property manager can refer them to another property rather than turn them away.

There are, however, pros to having multiple property management companies. If a GP decides to expand or transition to another market and their current management company doesn’t cover that new market, then they will need to find a second management company. Also, when the GP has two property management companies in the same market, if something happens with one company, the second company can take over management duties indefinitely or until they find another company.

Overall, there are benefits to both approaches as long as the GP adequately qualified the management company/companies.

As the limited partner, your sole duty involves the funding of the deal. After that, the process should be hands off except when reviewing the investor reports and doing your taxes at the end of the year

Generally, the general partner will find the deal, review and qualify the deal via underwriting, make and negotiate the offer, coordinate with professional property inspectors, find the best financing options, coordinate with attorneys to create the LLC and partnership agreements, travel to the property to perform due diligence and market research, hire and oversee the property management company and perform ongoing asset management, which includes lender conversations, overseeing the business plan and ongoing communication.

Some general partners will focus solely on apartment syndications, while others may also focus on other asset classes, whether it be single family homes, mobile homes, self-storage, retail, development, etc.

Ideally, their main focus is on apartment syndications. If it is just a side business, that is a red flag.

There are three main parts of an apartment syndication: acquisition, management and sale. Each part has its unique action items and challenges. Even if a general partner (GP) has previously acquired and managed a deal, you still don’t know if they are capable of finalizing the business plan with a sale. Keep that in mind when screening GPs. If they haven’t taken a deal full cycle, they are lacking in the full apartment syndication experience.

The point person is the individual in the general partner (GP) that you reach out to if you have any questions or concerns about the deal. You want to know who this person is and what their GP responsibilities are. Ideally, they are actively involved in the deal and are one of the experienced team member as opposed to their sole responsibility being the point person.

The three main benefits an aspiring syndicator or active investor receives from passively investing as a limited partner are:

  1. Practice evaluating and underwriting large apartment deals
  2. Ability to ask questions to an experienced syndicator
  3. Credibility as a partner in a larger deal

The third benefit will directly help you when speaking to lenders, while the other two are more indirect benefits. Since you have experience reviewing deals and were able to tap into the knowledge and experience of the general partner, your transition into active investing or syndications will be more seamless since you have a head start.

Market FAQs

You want to know what market factors the general partner looks at when qualifying a market. Important factors include unemployment change, population growth, population age, job diversity, the top employers and supply and demand.

Click here to learn about these important factors, including how the data is found and how to interpret the results.

One of the factors a prospective tenant will take into account when moving to an area is the quality of the school district. Even if the target tenant demographic are not small families, a quick way to gauge the overall quality of a market is the school district. Look at the elementary, middle and high schools and see how they rank.

A website to find information on the quality of the local school district is Great Schools.

No one wants to live in a high crime area. Look at the crime stats for the market. If there is a specific deal, look at the crime stats of the neighborhood.

More specifically, look at the crime trend. Even if it is relatively high, a downward trend is a good sign.

A good resource for crime statistics is Crime Reports.

You want to know the median income of the area in order to determine if the demographics income levels support the rent projections. Generally, people spend 25% to 35% of their annual income on home expenses. Therefore, confirm that the median income is at least 3-4 times higher than the annual projected rent.

The United States Census Bureau keeps details data on median incomes across the country.

The market vacancy rate is essentially the average multifamily vacancy rate in the market. However, a more accurate market vacancy rate is based on a handful of recent sales.

Ask them what the market vacancy rate is and how it was calculated, and then compare that rate to the assumed vacancy rate for the specific deal.

If the general partner is investing in a single MSA, the first thing you want to know is how they qualified that market (click here to learn about the most important market factors). As long as they properly qualified the market, as well as each new deal, diversification across multiple MSAs isn’t relevant, because you are investing in one deal at a time.

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Joe Fairless