How does a Real Estate Multifamily Syndication work?

 

The Syndicator, also called Sponsor, General Partner or Managing Member, offer Investors to be Members, also called Limited Partners, in a real estate multifamily property. The Syndicator is usually a group of entrepreneurs and with the experience and financial strength to meet lender requirements.

Limited Partners bring most of the funding for the acquisition down payment, repairs and closing costs. 

General Partners find the property, analyze it, structure the investment, obtain financing, coordinate the acquisition, and then run the day to day operations. 

For illustration, Limited Partners will own 80% of the property and General Partners will own 20% of the property. 

For the property acquisition, the Syndicator raises private money from qualified Investors typically under SEC rule 506(b) or 506(c). An SEC lawyer will prepare a Private Placement Memorandum describing the business plan that is provided to the Limited Partners / Investors.

The Investors' investment will correspond to a number of shares of an Limited Liability Company (or Limited Partnership) who owns the property. The LLC (or LP) operates as described an Operating Agreement that the Limited Partners / Investors and General Partners sign. Limited Partners / Investors will have voting rights on major events such as resale or re-finance.

For illustration, if the Syndicator raises a total of $1,000,000 and, as an Investor, you invest $100,000 with a split at 80% for Limited Partners and 20% for General Partners, then your $100,000 investment represents 8% overall ownership of the property. 

Cash flow money (income minus expenses including the loan repayment) will be distributed proportionally to the Investors' ownership every quarter.

The same principle applies in case of re-sale or re-finance of the property: any profit made will be distributed proportionally to the Investors' ownership.

How to learn more?

Illustration:

Property purchase price:

      $2,500,000

Acquisition and investment:

  • Down Payment: $500,000

  • Repairs budget: $350,000

  • Closing Costs:    $150,000

Raised money:

  • $1,000,000

  • 10 Investors invest $100,000 each, and own 8% of the property each. The Syndicator owns 20%.

Distributions

  • Year 1 Cash Flow: $100,000.

    • Each Investor will receive $8,000 year 1.

  • Thanks to improvements over several years, we progressively increase the Cash Flow to $150,000, leading to a resale value of $3,000,000.

    • Resale profit after sale costs: $400,000; each Investor will receive $32,000.

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