With multifamily real estat syndication deals, the property is owned by General Partners and Limited Partners. General Partners find and vet deals, create a business plan specific to each deal, then manage the property and execute the business plan. Limited Partners are passive investors. They don't have any management responsibilities, but enjoy attractive returns on their investment.
Multifamily Limited Partner investments could double your money in about 5 years, sometimes faster, with an inflation hedge. Here are some things for you and your financial advisor to consider regarding the risks and rewards of Limited Partner multifamily apartment investing, to help you decide whether multifamily investing is right for you.
SEC Oversight: Multifamily syndications are considered securities, and as such they must be registered with the Securities and Exchange Commission (SEC) for the protection of the investors. Nobody wants to mess with the SEC.
Professional Management: The Senior Partners on a multifamily deal need deep experience and significant assets behind them. Banks are diligent in looking out for a strong team before they provide the cash to finance deals. The General Partner team needs to bring in a professional property management team to handle the day-to-day management of the property. These deals are about generating Cash Flow and earning Capital Gains, not about fixing toilets.
Real Assets: Multifamily Limited Partnerships are backed by real assets, the land and the buildings, and of course, rental Cash Flow.
Cash Flow: Limited Partners receive a share of the Net Operating Income (NOI), also known as positive Cash Flow, usually paid quarterly. Every deal can be a little different, but this could be a preferred rate, maybe 7 or 8 percent, or it could be based on a split with the General Partners, often 80/20 or 70/30, with the larger piece divided proportionally between the Limited Partners. Some deals start out with a Preferred Rate to the Limited Partners, then switches to a split after the Limited Partners have received their original investment back.
Capital Gains: Limited Partners share in the Capital Gains earned when the property is sold. The Capital Gains are divided between the General Partners and the Limited Partners, often with an 80/20 or 70/30 split, with the larger piece divided proportionally among the Limited Partners. The expected time horizon from purchase to sale should be included in the plan that the General Partners present to the Limited Partners.
Return of Capital/Infinite Returns: With many multifamily deals, the property can be refinanced in year 2 or 3. At this time, most or all of the Limited Partners’ original investment is returned and can be reinvested in another multifamily deal or anything else. The original deal continues to generate quarterly Cash Flow and will receive a share of Capital Gains upon sale. Some call this infinite returns, when you have your original investment back and continue to earn returns from the investment.
Inflation Hedge: Real estate is widely considered an excellent hedge against inflation. This is because both rents and property values tend to increase when inflation occurs, potentially boosting both Cash Flow and Capital Gains.
Tax Benefits: Tax laws can be very favorable for real estate investors. There is depreciation that can reduce your tax burden, check with your tax professional to see how this applies for you. Also, many investors utilize self-directed IRAs and 401Ks to invest in Limited Partnerships, enjoying the benefits of tax-free growth.
Occupancy: With single family properties, or even 3 or 4 flats, vacancies can be very costly. Loosing 25-100% of the rent for one or more months can really hit the budget. Multifamily operators build vacancies into the business plan and budget. Vacancies can come from turnover, or may be the result of value add renovations, which means that rents should be higher upon completion Vacancies are part of the normal flow of the multifamily business, not a cause for stress in a well-run, quality property.