READY, SET, INVEST! Let's Go!

[Jorge Abreu]

You are ready to invest, but where do you start? And once you do, what can you expect?

FINDING A SPONSOR

Arguably, the most important tenet of passively investing in multifamily real estate is establishing a high level of trust in your sponsor. Look for a sponsor with a proven track record and ample experience—both are needed to provide accurate market insights, help demystify your investment options, and guide you through the entire process. But beyond that, you also want someone who aligns with your big-picture values, investment philosophy, and comfortability with risk.

The best way to start is by tapping your network for first-hand references. If that’s not an option, you can find many sponsors through reputable podcasts or by attending seminars. When you find a good fit, get ready to do your due diligence. Come into the conversation with a list of questions, including prompts about their worst and best deals and how they recovered. Treat this process like an interview— because it is.

ACCREDITATION STATUS

An accredited investor is any individual or entity that is legally permitted to trade securities without formal registration with large financial authorities (such as the Federal Reserve or FDIC), so long as they meet at least one requirement proving their financial sophistication (including income, net worth, asset size, or governance status). Accredited investors can include (but are not limited to) high‑net-worth individuals, insurance companies, brokers, banks, or trusts.

Accredited investors meet one or more of the following criteria:

👉They earn $200,000 a year as an individual or $300,000 with their spouse for two years prior to investing and anticipate the same (or more) earnings in the current year.

👉They have a net worth of $1 million outside of their primary residence.

👉They hold a Series 7, 65, or 82 license.

There is no formal process for receiving accredited investor status, and the sponsor is responsible for verifying. The passive investor/limited partner may receive a questionnaire that requires the submission of financial statements, tax returns, and other documents that prove their income or net worth. The sponsor may utilize a third-party verification service to request similar documentation. Additionally, a CPA, lawyer, or investment advisor may be able to draft a letter that states they meet the requirements.

REVIEWING THE FINANCIAL DOCUMENTS

As a passive investor in a multifamily real estate syndication, you will need to closely review the financial documents provided by the sponsor to evaluate the deal and decide if you want to proceed. These documents include:

Pitch deck: A document that outlines the investment opportunity and its financial projections, which may be paired with other relevant documents such as the purchase and sale agreement, asset appraisal, and inspection reports.

Private placement memorandum: A disclosure document that details the offering itself, legal documents, subscription terms, potential risks, management plan, fund distributions, and more; it is similar to a prospectus for public offerings of stocks, bonds, and mutual funds.

Partnership agreement (also known as operating agreement or limited partnership agreement): A document that describes the business operations, including voting rights, class of shares or membership, distribution of cash to partners, fee breakdown, legal support, etc.

Subscription agreement: A legally binding agreement between the general partner/sponsor and a limited partner/passive investor that describes the process for committing to and submitting funds for the investment; it may also ask for how investors would like to receive distributions and direct deposit information.

✨Returns

The preferred return is an agreed-upon percentage of income that passive investors receive before the sponsor gets paid.

The cash-on-cash return is the annual return of the investor’s investment that’s calculated by dividing annual cash flow and the amount of capital invested.

The internal rate of return (IRR) is a metric commonly referenced in an offering document. It is a financial calculation that accounts for all of the cash flows related to a project's inflows (rent, sales price, etc.) and outflows (expenses, purchase price, debt payments, etc.) and takes into account the time value of money. IRR is a discount rate that makes the Net Present Value (NPV) of all cash flows equal to zero in a discounted cash flow analysis.

The average annual return accounts for cash flow and profits at sale divided by the lifespan of the investment.

✨Exit Strategies

The exit strategy—or the sponsor’s predetermined strategy for selling the multifamily property at the conclusion of the syndication—is another important component of the investment documentation. The “fix-and-flip” strategy, for example, is when the owner renovates a property throughout the hold period and sells it for a profit. In the case of multifamily rental properties, the exit strategy is usually to stabilize the property by building a steady cash flow from tenants throughout the hold period and, once again, sell at a profit.