Great Investment Option for Passive Investor in Apartment Syndication

As a passive investor, investing in apartment implies investing in apartment syndication. It is a partnership between a sponsor/syndicator responsible for handling every aspect of this transaction and the passive investor who invest the fund in the portion of the down-payment (with no need to be actively involved in the day to day management of the project). The passive investor is entitled to the profits arising from the sale of apartment syndication.

The sponsor or general partner (GP) has the task of raising money from qualified investors and thus are also known as syndicators. Passive investor or limited partners (LP) use their money to buy part of apartment buildings.

Investing in apartment syndication is often referred to as a good passive investment strategy owing to time commitment, return, and the risk involved.

Understanding the part play of time commitment, returns, and risk while investing in apartment syndication

Time Commitment

As a passive investor you initially have to qualify the sponsor and qualify their deals before investing. After you have qualified the sponsor, they send you a deal and it is up to you as an investor to decide whether to invest or not. An investor can invest any amount with the minimum investment of $25,000 to $50,000 for apartment syndication.

The deals are usually required to commit about 3 years to 7 years depend on the deal and the operator's business plan. So, your investment amount of $25,000 to $50,000 or more will tie up at one investment for that amount of time.

Returns

As you partly fund the investment in apartment syndication, you have partial ownership of the property which implies a smaller percentage of profit. In apartment syndication investment, hundreds of unit profit margin increase considerably, and even if few lies vacant and there are evictions or maintenance issues chances of good returns are always higher.

Additionally, apartment valuation is done according to the revenue generated and not the market rates. This rate is usually controlled by sponsors who can increase the rent through innovations or can increase the revenue by adding luxuries in the units such as storage lockers, carports, etc.

In the apartment syndication, profit increases or decreases based upon the sponsor’s skills in executing their business plans.

Risk

The risk factor involved in a passive investor in apartment syndication is comparatively less because the investor does not sign on a loan. There is an investment in multiple units at one centralized location, which means economies of scale with lower management and contractor cost and higher revenues.

Earnings from the Apartment Syndication

Investments are for money making. Two ways in which investors made money from apartment syndication are:-

• Rental income
• Property appreciation

Sponsors distribute rental income from a syndicated property to investors on a monthly or quarterly basis, following predetermined terms and conditions. Rental income or profits (as in equity) payment by sponsor depends upon the time needed by investment to mature.

For instance, syndication may get over within 6-12 months or can take 6-7 years. Sponsor’s often taken an upfront fee at the beginning of the deal for sourcing and acquiring the property, known as acquisition fee.

Additionally, Investors receive a either ordinary return or preferred return which is a payment distributed to all investors, ranging from 5-10% annually of the initial money invested.

Explanation in Detail

According to the syndication deal, the preferred return of 8% was agreed upon. This means sponsors aim to give investors distributions of 8% on their investment each year (every quarter). After the investor receives 8% return, the rest of the profits are distributed between investors and operators at a set percentage, maybe 70% of investors and 30% operators.

As a perk, property value appreciates over time. Hence, investors can earn larger profits when the property is sold.

Look Before You Take A Big Leap (Invest In Apartment Syndication with Hard Earned Money)

As a passive investor involved in apartment deals, flexibility, and freedom to use your time to pursue other ventures come easily besides income generation from the investment.

To become a successful real estate investor, you should know some basics of apartment syndication. The sponsors or the syndicator’s experience with the apartment business plans makes a huge difference in the success of the business plan. Additionally, interest, transparency, and credibility of the sponsor are also factors affecting apartment syndication revenue generation capability.

To check the reputation and credibility of your sponsor, check their online presence from their website or content in the form of podcasts or blogs shared by them.

An established and experienced syndicator, with a proven track record of successfully implementing its business plan, promotes the alignment of interests of both LPs and GPs.

A genuine and fair sponsor should intent on keeping things/deals transparent, rendering details of what they are doing with investors’ money, and how the apartment syndication deal is progressing.