The Pros & Cons of Multifamily Real Estate Syndication

In the previous article, we described what is a multifamily syndication.  In this article, I want to present to you the pros and cons of syndication, and more importantly, if the strategy aligns with your goals. Jake and I amassed a portfolio of 1,000 units before we decided to syndicate our first deal. Should we have started syndicating sooner?

As we get into the pros and cons, the answer to that question will be clearer. Jake & I run a vertically integrated company, which means that we control all aspects of the business, from acquisitions, to management, to disposing of the asset. It is much more challenging for us to acquire thousands of units per year because we need to scale our hiring for our property management company, and as you may know, we are in a challenging environment for hiring.

We do not want to run the risk of over expanding our infrastructure. If we employed third party property management, this would be less of a concern. So for us, our goal is to acquire up to five hundred quality units per year, and we do not need capital from investors. We can fund the deals ourselves. Early on in our career, we were fortunate to have formed a partnership that had a strong balance sheet for us to qualify for financing.

We were also fortunate to be able to refinance in excess of $15,000,000 out of our current portfolio and utilize that capital to invest in the next deal. Our goal was to hold these assets long term, utilize the cost segregation from the deal as a generous tax break, and own as much equity in the deal for ourselves. If we did not have access to capital, then syndicating sooner would have been a no brainer.

Remember, focus on your goals and what you are trying to accomplish long term. And also remember, you can buy some deals with partners, and you can syndicate other deals. As we said in our previous article, syndication is only one “tool” in your Buy Right toolbox

Let’s jump into the pros & cons.

Pros:

• Other People’s Money
• Great Strategy To Get Into Multifamily.
• Get Into Bigger Deals.
• Control More Units
• Scale Quicker
• Create A Business
• Collect Fees

One of the huge benefits on investing in real estate is the ability to employ Other People’s Money (OPM). Syndication takes this benefit to the next level. You are pooling capital from investors to invest in an asset that would normally be much larger than you can take down by yourself, and you are able to own part of that asset with as little as 10-15% of your own capital in the deal.

For most investors, the limiting belief of not investing in multifamily is the fear of where am I going to find the money for the down payment. Syndication crushes that limiting belief by raising the capital from investors. Don’t let lack of capital stop you from pursuing deals in multifamily. Seek out a mentor or coach to teach you the multifamily space, and then utilize syndication to start taking down deals.

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With syndication, you will be able to invest in larger deals, control more units, and achieve economies of scale with more units. There are many investors out there who have controlled thousands of units, and have become wealthy the past few years from cap rates compressing. These syndicators may own a bit less equity in each deal, but they control thousands of units. Power comes to those who can achieve economies of scale in multifamily, and syndication is an excellent strategy to achieve it.

Syndication allows you to scale your business much quicker, and to achieve the economies of scale. Remember our path to growth. We did refinance the majority of our assets, but it did take time to reposition the deals before we were able to refinance. In some instances, it took 18-24 months, but our goal was patience and steady growth. For those who want to scale much quicker, syndication is excellent.

Isn’t one of the reasons you want to invest in real estate is to become an entrepreneur. At Jake and Gino, our catalyzing statement is We Create Multifamily Entrepreneurs.  It wasn’t that way when we began our investing career. We were not looking at real estate as building a business. We were only looking at buying a few deals that would cash flow. Scaling up, economies of scale, and systems were foreign to us.

With syndication, you can envision yourself becoming an entrepreneur and creating an amazing business.  You start by building your database of investors, begin to generate fees and cash flow from the deals, and begin to generate residual fees, such as asset management fees.  We treat our syndications as another stream of revenue. We generate asset management fees, acquisition fees where we roll into the deal, profits from general partner side, and passive income derived from investing on the limited partner side. As you can see, once you’ve executed a few syndications, the snow ball begins to grow exponentially!

Cons:

We’ve presented the pros! Now, it’s time to transition to the cons of syndication:

• Less Control (More Cooks in The Kitchen).
• Investors Are Your Boss.
• Investor Relations Is Another Task.
• Sharing The Profits.
• More of A Fix & Flip Model.
• Less Equity inThe Deal.
• Another Level of Complexity.
• Less Deals That Qualify in This Part of The Cycle.

Before I became a full-time investor, I was the pizza guy. That’s where I got the too many cooks in the kitchen analogy.  I enjoyed the simplicity of doing our own deals, not running it by multiple partners, and not having to take the investor’s needs into consideration. As a syndicator, you are a fiduciary for your investors. They are your boss, and your goal is to maximize their returns, not yours.

It was so much easier in the beginning for us to focus on our needs, and what was best for the property. Some months, we deferred the cash flow to utilize for repairs. That may not fly too well with investors. The complexity of a syndication, with the legal documents, the capital raise, the investor relations, was also a huge hurdle for us in the beginning. That being said, we have had countless Jake & Gino students syndicate their first deal with the guidance of our Wheelbarrow Profits Academy and our coaches. Please do not underestimate the hard work that goes into executing the steps throughout a syndication.

In this part of the cycle, Internal Rates of Return have diminished, and it is becoming more challenging to find deals that will generate an appropriate return for investors.  It doesn’t mean that they aren’t out there, they just aren’t as prevalent.

One of the biggest cons for myself and Jake is the nature of the syndication model. Remember, our goal is to buy these assets for the long term, generate cash flow, and take advantage of the tax benefits.  One of the biggest ways a syndicator gets paid is on the back end. What does that mean. They generate the majority of their profits when they sell, and split the proceeds with the investors. Sometimes, we take months and months to find an amazing deal. We do not want to kill our golden goose by selling.  You may be forced to sell prematurely in a syndicated deal if you have achieved your returns for your investors.

This leads me to my last con. When we buy a deal by ourselves, there is no sharing of the profits. They are all ours!  Our mantra has been to build us as much equity for ourselves as possible. We live by the saying “Transactions pay the bills. Equity makes you rich”. With a syndication, your limited partners get paid first, and they receive the majority of the profits.

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As you reflect back upon the words you have just read, my hope is that you become crystal clear with what your goals are, and what you are trying to accomplish long term. To some of you, syndication is a no brainer. And to others, syndication may not be the right fit for your business model. If you want to learn more about syndication, visit our YouTube Page.