You may have concerns with putting your hard-earned money into a multifamily syndication investment. Hopefully we can address those fears here!
Fear of the Unknown
Real estate can seem complex and intimidating, leaving you wondering where to even start. With all the information you may be coming across, it can feel like you’re late to the game.
With anything in life, these fears of the unknown are absolved by simply educating yourself, which you’re already doing! There are many websites, books and webinars available to expand your knowledge and familiarize yourself with the terminology. Additionally, local meetups provide you the opportunity to meet other experienced investors to ask them questions and build relationships.
Being Afraid of Losing Money
Any investment has its risks. When evaluating an opportunity to invest in, you find you have no understanding of the location or demand in the area of the property. And as a Limited Partner (LP), you don’t have insight into the daily operations on the property.
Researching the location and understanding demand can be accomplished by reviewing metrics such as census data, school district ratings, crime data, nearby businesses and amenities.
Asking the right questions from the General Partner (GP) team for the opportunity as well is important. They should be able to provide you with details on the existing cashflow, past vacancy rates, the type of loan being secured to purchase the property and the business plan for making improvements.
Perform thorough due diligence on the syndicator’s underwriting process. Ensure they are conservative in their assumptions and conduct comprehensive risk assessments. Also evaluate their alignment of interests. Look for syndicators who invest their own capital alongside investors, demonstrating their commitment and confidence in the deal.
After you invest in an opportunity, you will receive regular updates from the GP team on the status of the property and progress against the business plan. So you’ll stay in-the-know.
Handling the Market Fluctuations
Perhaps you’re concerned about market volatility or the limited liquidity options of the investment. Unlike stocks or other paper notes, you cannot immediately sell a multifamily real estate property if you need to cash out your original investment.
Real estate is a long-term investment strategy that appreciates over time. And multifamily properties have historically demonstrated resilience during economic downturns due to consistent demand for housing.
While true that this type of investment has limited liquidity, throughout that time you receive dividends (typically quarterly) once the business plan’s execution hits a profitability point. This is where the passive income stream begins to build. Once the business plan is completed, your original investment is cashed out along with a percentage of the profits from the sale, further increasing your returns.
These gains enable you to reinvest in additional opportunities, thereby expanding and increasing your overall wealth and investment options in the future. You can diversify your investments across multiple syndications in different geographic areas to reduce exposure to a single market or property.
Fear of Debt
Multifamily properties are large and expensive. Loans and funding are in the millions. This can feel very intimidating, especially when you don’t understand the expenses and revenue at this scale.
As a Limited Partner (LP) investor, you are not on any loans and therefore have no obligations or risk to your credit rating. This responsibility is with the sponsoring team. Typically these General Partners (GPs) secure a non-recourse loan, which means the property itself is the collateral. Additionally, these loans should include an interest rap cap to ensure the amortization schedule (payments) are manageable.
The Sponsors must figure out a realistic cash flow and set aside funds as a reserve to handle unexpected problems and increases in expenses. This is why due diligence is one of the most important phases of a deal. Don’t be afraid to ask the sponsoring team about the details and review the numbers yourself.