If you are interested in passive income with low-risk exposure, multifamily real estate syndication can be an attractive investment opportunity.
Those who are new to multifamily investing should take the time to research the topic and learn all they can about it. To get started, you should familiarize yourself with the business terminology. This article includes some of the more commonly used terms in multifamily investing.
Multifamily Syndication
Multifamily syndication is a group of individuals or companies who pool their financial resources to purchase and operate a multifamily building together while sharing the associated risk of ownership and returns in terms of rent and other tenant fees. The syndication structure typically involves a general partner, or syndicator, who runs business operations, and a limited partner, or investor, who provides funds for the acquisition of the syndication property.
General Partner (GP)
Multifamily syndication involves a general partner, commonly known as a sponsor or syndicator. He or she is responsible for managing the operations of the business. His role is to identify suitable investment assets, recruit passive investors, and oversee daily operations. The syndicator has unlimited liability as to the partnership owner.
Usually, multifamily syndication has a team of general partners who oversees all aspects of the syndication, but it can also be one person.
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Limited Partner (LP)
Limited partners are passive investors in multifamily syndication. These are the companies or individuals who provide the initial funds to invest in real estate. Limited partners do not participate in the day-to-day operations of the syndication, thus the term passive investors. Unlike the general partners, they are only liable up to their proportionate ownership share. Multifamily syndication can be funded by just one large investor, or it can be financed by several investors pooling their funds.
Accredited Investor
An accredited investor is an investor who must meet certain income and net worth criteria set by the U.S Securities and Exchange Commission. Current guidelines require earned income of over $200,000 (or over $300,000 if married) over the past two years with reasonable expectations of earning the same amount this year.
In other words, an investor is considered accredited if their net worth is over $1 million, excluding their primary residence. Only accredited investors are allowed to invest in certain securities, such as multifamily syndications, to ensure they are financially secure and can bear the potential loss.
Sophisticated Investor
A sophisticated investor can evaluate the risks and potential returns of new opportunities after having a thorough understanding of investments, financial markets, and business matters. Certain sophisticated investors may also be permitted to participate in private securities, even if they do not meet the SEC’s guidelines of accredited investors.
Equity Investment
Equity investment refers to the initial investment funds needed by multifamily syndication to purchase its target investment property. The funds cover the down payment, closing costs, and financing fees associated with the mortgage loan, as well as the initial funding for the property’s operating expenses. Additionally, it includes funds collected by the general partner for their management services. The equity investment funds are provided by the initial pool of limited partners, also known as passive investors.
Internal Rate of Return (IRR)
An Internal Rate of Return indicates the potential profitability of an investment, such as multifamily syndication. It represents the sum of all future cash flow funds (including eventual sale proceeds) as a ratio to the initial equity investment. The higher the percentage, the better the investment. While taking into account the investment term, the calculation ignores external factors such as inflation.
Cash-on-Cash Return (CoC Return)
The Cash on Cash Return is another method to assess the return on investment for apartment syndications. It is calculated by dividing the annual cash flow generated by the property by the initial property’s equity investment.
Equity Multiplier (EM)
The equity multiplier on an investment property is the rate of return that takes into account how much cash flow and sale proceeds are generated as a result of the investment. A return on equity is calculated by dividing cash flow, sale proceeds, and equity investment by the original equity investment amount.
Preferred Return
A preferred return is a profit that is distributed to the limited partners of multifamily syndication before any payments are made to the general partners.
Hopefully, this article has provided you with a better understanding of some of the syndication lingo. If you have any questions feel free to reach out: www.myrealtygains.com
Prashant Kumar, CCIM
If you’re still wondering where to
start from, we can have a
one-on-one session.
Prashant Kumar, CCIM
If you’re still wondering where to start from, we can have a one-on-one session.
