Multifamily Syndication for Beginners

Discover the basics of Multifamily Syndication; what it is, why do it, when to syndicate, how to best structure syndication deals and the 3 biggest multifamily syndication mistakes. Plus, you’ll learn 3 examples of real deals by beginners that prove multifamily syndication isn’t just for experienced investors.

What is Multifamily Syndication?

Multifamily syndication is when you (the syndicator) pool together other people’s resources (money) to purchase multifamily real estate. This includes raising the money for your down payment, closing costs, and renovation expenses. Syndication is a great way to invest in cash flowing multifamily assets when you don’t have the money to fund the deal yourself or when you want to leverage what little cash you have. It also allows you to do more deals and scale your business. Eventually everyone runs out of money to invest, and pooling resources together through syndication is a great way to continue to build your multifamily portfolio. Which means if you want to continue to acquire multifamily real estate, you will eventually need to learn how to syndicate a deal.

When NOT to Syndicate Multifamily

Do not syndicate a bad deal! You don’t want a reputation of being an untrustworthy syndicator. If you have a deal you’re not sure about it, ask yourself this question, “Would I put my grandma’s last dollars into this deal?” If your answer is no, then don’t syndicate the deal. That’s a bad deal. I have a video that can help you Distinguish the Good Deals from the Bad Deals so that you know which deals NOT to do.

And some unscrupulous investors cherry pick the good deals for their own money, and put investor money into bad deals. This is a huge mistake because even though you may think you’re getting ahead, the truth is you will reap what you sow. Instead, follow the golden rule of multifamily syndication: Do unto others as you would have them do unto you. You need to be multifamily syndicator who has integrity and negotiates win-win deals that cash flow for you and your investors.

How to Syndicate a Multifamily Deal

I have a training called Basics of Real Estate Syndication where I cover how to syndicate a commercial real estate deal. Here are some key topics I cover in that training:

• Basic syndication structure
• Guidelines for multifamily syndicators
• How to find investors and sell them on your deal
• Answers to FAQs like, “What comes first, the investor or the deal?”

Instead of going over the basics again here, I will share 3 real world examples of multifamily syndication to better help you understand how the syndication process works. These are real deals syndicated by our Proteges and it’s important to note that they are beginner investors. In fact, for two of the three they were their first deals, proving syndication isn’t just for experienced investors. Another common factor is all the multifamily properties are C-class properties. Class-C properties are great for syndication  because they are affordable, easy to finance, have value-add potential, produce the highest cash on cash return and are in high demand.

The 3 Main Syndication Structures

Multifamily syndication is typically structured in the following three ways. These 3 examples use the most common syndication structures for determining how cash flow and profits are distributed.

Syndication Structure #1: Straight Split

Straight split is the simplest structure in multifamily syndication. In this structure all the cash flow and profits from the property are split by a predetermined percentage. If it’s a 50/50 split, then 50% of the cash flow goes to the investors and 50% goes to the syndicator. And any profits from a cash out refinance or sale of the property would be split 50/50 as well. That percentage can vary and be 60/40, 70/30, 80/20, even 90/10. But regardless of how it’s divided up, it’s a straight split between you and the investor. The main advantage to the straight split structure is it’s simple to calculate. However, if there’s no cash flow, there’s nothing to split. That’s why it’s important to have a good deal and know what you’re doing when you calculate the returns.

Protégé Example: $0 Down 18 Unit Apartment Deal

Purchase Price: $937,000
Capital Raised: $171,000
Structure: Straight Split 60/40 (Investor/Protégé)

Within the straight split structure, our Proteges are the LLC managers, meaning they call all the shots and oversee the day-to-day operations of the property. The investor is passive, so their contribution is purely financial. They provided the entire down payment, and covered closing costs, inspection, and appraisals. Why would an investor put up all the money and then split it 60/40 with the syndicator? Well, our Proteges provided something the investor didn’t have. They provided the off-market property and all the knowledge and experience to negotiate and execute a deal able to produce great returns. And after executing their value-add plan, they were able to produce nearly 100% returns!

Check out the video $0 Down 18 Unit Apartment Investment Deal  and learn our Proteges syndicated this deal with no money down.

Syndication Structure #2: Preferred Return

Preferred Return structure determines who gets the profits first, meaning the investors get paid a fixed percentage over a  period of time, plus a profit split at sale. This example is just one version of the preferred structure.

Protégé Example: Beginner 48 Unit Multifamily Deal

Purchase Price: $3.6 million (5 yr hold, 12 % cash on cash return, appraised for $3.7 million at time of purchase so there’s $100,000 of equity built into the deal)
Capital Raised: 11 investors contributed $595,000
Protégé Capital: $75,000.
Payment Structure: 7% Preferred Return + 80/20 Profit Split

The investors are paid a 7% preferred return. Which means they are paid their 7% first and the syndicator gets any remaining profits. If cash flow is low one month, the syndicator will not get any share of the cash flow until the investors are paid their 7%. However, if the property is performing well and cash flow is high, anything above the 7% our Protégé gets to keep, which means he is incentivized to improve the performance of the property. When the asset is sold, the profits are split 80/20, meaning the investors get 80% of the profits and our protégé keeps 20%.

Calculating Return On Investment (ROI)

After the property is stabilized and cash flowing for 5 years, the projected after repair value is $4.5 million. The total profit to split will be $900,000. Now, to determine how profitable this deal is, we need to calculate the ROI (return on investment). This is a crucial calculation because as the syndicator you need to know the projected return for the deal (cash on cash return), your investors, and yourself. For this example I will simplify the calculations to help you better understand the basic principles of syndication, but it is quite complex. In fact, we provide our students a 23 page spreadsheet to calculate these figures.

The formula for calculating the ROI is: (Profit – Down Payment) divided by Down Payment

Investor ROI:  The investor’s share of the profit is 80% of $900,000, which is a $720,000. So, after the investors get paid back they’re initial investment of $595,000, they’re making an additional $720,000.

($720,000 – $595,000) divided by $595,000 = 21%

The investors are making a 21% return on investment. Now, don’t forget they are also getting 7% of the cash flow for five years.  5 yrs x 7% is another 35%. That gives the investors a 56% return on investment.

Protégé ROI: The protégé’s share of the $900,000 profit is 20%, which is $180,000.

($180,000 – $75,000) divided by $75,000 = 140%

That’s a 140% return on investment! But don’t forget, he gets 5% of the cash flow for 5 years (the cash on cash return is 12% -the investors get 7%, the syndicator gets 5%) 5yrs x 5% is another 25% for a total ROI of 165%.

Huge Tax Savings!

But wait! The deal gets better! On top of the already amazing returns in this deal, our Protégé performed a cost segregation study, which is a tax strategy of accelerating your depreciation. Instead of depreciating it over twenty-seven and a half years, he can depreciate parts of the building over five years. Using this tax saving tool, they were able to save $450,000! That’s phantom cash flow in everyone’s pocket in the form of tax savings! This $450,000 goes directly against their adjusted gross income which means they won’t have to pay income tax for a very long time.

When we factor in those tax savings, the investors are making over a 100% return and our protégé is making over 300%! Incredible! Does he deserve this kind of return? Yes! Because he worked hard for that money. He joined our Protege Program and showed up to all the weekly coaching calls. He found this off market deal, analyzed the deal, worked with the seller and got it under contract. Then he brought in all his resources to do thorough due diligence, found the investors, and secured the financing. He is responsible for the deal from start to finish. And this was his first deal! That’s the impact mentorship can have, and you can do the same if you are ambitious, do the work and apply what your learn.

Syndication Structure #3:  Preferred Return Plus Waterfall

The final example is structured as preferred return plus waterfall. The waterfall structure determines how payment progresses. (Think of a tiers of a waterfalls cascading down into pools.)

Protégé Example: Beginner 34 Unit Apartment Deal

Purchase Price: $1.4 million (Appraised for $1.6 million/$200,000 built in equity)
Value-Add Strategy: The value-add plan is to renovate, implementing the RUBS system and raise rents, thereby increasing the NOI and forcing the appreciation.
Capital Raised: $335,000 from 12 investors
Protégé Capital: $108,000 (He did get back about $50,000 in credit for repair but to simplify the calculations we will use $108,000)
Payment Structure: In this scenario, investors have an 8% preferred return with a 70/30 split of all cash flow in the first tier. Once the investors are returned their initial investment with a cash out refinance they proceed to tier 2 and the 8% preferred return ends and the cash flow is split 50/50. After seven years of splitting the cash flow 50/50, the asset will be sold and the profits split 50/50. This is a brilliant way to produce phenomenal returns for yourself and the investor. Again, this was his first deal and if he can do it, you can do it too.

Avoid These 3 Multifamily Syndication Mistakes!

Here are the 3 multifamily syndication mistakes investors make:

1. Overconfident Proforma: Since investors are trusting you with their money, you need to be conservative in your projections. If you are overconfident on how much you can increase the rents or underestimate operating expenses. You will fall short of your projections, miss investor payouts and lose the trust of the investor.
2. Giving Too Much to Investors: We teach our students to be hard negotiators that produce the best returns for their investor and for themselves. And they deserve what they negotiate. You need to know your worth and how to calculate how much to give away.
3. Not Hiring a Real Estate Attorney: Do not try to syndicate a deal without the help of a real estate attorney. There are strict laws that regulate syndication to protect investors from fraud. And violating the Security and Exchange Commission regulations can land you in jail, so don’t try to do this on your own. An experienced attorney will make sure you have the documents and lawful disclosures you need and provide legal protection. Again, this is another situation where having an experienced mentor is so valuable. We guide our students through the whole syndication process so they can avoid making costly mistakes.

For a more in-depth look at the mistakes multifamily syndicators make and how to avoid them, watch my video 3 Biggest Multifamily Syndication Mistakes. As you’ll learn in that training, every successful multifamily investor has a mentor. Get your mentor here by applying to my Protege Program.