What To Expect After Investing In A Real Estate Syndication?
You’ve finally done it.
You wired a $50,000 lump sum payment to invest in your first syndication. After months of teetering on the sideline and going back and forth you finally found a deal and a deal sponsor that you are excited to invest with.
But what happens now?
What should you expect after making an investment in a real estate syndication?
If this sounds like you, or maybe you are still on the sideline watching the action and thinking about stepping onto the playing field, then this article is just for you.
Before we can get to what happens after making an investment – how did we get to this point? For those that are new we will jump into a quick primer on syndications and what happens before you ultimately made the decision to invest.
There are many things that happen after you invest in a real estate syndication depending on what role and part you play in the syndication. We will primarily focus on the perspective of a passive investor in a multifamily apartment real estate syndication.
What is real estate syndication?
If you are new to real estate investing in general and syndications specifically you may be wondering – what in the world is a syndication? To put it plainly, a syndication occurs when a group of investors come together to pool assets (such as money) and skills (such as investing and asset management) to be able to purchase large investments (such as a multifamily investment property) that will create a financial benefit for all the investors involved.
Syndications can be an investment vehicle used to purchase multifamily apartments, office, storage, mobile home parks and any other type of real estate investment you can think of.
Syndications offer a great way to allow smaller investors to be a part of larger projects and gain the benefits of economies of scale which create better risk adjusted returns compared to investing solo.
How much money do I need to invest in a real estate syndication?
Multifamily apartment real estate syndications will typically require anywhere from $25,000 - $50,000 minimum investment. Depending on the actual syndication you may note that there are different share classes offered. Share classes refer to portions of the capital stack that where your investment would fall. Syndications would typically have different minimum investment amounts based on the share class you decide to buy. If you are considering investing in a syndication you should ensure you have sufficient money set aside so you can invest.
What are the phases of real estate syndication?
The real estate syndication life cycle can be quite long, lasting anywhere from a few months to a few decades. The real estate syndication cycle starts long before the passive investor gets involved. There is a lot of upfront work done by the active investors before they present the investment opportunity to passive investors. Once presented the opportunity, passive investors will have a set time where they can do due diligence and decide if they want to invest.
Upon deciding to invest, the passive investor would subsequently wire the amount of money that they committed to invest to an escrow account. Like the closing of a residential home, these funds would be distributed at the closing of the purchase of the investment property. The expected closing date would be communicated to investors by the lead sponsor.
Typically purchases are closed within 60-90 days after the investment is offered. There may be delays, as with any real estate purchase, that hold up the closing process. A good lead sponsor will communicate these changes timely to help investors remain aware of what is happening with their investment.
These steps represent a high-level summary of the real estate syndication process, but you can find a more detailed discussion of the real estate syndication cycle here.
What are the phases of a real estate syndication after closing?
Ok so now we are up to speed. What should you expect? First off, real estate investments are not like the stock market where you can log on a website and see a minute-by-minute change in value of your investment. Real estate is a more illiquid asset; you will receive updates on a more periodic basis.
After closing there are 5 categories of communications and events to expect during a real estate syndication:
Closing communication
Monthly communications and events
Quarterly communications and events
Annual communications and events and;
Capital events and communications/Sale and disposition of investments.
Closing Communication
The closing communication will come from the syndication team to confirm the purchase of the property and that you are now part owner of this multifamily apartment complex. Congrats! This email will provide various details on the purchase, reaffirmation of expectations of how the asset management team will execute their business plan in the coming months, when the first distributions maybe expected and the related frequency of payments as well as answers to other Frequently Asked Questions.
Monthly Communications and events
Typically, there will be more frequent communications during the early stages of the property take over. Based on the syndication team they may choose to provide property updates monthly for the life of the deal or only in the initial stages while they stabilize the property. These monthly communications will have highlights about the progress of the business plan, performance of the property, visual media showing updates and other quick news to help keep you in tune with what is happening with your investment. Depending on the business plan there may also be distribution of cashflows back to investors monthly as well.
Quarterly Communications and event
Sponsorship teams may more commonly lean towards quarterly communications, especially if the building is already stabilized and there are not many new activities that happen monthly. Distributions also may be made on a quarterly basis as well if this is what was communicated by the sponsorship team. Distributions are most sent via digital bank transfers, but they may also be sent as physical checks.
If sponsorship teams are currently making monthly communications, then the quarter end update may be a more in-depth version of the monthly communications. Additionally, you may receive financial statements on the property.
Annual Communications and events
At the end of the year, you will have the most comprehensive update about how the year went and how the asset performed during the past year and financial reporting. There will be a communication on timeline to expect K-1s. K-1s are the tax documents that each investment partner gets at the end of the year which state what is their share for income and expenses for the property. Like a W2 the K-1 will be used as part of filing your taxes.
Capital Events Communications and event/ Sale and Disposition of Investment
Capital events refer to such things as a refinance or sale of the investment and result in a distribution to investors. These are ad hoc events that can happen during the hold period of the investment or at the end. When completing a refinance typically sponsorship teams will return a portion of original invested capital back to investors. Upon the sale of the property the investors would receive back all their original capital that was invested in the deal plus the investor’s portion of profit earned from the investment.
On the other end of the spectrum a capital event may occur where investors need to provide additional funds to help make the investment perform successfully. When investors need to provide additional funding, this is referred to as a “capital call.” A capital call may occur if there are major unexpected events such as damage to the property which were not budgeted for or if the sponsorship team did not raise enough capital to have a reserve cushion upfront.
How much money can you make from real estate syndication?
The next thing you may be thinking about now is how much money would you get back from the capital events. Can real estate Syndication make you rich? Syndications are a proven method to build generational wealth; with outsized returns and tax advantaged benefits of real estate, syndications can make an ideal investment. Real estate syndications pay you in many ways. You may even consider retiring based off of the returns from one successful real estate syndication investment.
The 5 categories of communications and events to expect after investing in a real estate syndication:
Closing communication
Monthly communications and events
Quarterly communications and events
Annual communications and events and;
Capital events and communications/Sale and disposition of investments.
Interested in learning more about investing in multifamily apartments? Give us a call or check out some of the other free resources we have available at Investupmultifamily.com.