Fundamentals of Syndications
What is an Apartment Syndication?
Imagine you and a bunch of friends want to buy a huge apartment building, but none of you, individually, have enough money to buy it on your own. So, you all pool your resources together to make it happen. This is basically what an apartment syndication is—a lot of people combining their money to buy the apartment and a few people combining their expertise to manage it correctly so it turns a big profit. Of course there are a lot of moving parts and it’s something you should only consider pursing with experienced, expert operators, but the concept itself isn’t that complicated. The idea of investing in something like an apartment can be intimidating and scares some people away. But, if you are willing to learn and invest wisely, the rewards can be immense.
What about you? Have you ever considered investing in an alternative asset such as an apartment syndication?
The Key Players
General Partners (GPs) or Sponsor:
Think of the GPs as the leader of the group - the experts. They find the apartment building, organize everything, and manage the property once it’s bought. They will be very experienced in real estate and typically invest some of their own money as well to show they’re serious.
Limited Partners (LPs):
These are the investors who put up most of the money but don’t handle any of the day-to-day operations. They trust the GPs to manage the investment and expect to earn profits from their investment.
How the Deal Works
Finding the Deal:
The GPs starts by finding a promising apartment building to buy. They look for properties that can generate good rental income and possibly increase in value over time.
Creating the Syndication:
The GPs sets up a legal entity, like a Limited Liability Company (LLC), to own the apartment building. This makes everything official and helps protect everyone’s investment.
Raising Capital:
The GP then goes to potential investors (the LPs) to raise the money needed to buy the property. They explain why it’s a good investment, how much money is needed, and what the expected returns will be.
Buying the Property:
Once enough money is raised, the GP uses it (along with some borrowed money from a bank) to buy the apartment building. This is called the acquisition.
Managing the Property:
After buying the property, the GP manages it. This includes finding tenants, handling repairs, and making sure the building runs smoothly.
Earning Profits:
The apartment building earns money from renting out the units. This rental income is used to pay the property’s expenses, like mortgage payments, maintenance, and management fees. The leftover money is the profit, which is shared among the GPs and LPs..
Distributing Profits:
Profits are usually distributed regularly (like quarterly) to the investors. The GPs get a share of the profits for their work, and the LPs get their share based on how much they invested.
Exiting the Investment:
After a few years, the GP might decide to sell the apartment building, refinance it, or do something else to cash out the investment. If so, the profits from this exit are then distributed to the investors, and the syndication deal ends.
Why Do People Invest in Syndications?
Diversification: Investors can spread their money across multiple asset classes, reducing risk.
Expert Management: The LPs get to benefit from the GPs’ experience and skills.
Potential for High Returns: Larger properties, combined with expert management, typically offer better returns than smaller, individual investments.
Limited Liability: LPs are only responsible for the amount they invest, rather than the full value of the property, protecting their personal assets.
Conclusion
Real estate apartment syndication is a team effort to buy, manage and enjoy the considerable upside of owning a large property. The GPs lead the team and handle the heavy lifting, while the LPs provide most of the money and share in the profits. GPs benefit because they get to apply their knowledge and expertise in running large properties they couldn’t afford on their own. LPs benefit because they are able to invest in these often highly profitable deals without having to worry about actually running the property. Teamwork makes the dream work!
