“Exsqueeze Me, Baking Powder?”
If you haven’t seen Wayne’s World, please stop reading and go watch. That’s more important right now. (Kidding, but seriously, be better.)
Wayne dropped the infamous line of, “exsqueeze me, baking powder,” after being told about an occupancy permit he needed and had ZERO idea about.
I gave a similar reaction the first time I was asked about syndications and now receive that bewildered reaction when talking about what I do.
Wayne's World / Syndication World
Whether I’m meeting people at a cocktail hour, chatting with neighbors, or having an informal conversation at a church activity, saying “apartment syndication” is usually met with eyes that glaze over. Not because they lose interest, but because the term is synonymous with uninformed!
Here’s what’s interesting, I would have considered myself a fairly savvy investor the first time I learned about real estate syndications. I had some single family rentals, had been involved in some flips, hell, I had even wholesaled a few smaller apartment buildings. Yet, I had no idea what apartment syndication meant.
In fact, the reason I decided to wholesale the small apartment buildings was because I had NO idea how to fund the acquisition of something that size. Looking back, ignorance caused me to accept short term dollars instead of acquiring long term wealth.
I thought the only people who could own a big apartment complex were the extremely wealthy!
“Pardon me, do you have any Grey Poupon?”
What is apartment syndication?
The most basic definition of syndication I can think of is, “a group of individuals or companies combining their resources (time, expertise, money, etc) to do something they couldn’t do, or that would be very hard to do, on their own.”
A LOT of people would love to benefit from owning an appreciating asset, like an apartment complex, that provides cash flow and extremely attractive tax incentives. However, very few people have the ability (time, expertise, money, etc) to purchase a big apartment complex on their own.
Problem: Individual Ability
Solution: Real Estate Syndications
What apartment syndication is NOT
For clarification, an apartment syndication is NOT the same thing as a REIT (real estate investment trust). A REIT is a privately or publicly traded company that owns and manages real estate holdings. When you invest into a REIT, you’re not investing into a specific investment, but rather into a specific company.
A syndication differs in that, when you invest with a syndicator, you own a percentage of the property itself. This is important because it allows you, as an investor, to actually own and benefit from all that real estate has to offer. One small example, (with a big impact), investing in a REIT doesn’t provide you the same tax shelters that come from owning a percentage of the actual property.
Just want to make sure you “cross the t’s and dot the… lower case j’s.”
The more I explore the investment world, the more I realize my own financial illiteracy. The more I talk about apartment syndications, the more I realize I’m not alone in that illiteracy. The majority of the population view their investment options as follows…
1- Owning their personal residence
This is not an investment. “Buying a house is a major financial decision that can give you peace of mind and a wonderful place to live. But it’s not an investment.”
2- The American 401k, 403b, or traditional IRA
“Employer match and tax breaks, not a bad deal, right? Until you’re ready to retire, that is. That’s when a 401k or 403b suddenly becomes the worst possible retirement plan.” -Michael Reese, Kiplinger
“If (the American 401k) were an ice cream flavor, (it would) be pralines and dick”
(Listen, I had to lol!)
These are the most well known type of investment. If you had money invested in stocks during the coronavirus pandemic you know they are also highly volatile.
Very low yield. “At the end of 2018, the yield on the 10-year U.S. Treasury bond was 1.92 percent. That means that a 100 U.S. dollar Treasury bond purchased in 2019 would mature at a value of 101.92 in 2029.”
In other words…
The majority of the people invest in garbage because they don’t know any better. That’s a travesty.
“Hey Phil, if you’re gonna spew, spew in this!”
The apartment syndication roles
Ok, let’s get back on track by breaking down the different parties associated with apartment syndications.
The Sponsor, also referred to as the general partner (GP), operator, or syndicator, are responsible for identifying the market, sourcing the property, securing the funding (debt & equity), developing and overseeing the business plan, and managing the property management company.
The Limited Partners, also referred to as the LP’s, investors, or accredited investors, are responsible for investing the money needed to fund the deal. They typically have limited voting rights which also limits any liability should there be a lawsuit. The limited partner group is typically made up of a number of private investors who are looking to benefit from real estate without the headache or liability of operating the asset.
The Property Management team is an essential piece of the puzzle. They oversee the day-to-day operations of placing and caring for tenants, marketing the property, and overseeing any renovations.
The profit breakdown
The Sponsors make the majority of their money from the profits they split with the limited partners. That split can be structured a bunch of different ways, but it’s primarily a straight split (example: 70/30) or a waterfall structure (example: 6% preferred return to investors, after which split 70/30). Sponsors also make money from an acquisition fee upfront (for putting the deal together) and an asset management fee throughout the deal (for overseeing the managing asset). The Acquisition Fee is typically 3-5% of the purchase price and the Asset Management Fee is typically 2% of the gross income.
Limited Partners are typically the majority share holders in the deal and receive a large majority of the profits from the operations and sale of the asset. Profits are split in accordance to ownership percentage. The example of a 70/30 straight split (outlined above) would result in 70% of profits going to the Limited Partners and the remaining 30% of profits going to the Sponsors.
There are pro’s and con’s to each role. If you’d like to explore those in more detail, check out my “Passive or Active: What investing strategy makes since for you?” article.
An apartment syndication is a way for you to get access to institutional grade investments, investments that used to only be available to the largest of institutional investors. The next time you look at a big apartment complex and think…
“It will be mine. Oh yes, it will be mine.
Just know that it literally CAN be yours!
I’m sure your inner Garth (and society as a whole) will still tell you things like…
Stop torturing yourself, man! You’ll never affor it, LIVE IN THE NOW!
So, when that happens, and you think….
“No way,” just take a deep breath and reply back with a confident, “Way!!”
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