What is a Syndication?
A syndication involves bringing together capital from multiple investors to take advantage of opportunities that might be too expensive for an individual or small group to afford alone. By pooling resources through a joint venture, you are able to pursue investments that would otherwise be out of reach.
We focus on syndications to move away from the highly competitive and hectic market of smaller deals, typically under $1M to $2M.
The AXOS Group targets properties priced between $10M and $20M, a range that allows us to avoid direct competition with larger institutional investors and hedge funds, whose priority is usually preserving capital rather than maximizing equity growth.
You can syndicate almost anything, whether it’s a small business like a pizza shop or a multi-million dollar real estate development. The AXOS Group prefers to stay focused on cash-flowing real estate in areas with high tenant demand. That’s where we see the most opportunity for steady returns club members.
Various Roles in a Syndication
Whenever you’re learning something new, it’s best to start with definitions. Once you understand those, we can build on the concepts. Remember, mastery comes from working with the right people and jumping into real deals.
In syndications, the General Partners (GPs) are responsible finding the deal, negotiating terms, bringing in investors, securing financing, managing property operations, and overseeing the investment. GPs are also known as the sponsor, lead, manager, operator, or syndicator.
General Partner (GP) Responsibilities
Here’s what the GP does and why they deserve compensation:
- Source and identify assets
- Underwrite and discover hidden value
- Pursue, negotiate, and win deals
- Develop asset business plans
- Negotiate purchase and sale agreements
- Conduct thorough due diligence
- Secure financing
- Close deals
- Manage assets
- Lease to new tenants
- Renew leases with existing tenants
- Oversee capital expenditure projects
- Execute asset business plans
- Dispose of assets
- Deliver investment returns
Limited Partners (LPs)
provide most of the money for the deal but take a passive role. In return for their investment, they receive equity, a monthly or quarterly cash dividend, and profit shares when the property is sold, based on their equity shares.
Loan Guarantors or Key Principals (KPs)
The loans are guaranteed by Loan Guarantors or Key Principals (KPs), typically individuals with a net worth of over $2-5M who sign on the debt for the entire syndication. While they do get compensated, the risk-reward varies from deal to deal.
Why Invest as an LP in Syndication?
1. Minimizing Headaches
By investing passively, you no longer have to manage tenants, vacancies, or maintenance. Instead, the day-to-day operations are handled by experts, allowing you to focus on other things like making more money in your job, spending time with your family, or finding your own smaller deals to pursue.
2. Asset Diversification
Real estate syndications allow you to invest in properties that would otherwise be out of reach, like large commercial assets. Instead of dealing with smaller, highly competitive properties, investing passively enables you to diversify across asset classes and locations, reducing risks and increasing potential returns.
3. Avoid Credit and Liability Risk
LPs avoid personal liability or having to guarantee large multi-million-dollar loans. You don’t need documented W2 income or risk your credit. This means you can also take advantage of credit cards and travel perks without worrying about debt exposure.
Accredited Investor
An Accredited Investor is defined by the SEC as someone who:
- Made at least $200,000 ($300,000 if filing jointly) in each of the previous two years.
- Has a net worth of $1M or more (excluding their primary residence).
Accredited investors can invest in opportunities that are not available to the general public. There’s also the concept of a Sophisticated Investor, which is less clear but refers to someone with sufficient knowledge and experience to evaluate the risks of an investment, even if they don’t meet the financial criteria of an accredited investor.
Unfortunately, many individuals are not protected when investing in the stock market, despite its volatility. In contrast, real estate syndications offer a more tangible, predictable alternative. The 2012 JOBS Act allowed Main Street America to participate in more “alternative” investments through crowdfunding, but we still have a long way to go.
How Non-Accredited Investors Can Participate
Non-accredited investors can be tricky to work with because they require more education and handling due to SEC protections. However, here are some tips for non-accredited investors:
- Be serious and educated when building relationships with syndicators.
- Be upfront about your investment intentions.
- Add value and respect the time of syndicators. They are vetting you just as much as you’re vetting them.
Preferred Equity
Preferred Equity in real estate provides certain privileges over common equity. It is a hybrid of debt and equity, offering investors a priority claim on profits and liquidation proceeds. Investors in preferred equity usually receive a fixed return, have priority in distributions, and face less risk than common equity holders, though they may have limited upside.
Key Takeaways When Touring Properties
- Ensure updated and visible signage and logos.
- Keep foliage, paint schemes, and property exteriors well-maintained.
- Make sure tenant areas are clean and free from fire hazards.
- Look for mismatched appliances or kitchen cabinets that may need updating.
- Focus on improving common areas and amenities to enhance property value.
5 Steps to Successful Multifamily Investing
Syndication Property Types and Deal Structure
- Location: Growing cities with diverse economies and large populations.
- Price Range: $5M-$75M. Typically, 20% of the purchase price plus extra for value-add improvements needs to be raised.
- Equity Split: Usually, the LPs receive 70% of the equity, while the GPs get 30% for executing and managing the deal.
- Timeline: Syndications typically last 5 years.
- Property Type: Most syndications focus on large multifamily rental properties (100-500+ units) with value-add opportunities to increase property value.
Expected Returns
When done right, being a GP can result in 25-35% annual returns. As an LP, returns typically range from 17-20% per year or 80-100% over five years. While being an operator may produce higher returns, it comes with higher risks and responsibilities. LPs, on the other hand, benefit from passive income without the headaches of managing properties.
Know the equity split, preferred returns, fees, and holding periods.
In conclusion, real estate syndications offer the potential for solid returns with less involvement than being an active operator. With the right syndication team, proper due diligence, and a clear understanding of legal documents, investing in multifamily properties can provide steady, passive income for years to come.