Many deal syndicators these days are changing their investor pools. In the past, a multifamily syndicator would rely heavily on Wall Street, or institutional money to bring capital to their deals. Today syndicators are finding it easier to interface with individual investors. The benefits to the syndicator include a lower cost of capital, efficiency, and the chance to build an investor base that keeps coming back to do more deals. The benefits to the individual investor are many. Here are a few:
Leaving the Landlord Job Behind
While it’s true that many commercial real estate investors start out as landlords on smaller properties and graduate up, others simply don’t have the time. This is especially true of well paid professionals or business owners who would rather spend their weekends with their families instead of turning a wrench on a rental property or flip project. Commercial syndications allow investors to leave the landlord job behind. Investing in a large apartment complex allows them to directly own real estate assets without the burden of management. That job is left up to the professional syndicator and his management team. This frees the investor up to focus on the role of capital manager. The capital manager is focused on finding the right markets, the best syndication teams, and the best deals to put capital to work.
The Ability to Diversify Across Assets and Markets
Most active investor/landlords are reticent about investing in markets they don’t understand. This is for good reason. The risks and time involved in learning a new market is enormous. This is why most investor/landlords choose to build their portfolios close to home. They do this to control their assets and manage risk. The downside of this is a property portfolio of uniform assets in a single market. Concentration on single asset class in a single market presents an unfavorable risk proposition. This is especially true when that market is depending on jobs in certain industries for its economic security. In a downturn, if those industries suffer, so will the portfolio. Investing in multifamily syndications allows the investor to buy assets across a variety of markets, thus diversifying their holdings. You can own a self-storage deal in Atlanta, an apartment complex deal in Dallas, and a mobile home park deal in Phoenix and rest-assured knowing those assets are in markets with diverse risk profiles and run by managers who know and understand those markets and assets.
An experienced syndicator understands that investors want strong and consistent cash flow. This is why most good deals are underwritten with a conservative projection of 8-11% annual cash on cash return. These dividends are paid monthly or quarterly and are important to investors. Although these dividends are only a portion of the total investment return, investors want to see robust income early in their investment time horizon. These dividends finance lifestyles, supplement income, or are rolled into other investments. This income is especially attractive as it’s taxed differently than earned income. These dividends in many cases may have no tax liability after allotted interest expense and depreciation costs from the deal are applied against the income.
Every real estate investor expects their investment to appreciate over time. This is achieved either through forced equity or the gradual increase in prices in the real estate market over time. Syndications that focus on a value-add approach are able to increase the sales price of their asset through a disciplined application of their business plan. Good syndicators have this process down to a science. Instead of buying a rental home and hoping for the tailwind of growth, the syndicator makes equity happen by the intentional approach of renovating outdated units and raising rents. Skilled syndication teams also bring other services into the business that raise revenue like valet trash services, renting parking spaces, and selling amenities. Capital growth can be attained fast since these business plans can be easily implemented and are strategies that a skilled team has executed many times over.
Learning to Manage Capital
By investing in syndications the investor learns how to manage capital at a high level. This experience and knowledge is one of the more overlooked benefits of investing in larger deals. When an investor reads through an Investment Summary (or Deal Deck) they are gaining knowledge about the market dynamics, the experience of the syndication team, and attributes of the deal that are appealing to the syndicator. The Investor call is a tremendous educational opportunity for the investor to get an inside view of how the syndicator sees the opportunity and plans to execute the business plan. After participation in numerous syndications the investor grows their knowledge base and their ability to parse good deals from the best deals improves dramatically. These skills have a far greater return on the investors time than repairing sheetrock in a rental property. Learning to be a shrewd capital manager is arguably the highest art in the real estate business, but it demands focus and commitment.