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  • Keshav Kolur

The PROS of Multifamily Real Estate Syndication

Updated: Oct 27, 2022

"Should I have started sooner?"

In the previous article, we discussed what a multifamily real estate syndication is, so should you start asking yourself the question, “Should I have started sooner?”.

Real estate syndication can be an effective investment strategy. It is widely applied in multi-family real estate. So, in this article, we will be discussing to you the pros of syndication, along with whether or not this strategy will help you achieve your own goals and objectives.

You might not commonly see the word pros being used alongside its opposite, the cons. We’ll be talking about the cons in our next article but, right now let’s focus on the pros.

Remember to keep your attention on your long-term objectives and goals.

Also keep in mind that you can syndicate other deals and buy other deals with partners. Syndication is only one "tool" in your Buy Right toolkit, as we stated in our last article.

Here are the pros of multi-family real estate syndication:

1. Passive Investing

Real estate syndications are essentially passive investments. They make it possible for you to invest in these huge, multi-family properties. You just have your capital to lose, as opposed to a partnership or joint venture when everyone is "active" and you incur a much bigger risk.

For instance, you might contribute the capital in a partnership. While someone else manages the contract, you invest the money. However, if that transaction fails, you run the danger of the lender suing you if something happens to the property. Investing in a partnership can't be regarded as a fully passive investment because, even though you're merely bringing your funds, you're still considered to be "active" under the law.

If you're a business owner, attorney, accountant, programmer, or developer, syndication is very ideal for you. If you have a significant income, you can invest passively without taking on any additional risk.

2. Cash Flow (Scale)

Several real estate investors start out just by acquiring single-family properties, duplexes, triplexes, even smaller multi-families. Cash flow is one of the major obstacles to operating on such a tiny scale because scale doesn't work in your favor:

  • Your total property management costs range from 10 to 12 percent of your gross income.

  • Normally, you don't receive interest-only payments, which significantly improve your cash flow as you carry out your value-add plan.

  • When you're working on a smaller scale, your expense ratio is indeed very high.

  • When your business is in the residential sector, financing is exceedingly difficult.

Perhaps, you might have the funds to purchase a single-family home. However, functioning on such a small scale has significant drawbacks. Consider a scenario in which one of your duplex's tenants vacates. When it occurs, 50% of your revenue vanishes instantly.

However, through syndication, you can benefit from all the advantages of scaling up, such as investing in much larger properties. Together with other investors, you can pool your funds to benefit from the increased predictability, stability, and cash flow. Furthermore, depending on the sort of property, your expense ratios will be significantly lower, ranging from 40 to 50 percent.

The key to successful real estate investing is cash flow. So it is definitely advantageous to be able to take part in much larger investments that allow you to scale up in terms of size.

3. Tax Benefits

This is a logical extension of the previous statement. Cost segregation, which I like to refer to as "depreciation on steroids", is something you can use when you're scaling up. Basically, you strip out everything that isn't directly tied to the building and the actual land and depreciate it upfront to give you paper losses. Your tax obligation should be greatly lowered as a result.

You want your money to work hard for you as an investor. But you want to go about it in the most tax-effective method possible. No one likes to pay more in taxes than is necessary. By using syndication, you can reduce the amount of tax you'll have to pay on all the gains you make from your investment by utilizing depreciation as well as other tax breaks and incentives, such as bonus depreciation.

Let’s discuss the cons of joining a syndication in the next article. So be sure to watch out for our next newsletter or visit our blog section from time to time so you don’t miss out on any real estate news, article, tips, and educational content that can help you start your journey in the real estate industry.

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