What is Multifamily Real Estate Syndication?

Real estate syndication is not a one-person job

Making and maintaining a real estate investment takes a lot of effort and money. But maintaining everything by yourself is going to become overwhelming if real estate investing isn't your main source of income.

Multifamily syndication thrives in this area because it allows you to increase your real estate holdings passively without having to assume the position of a landlord or get bogged down in complicated legal procedures.

Multifamily syndication is a real estate deal in which several investors combine their funds to buy a property. A sponsor is in charge of finding the deal, organizing the transaction and financing, and overseeing the investment after the transaction has been completed.

Its sponsor is the general partner. Passive investors contribute the majority of the capital in exchange for equity in the real estate.

Any type of real estate investment can be the subject of a syndication deal, although multifamily is now the most popular. Because it frequently generates consistent income and is seen to be one of the safer types of real estate investments, multifamily investing is popular among real estate investors.

You can also refer to the Howey Test to determine what the SEC (Securities and Exchange Commission) considers to be a syndication, legally speaking.

The Howey Test refers to a U.S. Supreme Court case to determine if the transaction qualifies as an investment contract, and if it does, then it is considered a security and subject to the rules of the Securities Act of 1934. In this case, the Howey Company sold tracts of citrus grove to investors, who leased the land bank to the company. Howey was in charge of the groves, taking on the role of what we consider the sponsor. The company did not register with the SEC, and the court ruled that this transaction qualified as an investment contract. More importantly, the Supreme Court created criteria to determine what an investment contract should be:

An investment of money

In a common enterprise

With the expectation of a profit

To be derived from others

Credits to Investopedia or the Howey Test Definition.

if you’re partnering with someone else, taking their funds, and doing all the work while the partner is a passive participant, be very cautious. There's a good chance you're starting a syndication, in which case you should register with the SEC.

The only way to be sure is to schedule a call with an attorney who specializes in securities law. Always seek the guidance of licensed professionals when dealing with law and taxes.

In a syndication, who are the parties involved? A sponsor and investors make up a syndicate (limited partners). The sponsor is the entity that has the expertise, structures the transaction, oversees the transaction, and authorizes the debt. Usually, they contribute between 10 and 20 percent of the ownership.

They put up a relatively small amount of money, so it would seem unjust that they get a big share of the equity, but keep that in mind. They are in charge of managing the transaction and carrying the majority of the risk. The limited partner owns a portion of the LLC, which is often how the syndication is set up.

I know you might be wondering why this article is short. I want to make sure you understand everything I mentioned above before diving deep into the topic.

So, let’s discuss more on how sponsors and passive investors get paid in the next article. I’ll make sure to answer all of your questions on this article in the next one. See you in the next one!