Invest in a Business Backed By Real Estate
Investing in an apartment syndication is investing in a business. Like any business, there’s a product, and like any business, the business is valued on how much income it can produce. For apartments, the income is the rent minus the expenses, which is your net operating income, or your profit. To get the value of an apartment complex, net income is divided by what’s called the cap rate—capitalization rate, and that number changes with the market economy. Cap rate is a number showing what your return per dollar would be if you had paid cash for the investment. When it is a really hot market, cap rates are a small number so the price, or value, is higher. When the market is slow, or down, the cap rates are higher, meaning the price/value is lower.
When you invest in a syndication, you are investing in a business. Every business has an operation team or person running the business. They run the property management, employees, contractors, etc., with the purpose of fulfilling an investment plan, or operation. In a syndication you are investing in those operators/syndicators/sponsors. You must do your due diligence and make sure you are investing with an operator that knows what they are doing. The operator underwrites the value and improvement costs, and based on their experience and knowledge of how to make an apartment complex more valuable, you are trusting that they have that experience and track record to fulfill the operation plan. Pro forma is the expectation for the investment project if the operation plan is carried out as planned. Pro forma tells us that the property is going to be worth “X,” in the future, so when you are presented an offering, you are going to be presented with expected returns. Of course returns are never be promised, it is an investment and there is always risk involved, but based on their experience, their underwriting, and based on the future market predictions, the operator should be able to estimate, or project, returns.
Each syndication project has its own LLC, so instead of being called a CEO, the term is going to be either operator, syndicator, or sponsor.
So Much to Love About Apartment Syndication
What is lovely about apartment syndications is that it is backed by real estate. Not only do you get the cash flow and the capital gains by making the business more valuable through increasing the income, reducing expenses, or by market appreciation, but the real estate tax benefits—that is one of the biggest benefits to investing in a company like this.
That being said, I venture to say that you are investing more in the business than you are in the real estate from a due diligence standpoint—that always comes first.
Another benefit to investing in a syndication is that you are investing in properties in the muliti-millions of dollar value, and it’s typically backed by non-recourse debt—it’s government-backed debt. Meaning, if the business fails, the worst thing that could happen is you lose what you invested. You don’t want that to happen, but that is the worst that could happen. If the asset was not backed by a government non-recourse loan, the lender could potentially come after the partners for more capital. If you are invested in a single family home and you are the only one that owns it, the lender could come after you for more capital if you can’t make your payment. You also may have to come out of pocket for repairs, or if it loses value and you want to offload it, you may find yourself bringing money to the closing table.
There are a lot of reasons to love syndication, but my favorite is that you know you are investing in a business that is backed by real estate and your risk is capped at your investment.
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