Have you been looking for the best real estate investment option that can work for you and you have finally settled on passive apartment investment through apartment syndication? I know it always feels amazing to let your money work for you while you are not actively involved.
What is apartment syndication?
Apartment syndication is a passive real estate investment strategy where resources are pooled together to buy an apartment building, and thereafter operating and managing it to generate income. The syndicator also known as the general partner or sponsor will raise money from passive investors. They will then buy the apartment and execute the proposed business plan. The passive apartment investors will be entitled to periodic passive cash flows without being actively involved.
However, not all apartment syndications are good and profitable. If you are not sure about how to select the most ideal one, we have prepared a passive apartment investing checklist to help you understand the factors that you need to consider before passively investing in apartments.
- Property type- The type of investment property also matters. The three common types of apartment investments are; Distressed, Stabilized, or Value-add apartment investment. Each property type has its own risk levels, management work, and cash flow. Stabilized is less risky while distressed has the highest risk levels and requires a lot of repairs and maintenance before it can start generating income.
- The syndication team- It’s very important to do due diligence on the syndication team because they will determine whether the investment proposal is going to work or fail. Check their track records and references to ensure you are dealing with a genuine and committed syndicator as they claim. Don’t risk your investments if you don’t have some level of trust with your general partner.
- The target market- The target market and the location of the apartment is another great factor that you need to consider as well. You should invest in apartment projects that are targeting locations with a growing population, job diversity, and rising housing demand.
- Management fees- There are management fees that are associated with passive apartment investing. They can range from, acquisition fees, asset management fees, disposition fees, and property management fees. Although these are legit expenses, it’s very important to consider the percentages proposed by the syndicator to see whether they are within range or not.
- Profit splits- This is the percentage of sharing the profit generated from the apartment investment between the syndicator and passive apartment investors. Most of the best passive apartment investment deals have both preferred returns and profit splitting.
- Key metrics- There are different metrics and terms that you need to consider before making the investment choice. Ask which metric the sponsor offers which can either be about Cash on Cash Return, Equity Multiple, Average Annualized Return, or Internal Rate of Return. Once you understand the sponsor metrics you will make a decision whether it meets your preferred rate of return or not.
- Investment timeline and assumptions- Since apartment investments are long-term projects, understand the timeline. Also, ask if there is any refinancing plan and how the investor capital will be utilized. If there are any pro forma, it’s important to get their details and seek clarification on assumptions regarding the rental increase, expenses, interest rates, or exit cap rates. Enquire about the tax benefits that apartment investing also attracts to understand how this will impact your taxation policy.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, please consult with your own CPA, legal, and financial advisor before investing.