A real estate syndication is where a group of people pool their resources to purchase real estate – often a large property like an apartment building – which would otherwise be difficult or impossible to achieve on their own.

One of the most famous syndications is the purchase of The Empire State Building, which was purchased by Helmsley & Malkin in 1961 for $65 million from 3,000 small investors, many of whom paid only $10,000 for a single share.

A real estate syndication typically involves the “general partners” who organize the syndication, including finding the property, securing financing and managing the property; the general partners are sometimes referred to as the “sponsors” or “operators”. 

The group of people who provide the cash investment are often referred to as “passive investors” or “limited partners”. In return for their investment, the limited partners receive an equity share in the syndication along with cash flow distributions and profits.

A real estate investment syndicate is typically open to “accredited investors”. The Securities and Exchange Commision (SEC) defines an accredited investor as someone who has an annual income of $200,000 (or $300,000 joint income) or a net worth of at least $1M—not including your primary residence. Visit the SEC website for additional information and resources.

Some syndication offerings, such as the ones designed as “506(b)” offerings – are open to unaccredited investors. Many multifamily syndications are 506(b) offerings, which means they are open to unaccredited investors, but these investors have to be “sophisticated”.

A sophisticated Investor has enough knowledge and experience in investing in alternative investments such as real estate, oil, or precious metals. They may have made previous investments outside the stock market or perhaps they attended an investing seminar. Whether or not they have actual investing experience, the person has the ability to make an informed decision about a particular syndication offering.

Equally important to being “sophisticated”, the investor needs to have a pre-existing “substantive relationship” with the deal sponsor (i.e. the partner or partners who are presenting the opportunity). While the SEC doesn’t specifically define what “substantive relationship” means, it provided clues in this letter to a company called “Citizen VC”. 

When you become an investor with {{location.name}} you are taken through a “get to know you” process. These steps allow us to gather pertinent information such as: financial info and goals, risk tolerance, investment experience, etc.

The beautiful thing about passive investing in multifamily syndications is that you receive cash flow, get your principal back and make a return.

But when do you get paid and how much can you expect? 

In this section, I’m going to explain when and how often passive investors get paid and how much you can expect to earn.

You’ll understand the ins and outs of a cash out refinance and learn how passive investors can redeploy that money for infinite returns!

As a passive investor in a multifamily syndication, there are 3 ways you can get paid:

Cash flow distributions

Cash out refinance

Sale of property

Let’s go through each in turn and talk about when and how these payments can occur.

CASH FLOW DISTRIBUTIONS

When your multifamily investment property earns a profit, so do you! The frequency varies by project and operator, but most passive investors get paid quarterly.

One thing to keep in mind: Your first cash flow distribution may be delayed depending on the type of project.If you’re passive investing in a stable value-add deal or a heavy value-add deal, it generally takes 6 to 12 months for your cashflow to arrive.This timeline depends upon the performance of the property.

In other words, your syndicator may need time to make some basic improvements and raise occupancy before the first cash flow distributions can be delivered. Make sure you account this pause in receiving immediate cashflow.

(To learn more about earning cash flow distributions as a passive investor, watch my video on The Potential Returns of Multifamily Real Estate!)

CASH-ON-CASH RETURN

A related term you need to know is cash-on-cash (CoC) return. Let’s say you made a passive investment of $100K, and you earn $7K in annual cash flow distribution. The CoC return is calculated by taking the initial investment divided by your cash flow distribution:

7k/100k = 7% CoC return

At {{Location.name}} we shoot for CoC returns between 7% and 9% upon stabilization of the property. And we work to hit that target no later than Year 2.

Another cool thing to remember here is that adding value to the building will grow your CoC return. As the operator renovates and increases the money coming in, your cash flow distribution checks get bigger too!

CASH-OUT REFINANCE

Passive investors get another (much bigger) pay day in the case of a cash-out refinance. If you invest in a value-add deal and the syndicator’s team does their job, the building’s net operating income will increase over time.

Then, they can refinance the property at a higher valuation (it’s worth a lot more now that it’s earning more!). Now the operator can pay off the loan and give their passive investors a big chunk of their principal back. And hold the property to continue bringing in cash flow.

Here’s an example of how this works: We syndicated a 321-unit deal in Mainland called View. We purchased the deal for $6.8M and made $1M in capital improvements.

Now listen to this… We recently refinanced the property, and it was valued at $15M! This allowed us to return 84% of investors’ principal—and they continue owning 80% of the asset.

When you think about it, this is a pretty awesome scenario. Our passive investors got most of their initial investment back (which reduces their risk). They are now free to redeploy that money in a new multifamily syndication. But they still own equity in the original deal!

This leads to what we call infinite returns. Passive investors are still getting cash flow distribution checks based on their initial investment in Country view. But they have a huge portion of that original investment back—and available to invest in a new deal for another similar payout!

SALE OF THE PROPERTY

Last but not least, passive investors get paid when a property is sold. The syndicator repays the loan first and returns your principal investment. And then, profits from the sale are split by equity.

At {{Location.name}} the life of a deal is right around 5 to 7 years. In other words, we aim to return the majority of our passive investors’ capital (either through a cash-out refinance or sale of the property) within that time frame.

SHOW ME THE MONEY!

So, when do passive investors get paid for putting their money in a multifamily syndication?

You earn regular cash flow distributions quarterly.

You get a bigger pay day after a cash-out refinance OR sale of the property

If you’re still unsure about investing in multifamily syndications, check out my special report called What’s the Better Investment: The Stock Market or Real Estate. It might open your eyes about the true returns of the stock market and the absolutely amazing opportunity we have with real estate syndications.

If you’re ready to take the next step, and you want to invest in one of our upcoming multifamily investment opportunities, join our {{location.name}}.

You’ll be asked to fill out a short questionnaire and schedule a phone call with our{{location.name}} team so that we can get to know each other a bit more. We can then present you with an upcoming opportunity.

Don’t have money in the bank to invest in multifamily?

Don’t count yourself out!

There are several ways to access capital for real estate deals.There are different money sources you can use to invest in real estate syndications!

For example, you can convert your stocks and bonds into cash for a multifamily deal or open a line of credit. You can use a portion of your retirement account for passive investing. Let’s explore the different money sources you can use to invest in syndications.  Now, I am not a financial advisor, CPA, or attorney, and we are not giving you advice here based on your personal situation. 

CASH SAVINGS

The easiest way to invest in real estate syndications is with cash. Of the possible sources of capital, it is the most liquid—meaning it is readily available and can be quickly wired to the syndicator you are working with.

STOCKS & BONDS

Another source of funds for real estate syndications is stocks and bonds. You can sell a portion of your mutual funds or ETFs for cash and put that money in a multifamily deal.

Of course, you will have to call your broker and have a conversation about why you want to sell. And while I don’t recommend pulling ALL of the money from your current investments in stock and bonds, it makes a lot of sense to use a portion of it to add multifamily to your portfolio.

Like I’ve said before, there is no better investment in the world than apartment buildings. Nothing else affords you the cash flow, above-average returns AND the extraordinary tax benefits of real estate syndications.

LINES OF CREDIT

Yet another way to access funds involves opening a line of credit. If you have equity in your home, for example, you can get a loan at a relatively low interest rate and use that money to invest in real estate syndications.

Do be careful, though. It’s important that you invest in a multifamily deal with a fairly high return in order to bridge the gap.

SELF-DIRECTED IRA

If you have a retirement account, you can use a portion of that money to invest in real estate syndications too! Here’s how it works:

1. Open an account with a self-directed IRA custodian.

2. Write a letter to the administrator of your existing account, asking them to move a certain amount of money to the new self-directed IRA.

3. When you’re ready to invest in a real estate syndication, instruct the custodian of your self-directed IRA to wire the money to the appropriate closing attorney.

4. Congratulations, your self-directed IRA now holds a share in the LLC of that particular real estate syndication!

There are some limitations that come with investing through a self-directed IRA. The law requires you receive no direct or indirect benefit from the investment. In other words, you can’t touch the money and cash flow distribution checks must be deposited directly to the IRA.Let’s take a look at how to choose the right custodian, the processes involved, and the pros and cons of this strategy.

How to Invest Using Retirement Funds

The thing people don’t realize is that just by having a self-directed IRA doesn’t mean you can use it for real estate investing.  A self-directed IRA requires an IRA custodian. Normally, it’s a financial institution (like Schwab or Fidelity) that sets up and manages the account so that it abides by the US tax codes.

But if you call your custodian and start asking questions, you might find that you can’t actually use these funds to invest in real estate assets. They’ll call it a self-directed IRA, but you can only direct it in things like Wall Street. Obviously, you’ll need to find a new provider that will allow for real estate investment. And even then, they’re not all created equal.

From our experience at Nighthawk, we’ve found some of these self-directed IRAs are easier to work with than others. Some will allow for real estate, but not for syndications. Others only take paper checks, which we’ve made a rule to avoid.  When we conduct distributions, we actually require a group to take electronic deposits (ACH/Wire).  So, if your IRA custodian insists on paper checks, know that you will not be able to invest with us and certainly with other groups.

Another thing to consider is how quickly the custodian can execute documents. The tax code requires an arms-length transaction to happen, and one of the things that involves is the custodian must sign for every transaction on your IRA. While it might be the “Michael Blank IRA” it’s really its own separate entity, if you will.

Every time you have a document that needs to be signed, like an operating agreement for example, there’s a process for submission. If your custodian insists on receiving a paper document with a wet signature instead of accepting a DocuSign, it will put a delay on the deal.

In all, there are certain things you want to do when looking for a custodian of your self-directed IRA. First, just start a conversation with them and learn how they operate. Second, whether it’s Nighthawk or another investment group, ask their opinion about the custodian.

MOVING YOUR IRA TO A NEW CUSTODIAN

Once you’ve found a custodian for your self-directed IRA, there’s a series of paperwork that you’ll fill out.  The new custodian will then get in touch with your current custodian to process the money transfer, which may take a couple of weeks. It’s different for each group, but it’s a more involved process than you might expect.

That’s why the best time to make a change is before there’s an active deal present. You want to put yourself in a ready position, especially in today’s environment where deals happen pretty fast.

At {{location.name}} , our deals typically fill up in just a few days after we start, and we like to move quickly.

THE PROS AND CONS

Like any investment strategy, there are pros and cons.

The main advantage of using a self-directed IRA to invest in syndicated real estate deals is the return. Many people have a lot of money wrapped up in an IRA account that’s earning only 1-2% a year.  So that makes investing with an IRA very, very powerful.

The con is that you may actually have to pay taxes on your IRA. There is something called the UBIT (Unrelated Business Income Tax) which usually affects investments that have some kind of debt associated with it. And of course, all multifamily syndications have debt. That’s beautiful, but the tax law doesn’t think so, right? This tax law makes you pay income tax on any portion of income that’s derived from debt.

For example, let’s say you’re using a mortgage to fund 80% of a multifamily apartment deal.  This is a debt, which means that 80% of any profits you make are taxed at your current tax bracket. This is triggered when we sell, and will now be a taxable event in your IRA.  And if you didn’t create a tax ID for your IRA prior to getting it set up, you may have to pay a penalty and interest when you CPA files your returns.

Going through is a real nightmare. But I now know how to properly set these things up from the start, and I think it’s a great way to get started. The good news is there’s a solution for the headaches I experienced. It’s a different kind of 401k called a Solo 401k.

THE BOTTOM LINE

• You can use retirement funds within a self-directed IRA to invest in real estate, with the main advantage being an increase in your average annual return.

• The key is to find a custodian that understands the tax code, will allow you to invest specifically in syndicated real estate deals, is setup to allow for electronic money transfers, and works swiftly to execute documents on your behalf.

• Don’t wait until you have an active deal to transfer your funds. Start the process now so you are in the ready position, and be sure to ask the opinion of groups like ours about the custodians you are vetting.

•Be aware that there may be serious tax implications in this strategy, unless you set yourself up correctly.QRP

The one problem with investing through a self-directed IRA? There’s a good chance you will get taxed on the money you earn from a real estate syndication.I know this is hard to believe since you’re investing with your retirement fund, and theoretically your taxes are deferred. 

But when investing in something that uses debt (like real estate), there’s this pesky called the Unrelated Business Income Tax (UBIT) that you have to pay when the real estate is sold.

So, what’s the alternative?

Well, there’s this little thing called the Qualified Retirement Plan or QRP—and it just happens to be exempt from UBIT taxes IRA investors are subject to when an asset sells.

Full disclosure, it does cost more to set up a QRP trust up front, but it has benefits beyond avoiding the UBIT tax:

• You don’t need a custodian to sign your paperwork. You do that yourself!

• You can borrow up to $50K from the trust without penalty.

To learn more about how the QRP works, get a free copy of Damion’s book, How to Get Checkbook Control of Your 401(k) & IRA Money Now.

SO, WHAT’S BEST?

If you have access to several different sources of capital, cash is best—simply because it’s the easiest to deploy.

Multifamily deals move quickly, and once an opportunity is announced, syndicators take investors on a first come, first served basis. If you have cash, you can get into a deal quickly and wire the money right away.Investors using a self-directed IRA are at a slight disadvantage because it does take a few days to complete the paperwork and get your custodian to wire the money.

Conclusion

So, what are the different money sources you might use to invest in real estate syndications?

1. Cash

2. Stocks & Bonds

3. Lines of Credit

4. Self-Directed IRA

5. QRP

   Explore all the available options. Beyond cash savings, there are many different ways to invest in real estate syndications!