Everything has two sides and as it’s the same with all kinds of investments, Multifamily Syndication has pros and cons that investors need to understand and consider to avoid as much risk as possible.

Pros:

_ Multifamily syndication is a cost-effective and simple option to start investing in real estate. Depending on the project and operators, entry investment opportunities might be around as little as $25,000 (some may even be smaller amounts). This investing model offers investors a way to own a part of an apartment complex with an affordable capital amount. 

_ Multifamily syndications are truly passive investments. They allow you to participate in these large, multi-family properties. The only thing you risk is your capital, as opposed to a personal investment or a partnership or a joint venture where you or everybody is “active” and you risk so much more. You're investing the money and General partners are managing the deal. If that deal goes belly up, you are not at risk at all because the lender will come after General Partners in a lawsuit if something ever happens to the property. After the initial investment, the project requires no further attention from the Limited Partners. The General Partners take on all of the responsibilities that come with owning an apartment complex or other rental property. Passive investors can maintain their employment, hobbies, and other commitments.

_ You can take advantage of all the benefits of scaling up, like investing in much larger properties. You can pool your capital with other investors, so you can all take advantage of the added stability, cash flow, and predictability. Plus, your expense ratios are going to be much lower. Cash flow is key, it’s the lifeblood of real estate investing. So being able to participate in much larger investments that gives you the benefit of scaling up in terms of size is a definite pro.

_ When you scale up, you can take advantage of something called cost segregation. Which means you’re basically stripping out everything unrelated to the building and depreciating it right upfront to give you paper losses. This should significantly reduce your tax liability. As a passive investor, you want your money to be working hard for you. Yet, you want to do it in the most tax-efficient way. Nobody wants to pay more tax than they have to. Syndication allows you to take advantage of depreciation and other tax credits and incentives like bonus depreciation to minimize the tax that you’re going to pay on all the gains that you earn in your investment.

_ Even if the apartment isn't fully occupied, investors can profit from the increase in equity value. These equity gains from the sale or refinance of the property will be part of the total returns for investors aside from the quarterly cash flow distribution.  

And now, here comes the cons (yes, there are cons like every other type of investment!) of participating in a syndication. Despite the fact that multifamily syndications are promoted as a safe and "simple" investment, potential investors must be educated and informed about the risks involved before deciding whether this is the right investment for them.

Cons:

_ Multifamily syndication is not for you if you want to actively manage your investments. Let’s be short and simple: Do you want to be making decisions on which apartment is a good investment, when to buy, to sell or to refinance it? Do you want to manage and operate a 70+ unit apartment? Do you want to deal with 70+ tenants? If the answers are yes then being passively invested in a Multifamily syndication is not for you. But more and more investors say no because they want a “stress-free” investment without experiencing the “landlord’s headache”. 

_ Like many other investments, the real estate market - especially the rental market can be unpredictable and out of control. Looking back at 2020, Americans saw very low mortgage rates than ever before in economic history leading to more people buying houses, less people wanting to rent. Also with the eviction moratoriums in 2020 and 2021, it has kept non-paying tenants in apartments leading to a lot of syndicators who could not provide the target return to their investors. That is why it is very important for investors to partner and invest with a trusted syndication firm that can be transparent with you about all investment opportunities and their risks, actively communicate with you during the whole project, and can show a portfolio of their previous projects.

_ One of the most important factors that investors need to be aware of and always remember is real estate is illiquid assets. Simply means that you can’t sell your investment like tomorrow or you can’t just get out of the deal on a whim. A Multifamily syndication deal usually requires 3, 5 or 7 years or even more depending on the project and what needs to be done. If you own stocks, you can sell them whenever you want. You might be selling at a loss, but you can sell no matter what. That is definitely not how real estate works, especially true of syndications. There are rules in place with how you can exit or if you can even exit the deal. Sometimes, you can’t exit for the first two years. Then, there’s a penalty. Sometimes, you can only sell to other shareholders in the syndication. It all depends on how the deal is structured and set up. So always discuss and talk with your syndication team to understand the structure of the deal that you are looking to invest.

_ Last but not least, syndication deals often require prerequisites from the Limited partners. There are conditions and criteria that must be met for somebody to invest in real estate syndication. There are 2 types of investors in Limited partners side: accredited investor and non-accredited investor (check out our article “Accredited Investor Vs. Non-accredited Investor” coming soon next month). In general, investors oftentimes must hit income and asset thresholds to be an accredited investor to be able to participate in the deal. Sometimes syndicators can still work with non-accredited investors but it has a limit in each deal. So if you don’t qualify as an accredited investor, you might not be able to access that investment opportunity. This is why the general public sometimes doesn’t even hear about the best real estate investment opportunities out there.