What You Should Know Before You Raise Money Through Multifamily Real Estate Syndication
Syndication, as the term defines itself, is joining others or collectively taking steps in a group towards a common goal. Investors prefer multifamily real estate syndication to make big deals happen. It is not possible for every investor to dole out huge funds at a time for a big deal and they are not experienced enough to start with, so they invest through real estate syndication.
Why investing through multifamily real estate syndication?
Syndication is a popular term when it comes to multifamily investment. Not just it enables small investors to gain larger profits through bigger deals but to make better deals with experienced partners and mitigate their risk too. The other benefits are:
i. The process enables an investor to own more than one property and generate greater revenues.
ii. Syndication brings to them views and expertise of those who are more experienced, in a collective form.
iii. Investors need not put their entire attention on a deal. They have somebody to trust upon to manage their investment.
Now how one prefers to go by syndication depends on his priorities, amount of investment, size of the deal and number of investors he is going to syndicate with.
There are two ways to syndicate i.e. member managed and manager managed syndication. Each one has terms and conditions attached to it and the investor should be mindful while choosing one of them.
When the investor is planning to syndicate he should be clear with certain points and consider the points mentioned below:
• How much fund I would invest?
• Am I ready for decisions that are going to be taken unanimously?
• Who is going to manage the investment?
Important terms used in multifamily real estate syndication
Syndication involves a process of investment. Hence the investor should be well-versed with the terms used at each step.
Deal sponsor: A deal sponsor can also be called as a general partner. He is one that manages the security. He takes care of the funds and follows considering the interest of his investors, which is definitely earning return on investment. He is responsible to carry out the process of investment in multifamily deal with effectiveness through his network, experience and expertise. Investors can rely on the deal sponsor with confidence that their funds are allocated in the right way.
A deal sponsor also seeks other investors. He reaches out to other interested investor through his network. Moreover, they also have the network to find the size of the deals as per the preferences of their network of investors, in order to invest on their behalf, in a collective manner. All the responsibilities of a deal sponsor are bound to certain norms and defined set of laws.
Security: When a group of people is investing money in a common enterprise to earn profit by providing the fund to the third party, 1933 security act comes into the role. It calls for the compulsory registration of the fund with the Securities and Exchange Commission (SEC), to protect the interest of the investors and those investing on behalf of investors.
Types of multifamily real estate syndication
Now let us explore types of syndication
Member managed syndication: When two or more investors come together to raise money, to syndicate, in order to make a deal happen, they are forming the Limited Liability Company (LLC). In this kind of set-up, one of them gets to manage the investments of all the members. Decisions are taken unanimously. LLC is workable when the number of investors is small.
The concept of security does not apply in this case, as the profits are to be made through their own efforts and there is no third party involved in this.
Manager managed syndication: In this kind of syndication deal is managed by third party or deal sponsor. When number of investors is small, the deal can be managed by one of the members. However, when it is big, say 20 or 30, it is to be managed by a deal sponsor.
Some of the investors like to go for member managed syndication. In case they do not have enough capital to invest and need syndication they prefer to go through the mode of deal sponsor. In that case, the deal sponsor registers the security with the SEC i.e. Security and Exchange Commission.
The investors need to pay close attention to the terms and conditions as well as clauses defined during the registration of their security with SEC, as it is the most crucial part before raising the capital fund through syndication.
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