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Why Passive Investors Love Multifamily Syndication

Jan 08, 2021

There’s no question that multifamily real estate is one of the best investments available. The problem is, these investments are expensive and can be difficult to manage.

Multifamily syndication investing is the solution to this problem. Syndication allows people to invest in real estate deals they couldn't afford before.


What is multifamily syndication?

A multifamily syndication investment involves multiple investors pooling their money and resources into one multifamily property. In most cases, they buy properties that would be difficult to buy as single investors.


Real estate syndication structure

Multifamily syndication deals are usually set up as a limited partnership or a limited liability company (LLC). Both types of entities include someone that manages the investment and investors that simply contribute capital.

The multifamily syndication structure also involves other key individuals:

  • Property manager/management company
  • Real estate broker
  • Attorney

The property manager handles daily operations. This includes finding tenants, collecting rent, and handling maintenance requests.

A property manager can help with due diligence. They can help assess the property and provide recommendations.

Once they sign the deal, this company can help find opportunities to increase income.

The management company also keeps the property profitable once the deal closes.

The commercial real estate broker analyzes the market and sources various deals. They also assist in the entire transaction to ensure it closes.

The attorneys specialized in real estate and securities close the circle. They are responsible for drafting and reviewing the deal’s contracts. They will make sure that the following contracts secure their preferred return:

  • The buy and sale agreement is the contract that lays out the terms of the sale. The seller’s attorneys are in charge of creating the contract. Still, the buyer’s team of attorneys should also make sure that it protects his or her interests.
  • The multifamily syndication operating agreement states all the terms to the syndication. The GP forms a new entity for each deal and sells membership interest to each LP. The real estate attorney handles this agreement.
  • The private placement memorandum outlines the investment details, required disclaimers, and risks. The agreement is usually drafted and managed by the securities attorney.
  • The subscription agreement includes the number of shares available, the price, and the preferred return. The real estate attorney handles drafting it.

Syndication Regulations

In multifamily syndication partnerships, there are two types of investors:

  • Accredited investor - A person with a net worth of $1M+ excluding primary residence or anticipated income of $200k+ for the current year and for the past two years. In the case of joint income, the threshold is $300k.
  • Non-accredited investor - A person that doesn’t meet the requirements to be an accredited investor. They can only invest 10% of their annual income.

The Securities Act of 1933 created the first regulations affecting real estate syndication. The Act put several rules in place to protect investors. Syndicates now had to conduct an Initial Public Offering (IPO) to sell securities.

Rule 506 of the Act made an exception for developers selling securities to people they already had a relationship with. Thus, developers could skip the registration process when syndicating a deal.

Rule 506 allows investors to sell securities to up to 35 non-accredited investors and any number of accredited investors. The rule requires non-accredited investors to have enough knowledge to make informed investment decisions.


Regulation A

The 1936 regulation lets developers ask the public for investments without an IPO. But, the developer has to submit their offering to the SEC first. The developer can start selling securities once the SEC approves the offering.

Regulation A does have limitations. It states who is eligible to offer securities and the amounts they can raise.


The JOBS Act

The Jumpstart Our Business Startups (JOBS) Act was issued and implemented in 2012. It allows investors to sell securities without an existing relationship with the investors. This new rule is Rule 506(c). This rule allows investors to only secure investments from accredited investors.

This rule commits investors on the long-term. They cannot trade their equity shares. The issuer can buy the shares back but is not required to. The JOBS Act stimulates business startups and offers investors alternative investment options.


Regulation A+

The JOBS Act was amended in 2015 with Regulation A+. According to this new rule, the amount of raised capital can be higher. The obligation for state and SEC registration was also lifted. However, the rule about SEC submission is still in place.

Regulation A+ includes two tiers:

  • Tier I has a $20 million threshold for how much an issuer can raise from investors. They still have to submit the offering to the SEC and the state for review.
  • Tier II no longer asks for state review. It goes through a more severe SEC evaluation. The threshold for Tier II is $50 million.

Investors can invest a maximum 5% of their yearly income or net worth if it is below $100k. The percentage goes up to 10% for investors with a net worth or income higher than $100k in one year. The maximum investment for each is $100k.

Investors can sell their shares through the exchange used by the issuing company. They can also choose either after-market exchanges or registered broker-dealers.

Regulation A+ is suitable for real estate investors that are well established or raising a large amount of money.


What Is an Accredited Investor

An accredited investor is a person who meets one of the following criteria:

  • Has had an annual income of at least $200k (or $300k together with her/his spouse) for the past two years, and is likely to reach the same limit, or higher, in the current year, OR
  • Has a net worth over $1 million. The net worth is calculated either for the person alone or together with the spouse. The primary residence is excluded from this calculation.

An accredited investor can also be included in one of the following categories:

  • A trust that owns assets evaluated at more than $5 million. If the trust decides to purchase securities, the process must be directed by someone with adequate knowledge and experience in business and finance.
  • A group of accredited owners organized in the form of an entity.

Federal securities laws allow accredited investors to invest in more deals than non-accredited investors. Because of the income and net-worth requirements, it's assumed that accredited investors can handle losses.


The Main Benefits of Syndication Investments

Real estate investments can be very expensive. When it comes to multifamily syndication returns, this option holds more advantages. An investor who chooses this model has the following benefits:

  • Passive investors are liable only for the losses associated with the amount they invested.
  • Having multiple tenants keeps cash flow consistent, even during months with higher vacancy.
  • Multifamily syndication offers stable value over time. The property’s value is determined by its net operating income (NOI). You can increase the NOI by addressing any management issues and making capital improvements.
  • Experienced multifamily investors are able to secure financing at lower interest rates, which provides higher cash-on-cash returns.
  • Multifamily syndication deals are less time consuming. Investors don't deal with any management or transaction details. The investor simply collects their money.


Investing in the right syndication

As an investor in a syndicated multifamily investment, your investment is only as good as the person or company managing the investment. It’s essential to look at the knowledge, experience, and success of the syndicate partner you’re considering investing with.

You also want to invest in properties that match your investment goals. If you want a long-term investment, avoid deals aimed at flipping the property within a couple of years.

The asset manager is the most important piece of the deal. No matter how great the investment looks, an inexperienced managing partner can expose you to a high level of risk.

Grant Cardone is one of the most experienced and successful multifamily syndication asset managers in the industry. Cardone Capital only invests in the safest, high-quality apartments available, while providing its investors with some of the highest returns available.

Schedule a call or request more information on partnering with Grant Cardone and Cardone Capital on their next multifamily syndication deal.

How the CARES Act could benefit Investors

01 Jan, 2021
The $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law by President Trump on March 27th, 2020. The economic stimulus package is designed to bolster the U.S. economy with fiscal stimulus, grants and loans equal to nearly 10% of the country’s economy.1

Trends in Multi-Family Housing

26 Dec, 2020
For nearly 10 years, the multifamily market has continued to grow and today, industry leaders believe that the sector may continue that growth in 2020. To understand if those optimistic views of this asset class are justified, we’ll begin by reviewing the performance of the multifamily housing market in 2019. Then, we’ll explore five multifamily housing trends that may influence the demand for rental investments in 2020. Multifamily 2019 in review RealPage Chief Economist Greg Willett writes that the multifamily market ended 2019 in great shape.¹ Occupancy rates reached 96.3% in 2019, the lowest level since 2000. Since the middle of 2018, rent growth has exceeded 3% due to strong and consistent demand.² Research from Yardi Matrix shows that over 320,000 multifamily units were absorbed in 2019, marking the 6th year in a row where absorption has exceeded 250,000 units.³ Yardi also reports that tenant demand in 2019 was strong despite market rents increasing in most segments. Property values are at all-time highs with robust deal flow and few delinquencies with debt markets functioning smoothly. Multifamily housing trends in 2020 The National Apartment Association recently reported that the U.S. needs about 4.6 million new multifamily units by 2030 to keep up with demand. That’s about 328,000 new units annually over the next 10 years.⁴ Drivers behind the rising demand for multifamily housing include:⁵ Growing number of renters across all demographic classes Job portability Strong economic growth Historically low unemployment Accommodative fiscal policy by the Federal Reserve Significant capital available for commercial real estate investment With those fundamentals in mind, here are some of the top multifamily housing trends that may influence the demand for rental investments in 2020: Trend #1: Developer Activity in 2020 Since 2016, nearly 1.1 million new multifamily units have been delivered to the market, according to CBRE.⁶ Although permits, starts, and completions were at or near cyclical highs last year, the firm forecasts that 280,000 units or more will come to market in 2020. Part of the reason for this development trend is that multifamily is viewed as a commercial investment asset with possible lower volatility and a potential safe haven in unpredictable markets.⁷ Multifamily property generally sees steady tenant demand from a diversified renter base, short-term leases with rates that can be adjusted for inflation and better market value, with less capital required for upkeep relative to other CRE assets. Financing backed by Freddie Mac and Fannie Mae also provides investors with a potential liquidity benefit that most other commercial property types do not benefit from. Freddie Mac expects multifamily loan origination volume in 2020 to reach $390 billion, an increase of 5.7% compared to 2019 and an increase of 15% compared to 2018.⁸ Multifamily fundamentals, investor demand, and low interest rates are helping to create the supply side demand for capital and multifamily development in 2020. Trend #2: Millennials driving multifamily demand On the demand side, growth in the multifamily market in 2020 may come in large part from millenials.⁹ The National Association of Home Builders (NAHB) notes that 22% of adults between the ages of 25 and 34 still live at home. That’s a market of over 8.7 million potential new renters, according to the Kaiser Family Foundation and the Census Bureau.¹⁰ The rising cost of homeownership, student debt, and lifestyle preferences are key reasons why millennials are opting to rent rather than own. Developers have responded by building in urban and suburban areas where neighborhoods are walkable and opportunities for entertainment, services, and socializing are plentiful. In order to attract and retain these “renters-by-choice,” developers are creating multifamily communities with amenities such as on-site coffee bars, rooftop cafes, bars, and indoor basketball and bowling. Trend #3: Yields may tighten on multifamily investments The equity and debt flow into the multifamily sector are expected to increase in 2020, even as cap rates compress and yields tighten.¹¹ Institutional investors are allocating more money to the sector, traditional and private lenders are competing for business, and Fannie Mae and Freddie Mac have a combined $200 billion in loan purchases that must be completed by the end of 2020. Low interest rates, billions of dollars to lend and intense investor interest should create another “white hot year” for the multifamily sector, according to National Real Estate Investor (NREI).¹² The availability and reduced cost of capital may also cause cap rates to compress and yields to tighten. Over the last five years, average multifamily cap rates have declined from about 6% to 5.5% through November 2019. The U.S. Department of the Treasury reports the current 10-year Treasury yield is 1.33%.¹³ However, returns can and do change. In fact, the CoStar Group expects cap rates to decline across all property classes this year. CoStar’s managing consultant notes that because real estate lacks liquidity, it takes time for commercial real estate yields to trend down and compress closer to the 10-year Treasury returns of less than 2%. Trend #4: Secondary markets may outperform urban areas CBRE has been the top apartment broker in the U.S. since 2001.¹⁴ According to the commercial real estate brokerage and research firm, there will be more construction of new multifamily property in suburban markets than in urban markets in 2020. Many smaller markets with 2 million or fewer residents saw rents grow by 4% or more through Q3 2019, a trend that CBRE sees continuing in 2020. Secondary markets may have a higher risk of overbuilding. However, this risk is mitigated in cities with a healthy balance of supply and demand, driven in part by new renters attracted to areas undergoing urban revival. Smaller markets to watch in 2020 include: Albuquerque, New Mexico Birmingham, Alabama Colorado Springs, Colorado Greensboro, North Carolina Memphis, Tennessee Dayton, Ohio Tucson, Arizona Trend #5: High-growth and gateway markets CBRE also recommends that multifamily investors may benefit from lower vacancy and increasing rent rates in very high-growth metropolitan areas and gateway markets. These are metro areas where population, household, and employment growth help drive the demand for multifamily product.¹⁵ According to the firm’s Multifamily 2020 U.S. Real Estate Market Outlook report, the top four major markets for multifamily performance in 2020 are: Austin, Texas Atlanta, Georgia Phoenix, Arizona Boston, Massachusetts Summary The law of supply and demand may be working in favor of multifamily investors in 2020, with tenant demand for rental property continuing to grow. Recent surveys show that 32% of rental households don’t believe the American Dream includes homeownership, 26% of people who do own a home wish they were renting instead, and 20% say they never plan on buying a home in their lifetime.¹⁶ With high occupancy rates and rising rents, and property in short supply, demand from investors for multifamily product also may continue to rise. Multifamily investors in 2020 may find that property prices remain high, while future cap rate compression may increase asset values even more while driving today’s relatively high yields down. If you’ve been thinking about investing in the multifamily asset class, consider MogulREIT II , RealtyMogul’s REIT that exclusively invests in multifamily assets and has generated quarterly distributions of 4.5% since inception.¹⁷ All the assets currently in the MogulREIT II portfolio were previously only offered as private, single property investments available only to accredited investors with minimums of $35,000 or more. Open to all investors, a $5,000 minimum MogulREIT II investment can now gain you access to this vetted portfolio of multifamily assets. Investing in MogulREIT II’s common shares is speculative and involves substantial risks. The “Risk Factors” section of the offering circular contains a detailed discussion of risks that should be considered before you invest. These risks include, but are not limited to illiquidity, complete loss of capital, limited operating history, conflicts of interest and blind pool risk. MogulREIT II’s multifamily investments can be subject to specific risks including changes in demographic or real estate market conditions, resident defaults, and competition from other multifamily properties. References 1. https://www.housingwire.com/articles/heres-what-will-happen-in-multifamily-real-estate-in-2020/ 2. https://www.housingwire.com/articles/multifamily-housing-market-wrapping-up-2019-on-a-strong-note/ 3. https://www.yardi.com/news/press-releases/yardi-matrix-shows-u-s-multifamily-market-wrapping-up-a-strong-year/ 4. https://www.nmhc.org/contentassets/0662d3fe113046bb89019d0dfabfb271/apartment_supply_shortage_2018_08_fact_sheet.pdf 5. https://www.forbes.com/sites/forbesrealestatecouncil/2019/12/13/workforce-multifamily-rentals-will-remain-cres-darling-in-2020/#57764ebd313e 6. https://www.cbre.us/research-and-reports/2020-US-Real-Estate-Market-Outlook-Multifamily 7. https://www.multifamilyexecutive.com/business-finance/five-2020-trends-to-consider-in-multifamily-investment_o 8. https://mf.freddiemac.com/viewpoints/steve_guggenmos/20200113-2020-outlook.html 9. https://www.worldpropertyjournal.com/real-estate-news/united-states/irvine/national-association-of-home-builders-international-builders-show-us-apartment-production-data-in-2020-multifamily-housing-starts-in-2020-real-estate-news-11781.php 10. https://www.worldpropertyjournal.com/real-estate-news/united-states/irvine/national-association-of-home-builders-international-builders-show-us-apartment-production-data-in-2020-multifamily-housing-starts-in-2020-real-estate-news-11781.php 11. https://www.bisnow.com/national/news/multifamily/the-incredible-flow-of-capital-into-multifamily-is-expected-to-increase-in-2020-101023 12. https://www.nreionline.com/multifamily/expect-yields-multifamily-investments-tighten-further 13. https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield 14. https://www.constructiondive.com/news/cbre-ranks-the-hottest-multifamily-markets-for-2020/569832/ 15. https://www.cbre.us/research-and-reports/2020-US-Real-Estate-Market-Outlook-Multifamily 16. https://www.housingwire.com/articles/more-claim-the-american-dream-involves-renting/ 17. MogulREIT II has declared distributions on a quarterly basis since January 1, 2018. The quarterly distributions equate to approximately 4.50% on an annualized basis based upon the then current purchase price. The annualized distribution rate is not a guarantee or projection of future distributions, and the board of directors may in the future declare lower distributions or no distributions at all for any given period.
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