3 Ways Passive Investors Like You Can Make Money in Multifamily Syndications

You've invested in the deal.

Now what? How do you get paid when you passively invest in an apartment syndication?

In this blog post, I’m going to show you three ways you can make money as a passive investor in multifamily syndications. Let's get right into it.

1. Distributions

This is the free cash flow produced by the property, and this amount can vary. Maybe there are extensive renovations going on. Some of that cash flow will go toward subsidizing those renovations. Then, there are reserves that need to be kept up. So basically, distributions are the leftover cash flow produced by the property that is then paid out.

How are these paid out?

There are two common ways. You can have these paid out monthly or quarterly.

Now how are these divided?

As you may already know, there are two sides to a real estate syndication — the general partners and the limited partners (the passive investors). You'll hear the term split used quite a bit when we're talking about GPs (general partners) and LPs (limited partners).

There is no industry standard split because every deal is unique. In a heavier lift deal where there's a lot more legwork, it's a heavy lift with lots of renovations and construction. In that situation, the general partnership — the people running the deal — will have a higher split because there's more legwork and more oversight needed. But if it's more of a lipstick type of renovation, a lighter rehab, the split may sway less to the GP and more to the limited partner.

Some examples of splits could be 70/30 in favor of the LPs. Or it could be 75/25 or 60/40 — still in favor of the LPs. It really depends on the people running the deal as well as the opportunity. But generally speaking, most of the time, you'll be doing that 70/30 range. If we're just going to talk about generalizations, 70/30 is a good general split to use.

2. Refinancing (Refi)

This is more of a return of capital than profit, but still it's an important piece of the puzzle.

Let's say the syndication is following a value-add strategy. So we're forcing the appreciation of the property, pushing the rents up, and compressing those cap rates. This is how we control the profits in the syndication. We've done all the work and now it's time to pull out some capital. And we're really adding more debt to the property. What does this allow us to do? If we're adding more debt to the property, we are getting a big check from the lender. And we're able to return money to the investors.

So you know how I said this is more of a return of capital? Let's say somebody invested 100k in this syndication. Maybe through refinance, we are able to return 30k to the investor. So now the investor only has $70,000 left in the deal. And that's going to really boost up their returns. This is a happy day for the investor because they were planning on having 100k riding in the deal for the five- to seven-year hold period. Now they've just had $30,000 returned to them. Now, they can ride out the rest of the whole period — whether it's just another four years or three years — with only 70k. This is really going to boost up the returns. And now they have the $30,000 to do something else with — maybe invest it in another deal.

So this is always a great scenario. One thing to keep in mind is — and I’ve talked about this before — you should always be wary whenever a refinance is worked into deal underwriting. You can never guarantee that it's going to happen so having a refinance and a return of some capital. Maybe you can get 70 percent of your capital back on a refinance. It's all going to depend on the deal itself. I just used this as an example. But if you ever see a refinance work right into the yield underwriting, just be cautious because there's no guarantee that will happen. So if it's worked into all the return numbers, just be wary. Ask a couple of questions.

3. The Sale

The third way we can make money is when we sell the property (“divestiture” is the fancy way of putting it.) What happens is we've followed the value-add approach. We've pumped the value, raised the rents, compressed the cap rates, and increased asset’s value. Now it's time to unlock all the equity that has been built up.

So maybe we've done a refinance, returned some capital, but now we have a big chunk of equity sitting in the property and we want to access it. So then we can put it in a new deal, run through all the depreciation, go through all of that exercise with cost segregation and start the process all over again in a brand new deal — making sure our money is working efficiently and hard at the same time. So what happens in this case?

Well, we sell the property. A new buyer closes on the property, and the sale proceeds are again divided based upon the split we talked about. So it's just like cash flow. It's the same thing. So it could be a 70/30, 75/25, or 60/40 depending on the situation. And that's going to be divided between the limited partnership and the general partnership.

Here’s one way to think about it (and this is what I tell all my investors when we talk about distributions and sale proceeds):

Your monthly or quarterly distributions — depending on how the syndicator has set it up — is like the breadcrumbs in the Hansel and Gretel story as they were going through the forest. Each month or quarter, you get your breadcrumb check — whether you're earning seven, eight, nine, or ten percent per year during the whole period. These are just your breadcrumbs all along. And then finally, you get the big cake at the end. This is where you finally get your big check.

The Bottom Line

Multifamily real estate is awesome. You have the strong cash flow. You have the appreciation, especially if you're following the value-add strategy. You also have all the tax benefits that really put more money in your pocket, significantly reducing your tax liability. So you're getting your cash flow all along the way and it’s significantly better than the majority of investments out there. Then, at the end, you get your big fat check and you can roll it back into a brand new deal.

If you're not quite sure what makes a good deal or a great deal when it comes to multi-family… or if you just want to feel more confident, I want you to check out Discover Multifamily. It's a brand new, eight-week course I just launched. I’ll put a link down here: discovermultifamily.com. It takes you step-by-step from square one all the way through the investment process, so you can make better, more confident investment decisions.

I also want to personally invite you to join our free Facebook group. I'll put a link right down here. It's full of great people interested in learning more about multi-family and investing in multi-family real estate. And if you are an accredited investor and you're interested in learning more about the deals I’m currently looking at, head on over to CallSeth.com and set up a free 20-minute phone call with me. If you like this blog post and found it useful, hit the like button and leave a comment. Let me know what you think. And until next time, happy investing!