How to Invest in Multifamily Real Estate Using A Self-Directed IRA or solo 401K

How to Invest in Multifamily Real Estate Using A Self-Directed IRA or solo 401K

Can I Invest in Multifamily Real Estate Syndications Using Funds From My IRA?

Yes you can, by transferring the funds from your IRA into a self-directed IRA. This article will explain how that works and how doing so will increase your investment options, allowing you to use those funds to invest in a multifamily real estate syndication.

Why would you want to do that? Regardless of the amount of money that you have been able to save, the gold standard is to have those savings tied to investments that are both stable and produce strong returns.

The main advantage of investing in a real estate syndication is the return. If you have money wrapped up in an IRA account that’s earning only 1-2% a year, you may wish to look into setting up a self-directed IRA (sometimes called a checkbook IRA) to allow you to invest in real estate. 

Why A Self-Directed IRA?

Only the self-directed IRA can be set up to invest in real estate syndications. The tax code allows for this, and the key is to place your self-directed IRA account with a custodian that will accommodate investments for multifamily syndication. An IRA custodian is the financial institution responsible for record-keeping and IRS reporting requirements.

Multifamily, value-add syndications are a great type of investment for a self-directed IRA, they generate passive returns and then are liquidated for a bottom-line profit. That profit is usually taxed as a capital gain, but if it happens within your IRA, you won’t pay taxes until you actually retire and begin to withdraw income from that IRA.

You have to wait until you reach age 59½ to withdraw your funds, and the withdrawal will be included as ordinary income on your tax return. In the meantime, you have the right to invest in a real estate syndication deal or multiple deals, while maintaining the tax-deferral status of the IRA.

What is a Self-Directed IRA?

An IRA is an individual retirement account that allows the account owner to direct the account trustee to roll over all or part of their IRA and make investments in alternative assets such as real estate. Rolling the funds over from your IRA into a self-directed IRA gives you control of your own financial future. You control the investments instead of the company that handles your IRA.

With a self-directed IRA, you can create a Limited Liability Corporation, (LLC), and that entity invests in and holds your IRA funds. As the LLC General Manager, YOU can now handle the investing.

Tax Implications

Like a traditional IRA account, a self-directed IRA allows owners to defer taxes until retirement age. 

When using a self-directed IRA for purchasing real estate, you can’t claim depreciation on property held within it. Also, there may not be a way to take advantage of operating losses as well.

Another thing to consider is income. Most people consider the income that is produced from their IRA as investment income. Occasionally, the IRS may categorize it as business income instead.

If it does, then that income can be subject to something called UBIT, or “Unrelated Business Income Tax” which can be taxed at rates as high as 39.6%.

UDFI, or “unrelated debt-financed income,” is primarily used in the context of IRA investments that generate income derived from debt-financed real estate or other property owned by the IRA. The UDFI is subject to UBIT.

You may be liable to this tax if your IRA participates in buying and selling a significant number of real estate properties in at least half of a year.

The best way to be certain about whether you owe UBIT is to talk with your tax professional.

A Roth Self-Directed IRA

You will eventually have to pay taxes on the tax-deferred income in your IRA when you take cash out. An alternative is to choose a Roth SDIRA. With a Roth SDIRA, there is no up-front tax break, it uses after-tax contributions, but you don’t have to pay tax on withdrawals in retirement. Your earnings will grow tax-free and when you take distributions from the account in retirement, you won’t owe any taxes on them.

Solo 401k

Making the choice between setting up a self-directed IRA or a solo 401(k) is an important decision. You need to consider all of the differences.

To be eligible to benefit for the Solo 401k Plan, investors must meet two eligibility requirements:

  • The presence of self-employment activity.
  • The absence of full-time employees.

If there will be debt on real estate investments you are much better off choosing a solo 401(k) over an IRA as solo 401(k)s are exempt from UDFI tax on leveraged real estate.

The Importance of A Good CPA

It is vitally important that you work with a good Certified Public Accountant (CPA) who understands the legal side of real estate investing. Getting the right tax advice is essential in making the best use of your retirement funds.

Setting up Your Self-Directed IRA

A Self-Directed IRA LLC may be funded by a transfer from another IRA account or through a Self-Directed IRA Rollover from an eligible defined contribution plan. Eligible defined contribution plans include qualified 401(k) retirement plans.

With the transfer, you do not receive the IRA assets. The transaction is carried out between the two financial institutions. In order for the IRA transfer to be tax-free and penalty-free, the IRA holder must not receive the IRA funds in a transfer. Rather, the check must be made payable to the new IRA custodian.

You can then instruct the new custodian that you select to request the transfer of IRA assets from your existing IRA custodian in a tax-free and penalty-free IRA transfer. 

Once the IRA funds are either transferred to the new custodian, the new custodian will be able to invest the IRA assets into the new IRA LLC “checkbook control” structure.

Once the funds have been transferred to the new IRA LLC, you, as manager of the IRA LLC, would have “checkbook control” over your retirement funds so you can make traditional as well as non-traditional investments tax-free and penalty-free.

It is important to choose the right custodian, consider their experience, fees, and areas of expertise, and check out their rating with the Better Business Bureau.

A Word Of Caution

According to the Securities and Exchange Commission (SEC), you need to guard against criminals attempting to commit fraud against self-directed IRA account holders. Protect Yourself by:

  • Not taking unsolicited investment offers.
  • Asking lots of questions – be suspicious if these are not welcomed.
  • Being wary of those promising unrealistic returns on your investment. 

Why Multifamily Syndications?

It’s true that you have many options when it comes to investing. Some high-risk investments yield a high rate of return. Then there are safer investments but the rate of return is low. Multifamily real estate combines low-risk with generous returns.

The most common use of self-directed IRA funds is an investment in syndicated real estate deals.  A syndication is a group of investors pooling their funds for investment.  The investment is typically larger than one the investor could accomplish on their own.  These real estate investments are professionally managed and you are not required to do any of the legwork.

Investment returns & distributions are returned to the self-directed IRA as cash. Accumulated cash distributions can later be invested in another investment.

Pros and Cons

From what we have discussed so far you can see that using a self-directed IRA to invest in residential or commercial real estate which is not allowed through regular IRAs has pros and cons.

Let’s get specific and list them, starting with the positives.


  • Tax-free or tax-deferred account growth – With a self-directed IRA, you can invest in real estate as you normally would, but your gains are tax-free or tax-deferred, depending on the type of IRA account you use. There aren’t many other opportunities to invest in real estate in a tax-sheltered way.
  • Control over your investments – As the owner of the account, you get to decide what to do with your investments. It’s possible to create a limited liability company (LLC) for your SDIRA. Doing this gives you checkbook control.
  • Investing through an LLC can also provide other liability protections, though you should consult with a tax professional to better understand the LLC laws in your state.   
  • Potential For Higher Returns – A self-directed IRA real estate investment has the potential to earn a higher ROI than investing with traditional securities.


  • Fees – The Internal Revenue Service requires that either a qualified trustee or a custodian hold assets on behalf of the IRA owner. This means costs that can eat up into your profits if you’re not careful.
  • Complex Regulations – Your SDIRA could be disqualified as a tax-advantaged account if you don’t follow all of the IRS regulations carefully. 
  • UDFI – if your IRA owns property that has been financed, some of the income from the property is considered unrelated debt-financing income (UDFI), which is subject to taxes.

Are Self-Directed IRAs For You?

Those investors who choose to use self-directed IRAs do so to seek higher returns and greater diversification. 

Self-directed IRAs may not be for everybody but if you want to take advantage of higher yields and less volatility you should seriously consider the possibility.

If you are creative and knowledgeable enough to use self-directed IRAs in the right way it could be a great option for you and your investment future.

How to Analyze a Passive Investment Opportunity in Real Estate Syndication

How to Analyze a Passive Investment Opportunity in Real Estate Syndication

Passive investment opportunities in real estate syndication can provide outstanding ways to generate attractive financial returns. In the very best scenarios, you and your fellow passive investors can earn consistent income with few of the headaches that come from other types of investments. Simply put, these passive investment opportunities offer great chances to build real wealth.

That being said, getting to these ideal scenarios doesn’t automatically happen. They require some diligence from your end. Because of this, it is worthwhile to explore some of the things that you should consider when analyzing a passive investment opportunity. By doing your homework now, you can avoid mistakes and find the best passive investment opportunity for you.

First Principles in Analyzing Passive Investment Opportunities

To be clear, these are several first principles that you should follow when considering a syndication opportunity. They aren’t the only things that you should consider. Generally speaking, by being measured, reserved, and rational, you will make great decisions.

One of the first things that you can do is research specific asset classes and markets. There are plenty of multifamily asset class types, ranging from new upscale luxury buildings to 40-year-old buildings that were built for low-income residents. Each asset class provides its challenges and opportunities, so you’ll need to evaluate your risk profile before proceeding. The same is true of markets. You may have some more familiarity with a local market, but there may be greater opportunities elsewhere. Make sure that you are soberly thinking about your opportunity set before proceeding.

As with any type of investment, another one of the first things that you should do is research your potential partners. Naturally, much of the attention will veer toward the sponsor or general partner. This is for good reason, as the sponsor is active in the day-to-day operations of the syndicate. But beyond the sponsor’s experience and background, you will also want to evaluate the relevant property management company, commercial real estate broker, and any real estate and securities attorneys. See how they evaluate potential deals and how quickly they can close potential deals.

It takes a team to create and run a real estate syndicate, so you want to have a good understanding of your new partners. Beyond doing simple Internet research, don’t hesitate to make some reference checks. Speak with other limited partners who have worked with any of these individuals or entities. Completing this primary research will give you the confidence that your partners will maximize the value of your investment.

From there, you will need to closely scrutinize your potential returns. After all, much of your interest in real estate syndicates likely comes from the fact that you can earn outsized returns. As a limited partner, you can be compensated in several different ways, including a preferred return, a profit split, or supplemental loan proceeds. Preferred returns and profit splits are more common, but you’ll want to read the fine print for more. For instance, you may discover that your preferred return is 8% before the general partner is paid. Or you may discover an unequal profit split in your favor after that preferred return. Make sure you understand your potential profit before entering the syndicate.

Finally, you will want to examine the opportunity’s underlying fee structure. Sponsors, real estate attorneys, property management companies, and others provide significant value to the overall syndicate. Because of this, they receive compensation for completing their work. This compensation may impact your overall return on the property. For instance, your sponsor may take a profit split on an ongoing basis or upon the sale of your property. Your property manager may take a 10% management fee on the collected income. Whatever the case may be, have a good understanding of how your partners are being compensated. No fee structure, in and of itself, is good or bad. It depends on the value you are getting from your partners and how those fees impact your total returns.

Get Started Today

Whether you are new to passive investment opportunities or have been making investments for some time, it is critical to keep these first principles in mind. They can both help you find attractive investment opportunities and avoid those that are less attractive to your financial goals. Ultimately, the best time to get started is today.

Multifamily Syndication Tax Benefits Every Passive Investor Should Be Aware Of

Multifamily Syndication Tax Benefits Every Passive Investor Should Be Aware Of

While many people tend to dread tax season each year, those who are proactive with multifamily real estate investing (specifically real estate syndications) are likely excited about it. That is because there are tons of multifamily syndication tax benefits and incentives that arise for passive investors that enable them to gain max profits from this dynamic stream. 

In short, investing in multifamily syndications offers much more than a lucrative passive income stream; it is also one of the most tax-favoured investing avenues. 

Before we dive into these benefits, here’s a quick disclaimer.  Since we’re not tax professionals, the information in this article is from our experience and understanding only.  You should speak to a qualified CPA for details and advice about your specific situation.  This article should not be construed as tax advice. 

Below are the leading multifamily syndication tax benefits that every investor should be knowledgeable of so they can be fully prepared to capitalize on their opportunities.  


Depreciation is a huge tax deduction and is often overlooked. In tax terms, depreciation is an accounting method that calculates the cost of tangible business assets’ declined value over time and allows the owner to write it off. The most common form is called straight-line depreciation, which is a system that takes the annual deduction cost of items and divides it by its useful life. As for real estate, the IRS states that the useful life of residential properties is 27.5 years, and 39 years for commercial. 

For example, if you have a property valued at $1 million.  You can divide that by 27.5 years, which comes out to about $36K. That means that you can deduct $36K in depreciation each year for up to 27.5 years. The reason this is such a significant deal is because, hypothetically, let’s say you make about $10K profit in a year on your invested property. In such a case, you do not have to pay taxes on that $10K and you get to keep it completely tax-free. On paper it may look like you lost $26K, but in reality, you earned $10K.

Cost Segregation and Bonus Depreciation

Cost segregation is very similar to depreciation but accelerated.  Cost segregation takes into account that some parts of the property depreciate much faster than 27.5 years.  For example, flooring such as carpet has a much shorter life span.

You can have an engineer do a cost-segregation study where they evaluate the individual elements of a property and calculate the life span.  This can allow you to depreciate many items over a much shorter time frame, for example, 5-15 years.

What’s the benefit of taking the depreciation deduction at a must faster rate?

You see, the hold time for most multifamily real estate syndications is about 5 years. That means that you may only get 5 years of those depreciation benefits listed above (5 out of 27.5 years), meaning you’d miss out on over 22 years of depreciation benefits. 

So, if you have something that depreciates in 5 years instead of 27.5 years, and you only hold that property for 5 years, you may end up deducting the full depreciation amount for that part of the property.  By being able to take a larger depreciation deduction earlier, you get more of the depreciation benefits and make a higher profit.

When a property is sold, capital gains tax is owed, and in some cases, deprecation recapture.

Another depreciation option, which is a result of new tax bills, is “bonus depreciation”, which gives the option to depreciate the entire value of a property in the first year.  This way you can carry forward losses until the property is sold, which can offset capital gains.

1031 Exchange Tax 

If you do not want to embark on capital gains just yet, a 1031 exchange would be an ideal alternative. A 1031 exchange is what allows investors to sell one investment property, and in an allocated amount of time, swap it for another. Essentially, instead of having the gains be rolled out to you, you would have the ability to invest them in a new real estate syndication. That all equates to you not needing to owe any capital gains tax to the IRS when the first investment property is sold. Note that not every real estate syndication offers a 1031 exchange outlet, but it is something to be mindful of and ask about during your venture. 

Refinance Cash-Outs

It is not uncommon for multifamily real estate investors to invest in a property for about 1-3 years and then refinance the property after the value has increased due to renovations and rent increases. Doing this does not come with any tax obligations because it is not a taxable event when you return part of the investor’s equity. 

Other tax benefits

Rental income is not subject to social security tax or Medicare tax, so that is a benefit as well.

Summary – The Tax Code Favors Real Estate Investors 

In summary, multifamily real estate syndications can be a great investment that optimizes tax breaks and has been a proven channel to grow and preserve wealth. With the various multifamily syndication tax benefits, combined with typically excellent returns, it is clear how investing in real estate syndications can add up to significant short and long-term gains. 

All in all, for any investor looking to convert their hard-earned capital to passive income in one of the most tax-friendly ways, then multifamily real estate syndication is certainly a prime avenue to think about. 

Balance Your Portfolio Through Diversification

Balance Your Portfolio Through Diversification

Current global events should motivate you to focus on certain pressing questions. Here is one of the most vital questions to consider:

Is my investment portfolio balanced and resilient enough to withstand market volatility or do I need to diversify more fully? 

This article will:

  • Give an overview of the importance of diversification
  • Encourage you to consider adding real estate investment to your portfolio to add stability
  • Explain how you can diversify your investments even within the sphere of real estate

Investment Diversification – An Overview

Why is diversification of your investments so important?

Diversification is the very best way to minimize risk. Every investor has different investment goals and it is important to have a clear view of your own, whether it is saving for retirement or for more short-term goals, focusing on your ultimate aims will enable success.

Of course, differing investment goals also means different risk tolerance which will have an impact on your investment portfolio.  Whether your investment goals allow you to tolerate slightly more risk or not, it is important to analyze risk reduction strategies.  Diversification is an excellent way to add stability and reduce risk while not affecting a portfolio’s wealth building capacity.

How does diversification achieve this risk reduction?

This is mainly achieved by ensuring your portfolio is spread across different types of investment that will each react differently to the same event.

The key with diversification is to try to limit the correlation between your investments. Simply investing in more financial assets does not mean better diversification if those assets are strongly related. For example, buying stocks in multiple companies of the same type is risky because a single event may cause all of those stocks to devalue. Due to globalization, asset classes are also becoming more correlated than in the past.

In view of the fact, that unexpected events can impact investment, you should certainly consider adding real estate to diversify and stabilize your investment portfolio. This reduces exposure to unsystematic risk by diversifying your investments and ensuring that they are not closely correlated to one another.

See the article, Investing In Real Estate Vs. The Stock Market

Add Stability to Your Portfolio by Investing in Real Estate 

Many investors shy away from diversifying their portfolio with a real estate investment because of their inability to liquidate that investment quickly. In actual fact, it is this illiquid quality of real estate investment that can anchor and stabilize your investment portfolio!

Real estate is a tangible asset and as such for many investors, feels more real. It is an asset that engenders confidence. A great appeal of this type of investment is its stability. For many millions of people, this kind of investment has generated consistent wealth and long-term appreciation.

See the article, Why Multifamily Investment Makes Sense

Real estate investment provides passive investors a very consistent and stable rental income. Having a home is a vital necessity for all people, and as a result, rental investors are relatively protected even during economic downturns.

As we have seen, your portfolio’s long term resilience lies in diversification across different asset classes.

Due to the different buying and selling dynamics of the private market, private real estate investment benefits from low correlation to the performance of stocks and bonds unlike publicly traded real estate investment trusts aka (REITs). That is why they are great options for diversification against unsystematic risk and are thus considered crucial to a clear strategy for diversification.

Even within the percentage of your portfolio that includes real estate investment we encourage further diversification subsequently reducing risk even further.

Diversification in Your Real Estate Investments

How can you create a diversified real estate investment portfolio?

There are three main areas where we encourage diversification. These are:

  1. Geography
  2. Asset Class
  3. Operator

Geography Diversification

Although the risk is relatively small, having all your real estate investments in one geographic location is like having all your eggs in one basket.

A real estate investment in a certain area affected by extreme weather for example, might typically perform well, but would it be wise to have all of your real estate investments in that one area?

Aside from weather issues, there are economic factors such as one area being heavily dependent on one particular employer or one particular type of employer. 

Although it would likely be wise to invest in that area in certain circumstances, if there is some major issue that affects that one industry or employer then that area might become vulnerable.

For these reasons, it is wise to spread your investments in real estate over a wide and varied geographical area as your portfolio grows.

Asset Class Diversification

When it comes to investing in multifamily properties, certain asset classes perform better in a growing economy while others weather a downturn more effectively.

See the article, Multi-Family Property Classifications and Your Investment Strategy

As your portfolio expands try to diversify as much as possible within the range of risk that you are comfortable with. (Some asset classes such as hotels may be too high risk for your liking.) The goal is for your cash flow/returns to remain consistent.

Operator Diversification

As a passive investor in a multifamily syndication, you are putting trust in the operator of the deal. Since the day to day running of the operation is taken care of by the operator this leaves you free to diversify and invest in multiple syndication deals. By doing so, you will not have 100% of your real estate investment capital with any one operator.

To summarize, advanced diversification affords investors the opportunity to increase return potential and reduce portfolio volatility. This is particularly true when diversifying into investing in real estate and when investing across various geographical locations as well as different asset classes and with more than one operator. While the details of the diversification are down to you, it is sure that the more advanced and carefully planned the diversification, the stronger and safer your investment will be!

Active vs. Passive Property Investing: What’s the Difference?

Active vs. Passive Property Investing: What’s the Difference?

There’s a lot to learn when you first start thinking about investing in real estate and a lot of decisions to make. One of the very first decisions is whether you want to be an active or passive investor. To decide, you should know what each involves, as well as the pros and cons. Read on to discover which is right for you. 

What is an active investor? 

An active investor is in control of the property or properties and spends a lot of time ensuring everything is running smoothly. They are responsible for: 

  • Finding the property 
  • Securing financing for the investment 
  • Making a business plan 
  • Executing the plan 
  • Finding and managing the right team members 
  • Talking to property managers 
  • Managing the risks associated 
  • Putting things right when they go wrong 

If you have the required time, the idea of starting a new business excites you, and you want to be involved in every aspect of the day-to-day management of your investments, then being an active investor may suit you. Let’s take a look at the pros and cons of being an active investor: 

Pros of Active Investing 

  • You are in full control 
  • You know every detail of what’s going wrong or right 
  • If you have sufficient resources, you can be the sole investor and receive all income or profit 

Cons of Active Investing 

  • You are responsible for everything 
  • You need to invest the time to learn what you need to know to make the right decisions 
  • You could make costly poor decisions if you don’t have someone experienced to guide you 
  • If you’re not available full-time, it can eat up all your spare time 
  • You are responsible for building the right team and replacing anyone as necessary 
  • If you’re seeking a significant amount of financing from others or institutions, you need to be able to prove why you are a good investment 
  • More of the risk typically rests with you 
  • Renovation budgets can get out of hand quickly, especially if you don’t have a lot of experience evaluating properties or if you get carried away with the finish of the property 
  • If you fail to correctly project your costs, you could end up with a much less healthy profit margin (or even none at all) 

What is a passive investor?

passive investor (also known as a limited partner) is someone who is happy to invest the money and let someone more experienced take on the day-to-day operations. Limited partners invest their money with someone knowledgeable, such as a multifamily syndicator (often referred to as a sponsor).  

You will see a return on your investment with little-to-no effort from you. You might compare it to investing in the stock market, where you invest your money in a certain company, but don’t have to deal with the day-to-day operations of that company.  However, the difference with multifamily investing is your investment is backed by a solid asset, and often the returns can be better.  

Let’s take a look at the pros and cons: 

Pros of Passive Investing 

  • You’re essentially hands-free 
  • Your money works for you while you live your life 
  • You can diversify through multiple syndications with the same sponsor or multiple 
  • Your sponsor is incentivized to make a return
  • Typically less personal risk
  • Developing a good relationship with a talented sponsor or syndication can result in many profitable investments for you 
  • In many cases, you will receive a “preferred return,” which means you’ll receive your return before the syndicator receives their money 
  • You’re trusting someone with more expertise rather than depending on your own research 

Cons of Passive Investing 

  • You have limited control over the business plan (instead, you choose to invest in one that appeals to you with someone you trust) 
  • A high level of trust in your sponsor is required
  • You need to be someone who knows how to delegate and let people do their work (ideal for busy business owners, doctors, those who have created and sold companies, CEOs, etc.) because you can’t micromanage your sponsor 

How Much Money Do I Need to Invest? 

If you’re going to actively invest, then that depends entirely on what model you choose. What class property are you looking at? Are you looking at single-family or multifamily properties? In some areas, you can get started for little (a down payment of around $10,000 for a single-family residence) if you are happy to have a large mortgage, though you do need to be aware that you should keep some money aside for emergencies and any periods without a tenant. Do your math meticulously to ensure you have a sound ROI. 

If you’re looking to invest passively, you should look to have $50,000 or more, again, depending on the specific properties, areas, and opportunities you’re considering. You won’t need to worry about additional costs, and most syndications aim to offer you a very healthy ROI. Why? Because they want you to invest with them again so they can make you – and them – more money in the future. 

So Which is Right for Me? 

You’re going to need to do your research, regardless of which style of investing appeals to you most. Obviously, if you plan to actively invest, you’re going to have to do even more because you’ll be making every decision. When you’re investing a lot of money, you need to ensure you’re getting it right. 

If you’ve always imagined being an active investor but are worried about the time commitment and making a mistake, starting with passive investing can be a good way to dip your toe and start learning what to look for in the future. 

If active investing doesn’t really interest you, but you’ve been interested in property investing due to the security a physical asset brings, then passive is the perfect choice for you. It can offer you all the benefits of investing in real estate, without the steep learning curve or headaches of managing your own properties. 

The good news is that just about anyone can invest in real estate, but you need to choose the right investment strategy. If you choose to invest actively but realize it’s not for you, changing your mind can be costly, not to mention stressful. Unless you have prior experience working in real estate, passive investing may be the safer bet. Just ensure you work with a syndicator you believe in that is happy to answer all your questions. 

If you’re interested in learning more about investing passively or about our upcoming syndications, please don’t hesitate to contact us

How a General Partner (Sponsor) Makes Money in an Apartment Syndication

How a General Partner (Sponsor) Makes Money in an Apartment Syndication

Apartment syndication has been a strong buzzword in society, especially since the JOBS Act passed back in 2012 that boosted real estate crowdfunding. All in all, apartment syndication is an inked transaction between a general partner/sponsor and a group of passive partner investors to adequately fund a property that holds high credibility to drive optimal financial gains. Now, as clear-cut as this process may seem on the surface for all parties involved, there is one leading and fully justified question that arises amongst potential passive investors – how do general partners make money from this deal?

In summary, the answer to this question is quite dynamic, as there are several ways general partners can (and do) make money from apartment syndication. To offer more insight and clarity within this area, below is a comprehensive overview of the diverse streams a general partner has that allows them to get compensated for their role. 

1. Distributions 

First are distributions, which is an umbrella term that consists of operations, refinancing, and the sale of the property. Depending on the written contract and how much everyone invested will determine what the split and payout will be. For instance, the profit split could be a clean 50/50 between a passive partner and the general partner, or it could be as tilted as 90/10. As long as everyone agrees, the profits can be split equally, or each person could obtain a different return based on the X/X ratio listed. 

Example: If a passive partner with an 8% preferred return invested $2,000,000 into a property that earned an annual cash flow of $200,000, they would receive $160,000 along with an additional $20,000 if the contract was a 50/50 split. That scenario would leave the general partner with $20,000 to take. 

2. Percentage Ownership 

Another primary way, which is also linked to the distribution point above, is making money through percentage ownership. Again, depending on how much personal investment the general partner chose to invest and how much the property refinanced or sold for will determine the outcome of this profit. An example for this one is the general partner owning 30% of the property and the passive partners owning 70% of it. The only underlying issue with this one is that it does not usually offer steady cash flow over time, but it could deliver large lump sums in the end if the value of the property rose significantly. 

3. Fees 

Next involves general partner fees. In short, there are typically a few different fees involved in an apartment syndication agreement, one of which is an acquisition fee. Almost all general partners will charge this one-time upfront fee, usually around 1-5% of the total purchase price. This profit will again be strongly determined on the potential of the property, the qualifications of the team, and the scope of the project as a whole. Why do you, as a passive partner, need to pay this? Because it covers the time and money spent by the general partner on their efforts involving deal development, team building, marketing analysis work, finance securing, and other aspects involved to make the project a successful and seamless one. Other fees that a passive partner can expect to pay and how general partners get paid for their time include:

  • Asset Management Fee: An annual per unit fee ranging from about 2-3% and is used to cover aspects within the business plan such as interior/exterior renovations. An important thing to note here is that this percentage is based on what the collected income is, meaning the lower the income, the lower the percentage will be. 
  • Organization Fee: The majority of the time, most apartment syndication contracts do not list an organization fee as it is built into the acquisition fee. However, if it is separate, then a general partner will likely ask for a 3-10% upfront fee based on the total money that has been raised to organize and orchestrate the project team fundamentals. 
  • Refinance Fee: A refinance fee goes to a general partner for their time involved in refinancing a property. Perhaps the value increases as time goes on, and they are able to refinance with a better interest rate and terms. Refinancing is not always applicable, but if it is, there may be a 1-3% fee collected based on the total loan amount.
  • Loan Guarantor Fee: This is another one-time closing fee (that a general partner may or may not ask for) which is collected to guarantee the loan. This one had a larger percentage range falling anywhere from .5% to 5%, depending on the risk involved and if it is a recourse loan or not. Diving deeper into the risks, a recourse loan is red on the risk chart because it allows the lender to collect the general partner’s assets (home, car, credit cards, etc.) even after the collateral has been taken to collect the debt owed. On the other hand, a nonrecourse does not allow the lender to collect assets other than the collateral. In those circumstances, the loan guarantor fee will be lower since there is less risk on the general partner. 
  • Loan Interest Fees: Regardless of the size of the loan being taken on to carry out the property renovating objectives, there is going to be interest involved. Because of this, there might be an 8-12% loan interest fee as part of the apartment syndication deal. This fee is to help cover that said interest incurred from the loans made to the company
  • Construction Management Fee: Lastly, a construction management fee is typically an on-going 5-10% fee to support the general partner in optimizing the project pipeline efforts. This percentage is calculated on the total renovation budget, but keep in mind that it is often intertwined with the asset management fee to maximize passive partner returns. 

4. Brokerage Commissions (If Licensed A Broker in The Same State as The Property)

If a general partner happens to be a licensed real estate broker in the same state as the property they are investing in, then they could earn compensation for that area of business as well for performing brokerage activities to the syndication. For instance, they may earn a commission for purchasing the property initially and potentially a resale commission if selling the flipped property is part of the big picture agenda. As a final comment here, if a general partner is not a licensed broker, then onboarding one will be part of their team building process, as they are the main link between the buyer and seller and helps ensure that the entire acquisition process will go smoothly. 

Conclusion – Ready to Invest Passively? 

From finding and underwriting deals, securing finances, negotiating, executing business plans to investor communications, general partners are essentially the drivers when it comes to apartment syndication. Because of that, it stands to reason why many people looking to invest passively stop and ask how do general partners make money as their role significantly differs from theirs. After reviewing the list of streams above, hopefully you now have a better understanding of how the process works on that side of the spectrum and have a concrete idea of what to expect if you choose to opt for this investing avenue yourself. 

With that being said, passive investing is one of the leading ways to obtain the advantages of owning an apartment property without having to put in the full time, commitment, and funding needed to execute the project. Now, this is certainly not a get rich quick scheme, but it is one that can hold monumental value that builds over time. Remember, when a multifamily property you invested in earns a profit, so do you! Overall, if you are ready to have your money work for you and invest passively in multifamily real estate, then contact us today, and we will be happy to help you get the process started.