Frequently Asked Questions
A syndication is a partnership between several investors. They combine their skills, resources, and capital to purchase and manage a property. The syndicate consists of a General Partner (also referred to as a “Sponsor”) and Limited Partners (investors).
A General Partner (see below) is an individual or, more commonly, a group who spearheads the acquisition process and manages all decisions related to the asset (construction, asset management, financing, etc.). They share in a minority share of the profits based upon specific criteria outlined in each investment.
As a Limited Partner, you can participate passively in the partnership which allows you access to the benefits of real estate investing without the hands-on participation, time commitment, or large capital outlay needed to acquire real estate alone. Syndication provides an opportunity to diversify your portfolio and generate additional income streams. To be clear, as a Limited Partner you are not individually on title. You become a member of the entity who is, thus allowing all proportionate benefits to be passed through to you, the same as you’d be entitled to if you owned the asset individually.
A Multi-family Apartment Syndication allows investors to participate in otherwise unobtainable real estate investment opportunities by aggregating capital and experience by teaming up with other like-minded investors. This also allows you to diversify your capital into other real estate syndications or in other economic sectors.
The typical minimum is $50K although certain deals have a $75K or even $100K minimums
This depends on the structure of the entity. VAMOS Capital Group structures theirs (506b) so it is eligible to work with Accredited Investors and up to 35 non-accredited or sophisticated investors
An individual who satisfies one of the following two requirements:
- Annual income of over $200,000 (or $300,000 of joint income), or
- Net worth of at least $1MM (excluding the value of primary residence)
Sophisticated investors must have knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment
Typically, a minimum investment ranges from $50,000 - $100,000. Although, each syndication is unique.
Investors can capture tax benefits such as accelerated depreciation (not available for single family rentals) through cost segregation to reduce taxable income, possible 1031 exchanges into new projects, and tax-free return of initial equity.
Investors have multiple funding options when acquiring an equity position in an asset: Cash, Self-Directed IRAs, Solo 401Ks, SEP IRAs, SIMPLE IRAs, Trusts and LLCs.
Quarterly distributions is the standard; however, each syndication is a business with varying distribution amounts based on the performance of the property. Each syndication has a specific strategy based on the specific value-add, cash flow or hybrid (“blended”) components of the asset.
We look for an 8%+ cash-on-cash return with an IRR north of 15% (doubling the initial value their investment over a typical 5 -7 year hold)
The preferred return is the threshold return that must be paid to the Limited Partner (LP) or Passive Investor (PI) before the General Partners (GP) are compensated. For example, if the preferred return is 8% and the available cash for distribution is $120,000, $80,000 is paid to the LPs and remaining $40,000 is distributed to LPs and GPs according to the specifics of the deal.
After the preferred return is paid to the LPs, the remaining cash is distributed amongst the LPs and GPs according to the split documented in the PPM. If the split is 70% to LPs and 30% to GPs, then the remaining cash is distributed accordingly: 70% of the cash in excess of the preferred return is paid to the LPs and the remaining 30% is paid to the GPs.
For each deal, monthly updates on the status of the business plan and associated operating metrics will be sent out. In addition, quarterly distributions will be made approximately 15 days after each quarter. At the end of each year, a K1 statement will be sent out before March 31st.
As in all investments, unforeseen factors can impact the investments’ performance. While Limited Partners’ liabilities are limited to their principal investment (they are not individually listed on the title or loan documents), there is risk of the asset underperforming and the business plan not being executed effectively. Moreover, external factors (macro-economics, force majeure, interest rates, pandemics, natural disasters, government policy changes, etc.) may negatively contribute to performance.
Educate yourself, read books and blogs, attend seminars or meetups, establish your investment goals, and engage with VAMOS Capital Group. We can point you in the direction of other resources to help get you on the path to Financial Freedom.
Accredited investor – an individual who satisfies one of the following two requirements:
– Annual income of over $200,000 (or $300,000 of joint income), or
– Net worth of at least $1MM (excluding the value of primary residence) -> Learn more
Acquisition fee – a fee paid to the General Partner/Sponsor for sourcing, assembling, and securing the transaction. These fees typically range between 1-3% of the total value of the acquisition.
Asset management fee – an annual fee paid for executing the business plan for the asset (leading construction, monitoring and overseeing the property management, providing updates on the progress of the business plan to investors, etc.). This fee typically ranges between 1.5%-3% of gross rent the asset produces. Asset management is often performed by the General Partner/Sponsor but can be outsourced to a independent 3rd party.
Cap rate – short for capitalization rate, which represents the NOI divided by the purchase price. For example, if an asset was acquired for $1MM and produced $60K of NOI for the year, the cap rate would be 6.0%.
Cash-on-cash return – the net annual cash return percentage provided to investors in proportion to the amount invested (after all expenses and debt). For example, if $10,000 was returned annually for $100,000 invested, the annual cash-on-cash return would be 10%.
Cost Segregation – the reclassification of specific assets acquired in the property acquisition by maximizing the aspects which are eligible for treatment as having 5-15 years of depreciable life (carpeting, wall coverings, partitions, millwork, lighting fixtures). The purpose of the study is to utilize accelerated depreciation to increase deductions passed on to Limited Partners. This study is performed by a hired, independent 3rd party specialist.
Depreciation – a reduction in the value of an asset with the passage of time, due in particular to wear and tear. When contemplated within multi-family acquisitions, these “paper losses” appear in K-1 tax forms distributed to each individual investor which serve to offset passive income. The impact of these losses are specific to each individual; please consult a tax advisor for more details.
Debt service – payments made for debt provided to acquire and/or improve the asset. Debt service coverage ratio (DSCR) refers to the amount of rent produced in relation to the debt service payment. For example, $125,000 in monthly rent generated for a $100,000 per month debt payment would provide a DSCR of 1.25.
Gross Operating Income (GOI) – the income the asset generates before expenses have been paid.
General Partner – often referred to as the Sponsor, the individual or group who spearheads the acquisition process and creates, implements and oversees the execution of the business plan for the acquisition.
Hold Period – the number of years the asset is expected to be held before an anticipated sale. This will be indicated in the Private Placement Memorandum (PPM).
Internal Rate of Return (IRR) – is the rate at which the net present value of all future cash inflows and outflows for a project is zero. What does that mean? In short, it provides an annualized return when taking into account when the return is provided. This serves to compare different investments types on equal ground when taking into account inflows/outflows in addition to hold periods. Take the following three examples into consideration – all three provide the same dollar amount of return (doubling your money) but the speed with which you are able to receive the return impacts the IRR, shown here.
Investor Partner – (see Limited Partners)
Limited Partners – equity owners of the asset who participate in the benefits of their proportionate amount of ownership.
Loan-to-Value Ratio – this number represents how much debt is being utilized in relation to the value of the asset overall. Multi-family loan-to-value ratios tend to range between 65%-80% (e.g., a $1MM acquisition would typically use a loan between $650K-$800K, the balance of which would be equity).
Net Operating Income (NOI) – the income the asset generates after all expenses have been paid. This does not include debt service payments.
Passive Investor – (see Limited Partners)
Preferred Return – indicates the percent of annual return that investors will be paid first before additional profits are shared with the General Partner. Once a preferred return has been provided to investors, all profit above that hurdle will be shared with the General Partner. This is unique to each specific investment; the preferred return hurdle can be an annual yield or IRR.
Private Placement Memorandum (PPM) – SEC required legal document that provides the details of the offering, associated risks, the partnership agreement for the LLC holding the property, and the subscription agreement which documents the amounts being purchased and associated percentage ownership of the LLC. This document also provides a detailed overview of the business plan of the investment.
Sophisticated Investor – investors with sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.
Syndication – a grouping of investors who maintain passive equity ownership in an investment or business.