4 Common Myths about Multifamily Syndications
1. “I can't invest because my net worth is under $1 million/I don’t have any money.”
Real estate syndications can be conducted through two different methods of offerings through the SEC. The first and most used is the 506(b) offering and it allows what the SEC calls “Sophisticated Investors” to invest in multifamily syndications with as little as $5,000 (deal specific) and thereby doesn’t require you to be any kind of wealthy in order to get into this class of investing. (To learn more about the different types of capital you can use in syndications, visit our article about “Ways to Invest”) The second type of real estate offering is the 506(c) offering, which mandates that each individual(s) or entity in the investment be a verified accredited investor. Having a net worth over $1 million is just one of several ways to pass the “accredited” test. An individual with an annual income in excess of $200,000 ($300,000 if combined with their spouse) in each of the two most recent years may qualify you to participate in the 506(c) investment offering. Trusts with total assets in excess of $5 million may also be qualified to invest.
2. “I can't communicate with the Syndicator.
While this may be true with a REIT investment, Syndicators work closely with every investor. This relationship provides valuable direct contact between investor and Syndicator, from answering questions about portfolio diversity to navigating a 1031 exchange. Reputable syndicators deliver transparent reporting to their investors from pre-investment through the hold period and eventual sale.
3. “Syndicators with a lower minimum investment amount are buying lower-grade real estate.”
In years past, Syndicators tended to set higher minimum investment amounts to keep investor groups small.
Today, documentation and accounting are done with virtual deal room technology allowing for electronic signatures, cloud document storage and ACH distributions. Moving from paper to the portal has drastically reduced administrative time (and countless trees). As investor groups grow, the minimum investment requirements have dropped to levels as low as $5,000 to $25,000.
With this newly available technology, experienced Syndicators can acquire very large real estate projects with low investment minimums to open deals up to broader participation.
4. "I’ll have no authority in decision making."
Not necessarily. Syndicators who structure ownership through a Tenancy-In-Common (TIC) model will follow IRS guidelines that actually require TIC owners to participate in major decision making, such as sales, refinancings and annual budgets. Investors won’t be bothered for input on routine maintenance, but their vote ultimately controls the property.
In contrast, investments into funds, Delaware Statutory Trusts (DSTs) and REITs offer indirect or no control through voting rights. These investment structures grant control to a manager or trustee, or typically an insignificant vote in the case of a REIT shareholder.
If you’re really worried about your syndicator’s decision-making abilities, then maybe it’s time to move on to a different syndicator. Before entrusting your money with someone, I highly recommend trusting them as a person first, since that will ultimately relieve a ton of stress off of both you and the syndicator.