Below, you'll find the most comprehensive guide, and the most frequently asked questions on how to passively invest in real estate, from beginning to end—learn about syndications, finding deals, funding your very first investment, as well as receiving distributions.
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A real estate syndication is a group of investors combining their skills, resources, and capital to purchase real estate investments that would otherwise be difficult or impossible to acquire alone. For example, an apartment complex or storage facility.
A “Syndicated” investment is synonymous with “Crowdfunded” investment.
Passive Income. A multifamily syndication generates cash flow for investors from the income generated by the asset. Implementing a value-add strategy allows us to force appreciation and reward our investors for years to come.
Above Average Returns. Between 2000 and 2019, the average annualized return of the S&P 500 Index was about 8.87%. On the other hand, multifamily syndications can return average annual returns of 10% and higher. That’s after fees, inflation, and taxes.
Below Average Risk. When the great recession hit in 2008, the delinquency rates on single-family home loans hit 4% in 2010. Despite the recession, delinquency on multifamily loans only hit 0.4%. Only a tenth of what single-family assets experienced! If you’re looking for an asset to invest in that can potentially beat the odds, there’s no better way to invest your money than in a multifamily syndication.
Hedge Against Inflation. Generally, the value of multifamily assets increases as inflation increases. This creates a potential inflation hedge for our investors.
Massive Tax Benefits. Your passive investment income is taxed at a far lower rate than other investments because of something called “bonus depreciation”. Bonus depreciation can actually help you show a taxable loss. That taxable loss can then be leveraged to offset other passive gains. This is why a multifamily syndication is the best passive investment vehicle out there.
High Minimum Investment. Sometimes starting at $25k—but, usually, it’s $50k–100k—real estate syndications have a relatively high entry point for investors.
Illiquid Investment Type. Even though investors can receive quarterly distributions, investments can be typically tied up for up to 5–7 years before they are returned along with any additional profit.
Lack of Industry Regulation. Unlike public markets, real estate investments operate at a much lower level of scrutiny from the SEC. When engaging in a real estate syndication, make sure you only engage with companies you know and trust.
There are many roles to fill in a real estate syndication—General Partners (GP), Lenders, Brokers, Attorneys and Limited Partners (LP). Each plays a key role in making sure the deal sourcing, fundraising, acquisition, reposition, sale and distribution of capital go as smoothly as possible.
A General Partner is the party who organizes the syndication. General Partners find the investment opportunity, secure the financing, and manage the property. “General Partners” is synonymous with “Sponsors”, “Operators”, or “Syndicator”.
The group of people who provide capital (Cash, 401(k) or IRA (Traditional or Roth)) for the investment are called Limited Partners, LPs, or “Passive Investors”.
The Limited Partners receive a share of the equity in the real estate investment along with distributions (cash flow) and profits, in return for their contribution with limited liability up to their investment amount.
Lenders, when used, provide debt leverage to increase buying power and can help achieve a higher ROI than otherwise possible.
Real estate syndications are typically available to verified “accredited investors”. The Securities and Exchange Commission (SEC) defines an accredited investor as someone who has an annual income of $200,000 (or $300,000 joint income) or a net worth of at least $1.00MM, not including a primary residence.
Some syndications—like 506(b) offerings—are available to non-accredited investors as well as accredited investors. Many real estate syndications are designated as 506(b). This means they are open to non-accredited investors or “sophisticated” investors.
A sophisticated investor should have enough know-how and/or experience in investing in alternative investments such as real estate, ATMs, oil, gold; any investments outside of the stock market. A sophisticated investor should be able to make educated decisions about syndication offerings.
Aside from being “sophisticated”, the investor needs to have a pre-existing “substantive relationship” with the General Partner(s). The SEC doesn’t exactly define what a “substantive relationship” entails. This document from the SEC alludes to what a “substantive relationship” may consist of.
When you decide to become an investor with Prime Capital Investments you are guided through an onboarding process that allows us to gather important information (your experience, goals, etc.) and begin to develop a relationship with you.
Here at Prime Capital Investments, we specialize in Multifamily assets.
Other assets that are available to you in the market are high-value commercial real estate assets: Multifamily, Industrial Warehouses, Mobile Home Parks, Self-Storage, Office Buildings, or Retail Buildings.
When it comes to participating in real estate crowdfunding, the real estate investment offering can be under one of the two SEC exemptions— rules 506(b) and 506(c) of Regulation D. These exemptions make it possible for companies to raise capital from investors without having to register a public offering.
Rules 506(b) of Regulation D allows real estate investors to raise an unlimited amount of money from an unlimited number of accredited investors and up to 35 sophisticated investors. The catch is that investors and syndications must have a “substantive relationship” already in place before being able to offer their deal to investors. No advertising allowed.
Rule 506(c) of Regulation D is a relatively new modification of the rule (est. 2012) which allows syndicators to advertise their offerings to the general public. The difference being, is that syndicators must only raise capital from accredited (and verified) investors.
In terms of getting paid from rent distributions and from sale of the property, Lenders, Limited Partners, and General Partners are the ones to get repaid—in that order.
Typically, a minimum investment ranges from $50k–100k.
When we think about investing, we often think of having cash at hand to commit. While cash is easiest to deploy, did you know that you can fund investments by using capital from your 401(k) (IRA or SDIRA), or by converting stocks or bonds into cash? Let’s consider a few ways to invest in a real estate syndication.
Yes, you can invest with a Trust. Check with your trust attorney prior and just follow the instructions for the ‘Entity’.
Yes, you can invest with an LLC. You can add an investor account for your entity.
If you’re a family office looking to invest, please reach out to us directly at firstname.lastname@example.org to let us know and we’ll be in touch to see how we could accommodate getting you set up on our platform.
Depreciation is a key component of why real estate syndications make such attractive investments.
In the eyes of the IRS, depreciation is the ability to write-off the cost of business items, such as the property itself. The actual building itself, over time, will break down, and as an investor you are allowed to write off this wear and tear on your taxes.
Using a simple formula, the IRS allows you to report a smaller profit (accounting for depreciation that offsets gains), reducing the amount you owe in taxes.
Be sure to consult with your tax professional to fully understand your tax implications as everyone’s situation is unique.
So, we’ve closed on a multifamily asset, you’ve been presented with an investment opportunity, you’ve contributed your investment, and now the deal is fully funded. What happens next?
Here’s what to expect—
Once per quarter (with any critical updates in between), expect to receive an email from us with a description of what transpired in the last 3 months. The description may include the following:
If you’d like more information beyond the quarterly updates, feel free to ask us for additional documentation. We’d be happy to provide that for you.
We are available via email or phone should you have any questions or concerns. We pride ourselves on being responsive and transparent.
Now, for the fun part. Receiving the cash flow distribution checks! Mailbox money!
The first distribution may be delayed for two quarters after the deal closes to give us time to start stabilizing the property and deal with any unexpected issues immediately after closing on the property. It’s important to have enough cash on hand for any unexpected issues.
Once any issues have been dealt with and the asset has been stabilized, we will begin paying out distributions to you as cash permits. We pay out these distributions quarterly.
To see how distributions are calculated please see your Operating Agreement. Each deal varies.
Once the books are closed for the year and the corporate taxes completed then we will send out an annual report along with the K-1 tax document. This will be uploaded to your investor portal for access.
The annual report will provide a summary of the project’s actual performance.
While real estate investments are considered illiquid, there are three most common ways an investor gets their initial investment back, along with a profitable return.
There are several ways investors get paid from their real estate investment:
If a real estate asset is underwritten to have a prolonged hold period (can be 5–7 years), investors can rely on projected quarterly distributions from the net operating income produced by the asset. Because you are a part-owner of the asset, you get paid like one too. Depending if there needs to be any value-add and stabilization done to the property, distribution commencement could be delayed.
A good rule of thumb is to aim for a 6–9% cash-on-cash amount. Cash-on-cash is calculated by taking the initial investment, and dividing it by the annual distribution amount. For example, $100k initial investment divided by the annual distribution of $7k equals 7% cash-on-cash return.
Every deal is different but sometimes we will refinance a project during the hold period. This will allow us to get more favorable financing terms and in some cases be able to return some of the investor capital.
The asset was purchased at a certain price and considerable upgrades were made to raise its value. The rents have been increased to market and any vacancies have been filled. After “stabilizing” the asset for at least a year, showing that the returns are consistent and dependable, the value of the asset increases to allow for the refinance.
A refinance event is what allows investors to capitalize on this additional value created by the investment management team. All before the sale of the property.
For investors, this frees up funds to pursue other investment opportunities while maintaining their original ownership percentage in the project.
Once the investment seasons through the investment period, it will be sold. The syndicator pays any outstanding debt, any sales expenses, any outstanding property expenses, then investor capital is returned. Once all these have been paid then profits are distributed between the LP and GP pro rata, based on equity ownership.
Find out how many deals the team has completed and how their actual returns stacked up against their initial projections.
Coming up short on projections shouldn’t necessarily end your relationship immediately. The syndicator should be able to elaborate on the circumstances, their process, and what they’ve done to lessen the chances of it occurring again in the future.
Remember, a seasoned syndication will have dealt with plenty of challenges. What’s important to note is how they met and overcame those challenges. Be wary of any syndication team who hasn’t met any resistance whatsoever and/or hasn’t taken a deal from start to finish.
An experienced team will maintain their composure and remain solution-oriented during challenging times.
Investors nationwide choose to passively invest with us at Prime Capital Investments because of our extensive experience, conservative approach, and commitment to transparency.
Danny Flores, the founder of Prime Capital Investments has over 20 years of experience in the real estate arena. He started out as a general contractor with boots on the ground, went to USC and got a BS with an emphasis in General Financial Management, became a middle market lender syndicating corporate loans that were used for working capital lines and acquisition lines, founded a property management company in 2006 and finally formed Prime Capital Investments to grow the real estate portfolio and to be able to help investors access investments only available to institutional investors.
With Danny’s unique perspective and thorough understanding of, not only the physical side of multifamily real estate, but the management and financial side as well, you can rest assured that you have the most qualified sponsor team caring for your investments.
We take a conservative approach to underwriting our investment opportunities to shield our investors from any downturns in the market. We always factor in unexpected emergency events in our underwriting and ensure that we maintain a healthy reserve during our time with the investment. We know just how hairy things can get out there so we stay prepared for anything.
Transparency is among our highest values because we know just how important it is to you to know the status of your investment. We send our investors quarterly reports while maintaining an open door policy for any investor who wishes to gather further information at any given time. We typically respond to emails within 24 hours or less. We also have a call scheduler available in order to lock in a time to connect.
Furthermore, we make sure that our interests are aligned with yours. Meaning we invest alongside you in these multifamily opportunities and become investors ourselves.
Make it a point to look for Syndicators who align with your goals, values, and ultimately someone who you can feel comfortable doing business with.
As a Limited Partner, you won’t receive any phone calls in the middle of the night from renters.
The advantage to Operators who use a single property management company is that their process is streamlined. Communication, billing, reporting—all of it is consistent.
When dealing with multifamily opportunities in multiple markets, an Operator may need to use several property management companies.
Prime Capital Investments will typically hire a Property Management Company who are experts in their respective markets and submarkets. We help to increase rents, reduce expenses, driving NOI higher to deliver strong returns to you as a Limited Partner.
Within the General Partnership, you should have a point of contact who you can reach out to with any questions. Ideally, this should be a team member who is actively engaged with the deal.
At Prime Capital Investments, Danny Flores (email@example.com) will be your point of contact.
At Prime Capital Investments, our team visits each and every property before signing a Letter of Intent (LOI) to acquire the asset. During this visit, we meet with building contractors as well as the property management team to assess all of the factors that go into determining the value of the property. These assessments include renovation estimates, rent rolls, and estimating repositioning schedule.
There’s no better way to assess a potential real estate investment than by putting boots on the ground.
A lot of the deals that Prime Capital investments sources come off-market, from having long-established relationships with brokers. Sponsors may also find publicly advertised deals online. The benefit of having great relationships with brokers is that great deals come straight to you since you have the investor relationships in place to close quickly, making a broker’s job easier. In return, the investors get better purchasing terms and higher cash-on-cash returns.
Nothing worse than trusting someone with your hard earned money and then not hearing anything after that. Even worse, having to ask for updates.
At Prime Capital Investments, we deliver quarterly reports straight to the email inbox of all investors on the deal. The report includes any shifts in the market, as well as any property updates, outlining latest developments that impact the deal, such as renovations.
The report also includes financials such as Revenue for the Quarter, Net Operating Income, Capital Expenditures, Occupancy rates, and more.
When passively investing in real estate, make sure the sponsors send regular updates—it’s a good idea to ask for the most recent update so you can get a feel for what to expect.
Unexpected things always come up, especially in distressed/value-add deals that include renovation. Which, in a way, makes them expected, so why not prepare for the unexpected?
On top of accounting for all the possible (padded) contingencies, the analysts at Prime Capital Investments also rounds up those contingency reserves.
If there isn’t enough padding in place, any additional capital expenditures accrued may come out of your pocket, before the investment even goes live. This is why we pad our reserves sufficiently—if the capital is unused, it is returned to investors.
While there are no sure ways to protect an investment from a market downturn, it is possible to mitigate the risk.
A detailed breakdown of general partner fees should be outlined in the Private Placement Memorandum (PPM), which should be sent to you prior to wiring capital.
The answer to this question should always be a “No”. No investment is guaranteed and when talking to the deal sponsor, be on the lookout for phrases such as “projected” & “targeted” returns. No investment can be guaranteed, so if it is, look for a different sponsor.
Put your capital to work by passively investing in real estate alongside Prime Capital Investments. Get started today.Start Investing
Accredited investors are individuals qualified to invest in alternative investments by having an annual income of $200k, or $300k for joint income, or a net worth of $1M (not including the primary residence).
Compensation earned by the general partner(s) in a syndication for finding, screening, arranging financing, and closing on the investment opportunity.
The opposite of passive investing. An active investor does all the work of finding, structuring, managing, and exiting investments.
An increase in the value of an asset over time. This can be due to the natural appreciation of real estate overtime, or via “forced appreciation” by adding value to the asset and increasing Net Operating Income (NOI).
A ranking system of A, B, C or D assigned to a property and a neighborhood based on a variety of factors. For property classes, these factors include date of construction, condition of the property and amenities offered. For neighborhood classes, these factors include demographics, median income, median home values, crime rates, and school district rankings.
A recurring fee paid from the investment property revenues to the General Partner(s) for asset management.
The occupancy rate required to cover all of the expenses of a multifamily property.
A short-term loan allowing investors to leverage equity on the property for a down payment on the new acquisition.
These expenses are funds used by the managing company or partners to acquire, improve, or maintain an investment property. Also referred to as "CAPEX". It specifically applies to when these funds improve the useful life of a property.
The capitalization rate is calculated by dividing net operating income by the current market value of a property in order to determine a forecasted rate of return.
The revenue remaining after paying all expenses. Cash flow is calculated by subtracting the operating expense and debt service from the collected revenue.
The rate of return based on the cash flow and the equity invested. Also referred to as CoC return. CoC return is calculated by dividing the cash flow by the initial equity invested.
Costs required to close on a real estate or financing transaction. May include origination fees, application fees, appraisal fees, underwriting fees, processing fees, and recording fees.
The annual amount paid to the mortgage lender. Includes principal and interest. Principal is the original sum lent to a borrower and the interest rate is the charge for borrowing the principal amount.
The DSCR is the ratio mortgage lenders use to evaluate and qualify a deal for financing. The DSCR measures how much cash flow will be available to cover debt service. A DSCR ratio of 1 means the cash flow should cover the debt payments. Lenders typically expect a minimum DSCR of 1.20x in order to get a loan. A better ratio may qualify the borrower for better terms.
A decrease, or loss in value due to wear, age unforeseeable circumstances. This is a non-cash expense.
The Partner’s portion of the profits, which are sent on a monthly, quarterly or annual basis, at refinance and/or at sale, depending on the business plan.
The process of confirming that a property is as represented by the seller and is not subject to other problems. For multifamily syndications, the General Partners will perform due diligence to confirm their underwriting assumptions and plans.
An earnest money deposit is placed into escrow by the buyer of an apartment complex to demonstrate their commitment to execute on the purchase contract. This deposit will be credited toward the acquisition cost at closing.
Calculated by dividing the total cash distributions, cash flow and cash upon exit, by the initial equity investment made. The equity multiple is a way to calculate a rate of return on multifamily investment property.
The syndicator’s plan for selling the apartment complex and compensating the limited partners at the conclusion of the business plan.
An owner of a partnership who has unlimited liability. A General Partner is usually a managing partner and is active in the day-to-day operations of the business. In multifamily syndications, the General Partner is also referred to as the sponsor, operator or syndicator and is responsible for executing the business plan.
The holding period is the projected amount of time the syndicator plans to hold the asset.
The amount charged by a lender to a borrower for the use of their funds to finance an investment opportunity.
The rate needed to convert the sum of all future uneven cash flow (cash flow, sales proceeds and principal paydown on the mortgage loan) to equal the equity investment.
A partnership between two or more investment partners who collaborate on an investment opportunity.
An LOI is a non-binding agreement drafted by the buyer proposing their purchase terms to the seller. They’re used as a way to make an offer without being immediately tied into the deal.
A Limited Partner is a passive investor who contributes capital. A Limited Partner’s liability is limited to the extent of their cash contribution.
The ratio of the value of the loan amount divided by the property’s appraised value.
The market rent refers to the market value of a rental unit for lease based on comparable rental rates for similar units in close proximity to the subject property. It is used to calculate value, cash flow, and potential loan amounts.
The net operating income of an investment property is calculated by adding up all of the income and subtracting the operating expenses.
A loan on which the borrower is not personally signing a guarantee. The lender generally has no recourse to pursue the borrower in a default, beyond the pledged real estate collateral the loan was made against and bad boy carve-outs.
The percentage rate of occupied units within a multifamily property.
The costs of running and maintaining the property and its grounds. In multifamily syndications, operating expenses consist of: maintenance, repairs, payroll, contractors, marketing, administrative, utilities, management fees, property taxes, insurance, and capital reserves.
Placing your capital into a multifamily syndication that is managed entirely by a General Partner.
A risk mitigation/incentive strategy that allows investors with preferred shares to receive an amount of distributions up to a predetermined percentage before the sponsor collects any profit.
A metric used to compare like-apartments in order to determine value. Total perceived value divided by the amount of units equals Price Per Unit.
A document that lays out the risks, terms, and objectives of an investment, as well as documents the syndicators’ business operations and condition. Also known as an offering memorandum.
A projected financial statement with itemized line items for revenue and expenses projected for a fixed period of time.
The cost associated with hiring a property management company to manage the day-to-day operations of the property.
The right of the mortgage lender to pursue collection of the debt that is owed to them in case of a default.
A replacement of a debt obligation with another, usually with better repayment terms. Often used as a tool after adding value to the property then reassessing its value to return capital to investors well before the sale event.
An outlined comparison of like-properties within the location market to compare market rent costs. Used to project the rent profit potential. Compares unit allocation, price per unit, square footage, occupancy rates, as well as other metrics.
A manifesto that outlines each tenant, square footage, unit types, number, deposit amount, move-in date, as well as lease start and lease end dates for every unit in the property.
An event during which the hold period comes to an end and the asset is sold off to a new holding entity. Investors share a windfall of capital, the amount of which is dependent on their equity stake in the asset.
An outlined comparison of like-properties within the location market to compare sales prices. Used to project the profit potential from the sale of the property. Compares unit allocation, price per unit, square footage, occupancy rates, as well as other metrics.
A financial modeling tool that studies risk factors within the investment. In real estate, it can take into account debt ratios, occupancy rates, or other factors.
An individual deemed to have enough investing experience to assess potential risk and reward of an investment.
A document between the syndicator and the investor that outlines the amount of shares that is being purchased (and sold) at a specific price.
Investment partnerships that allow a group of investors to pool their capital together to increase their buying power.
A profit and loss statement showing actual financial numbers for the past 12 months.
The act of evaluating a real estate deal to determine its potential strengths, weaknesses, and returns.
The amount of potential cash flow loss due to having empty units
The percentage rate of vacant units within the multifamily property.
The act of renovating the asset by adding value to the property, operations, as well as the lives of the tenants who reside there. This allows for raising rents to market and many times also lowering operating expenses.
A 1031 exchange is a swap of properties that are held for business or investment purposes. The properties being exchanged must be considered like-kind in the eyes of the IRS for capital gains taxes to be deferred. If used correctly, there is no limit on how many times or how frequently you can do 1031 exchanges.
Put your capital to work by passively investing in real estate alongside Prime Capital Investments. Get started today.Start Investing