How Do Passive Investors Make Money In Apartment Syndications?
Real estate is a versatile investment that provides several ways for investors to earn returns over time. Specifically, apartment syndications often follow a structured plan to pay investors at different stages of the project. While each multifamily syndication can differ in how it's managed, expected returns, and other details, they generally offer three main types of payouts.
Apart from the cash distributions you receive, real estate investments come with significant tax benefits. Real estate is a physical asset that can depreciate over time, meaning its value decreases due to wear and tear. This depreciation can be used to lower the tax burden on the income you receive from the investment. If you're curious about how depreciation works in apartment syndications, there's more information available on that topic.
Now, let’s look at how investors earn money from these projects. There are three main ways passive investors make money in apartment syndications:
Cash Flow Distributions This is the most straightforward way to earn money. It comes from the property’s rental income and any other revenues, minus expenses and mortgage payments. The remaining cash is divided among investors based on their initial investment. So, the more you invest, the bigger your share of the cash flow. Distributions usually occur monthly or quarterly, though this can vary. Initially, you might not see distributions until a few months after the property is acquired, as the sponsors need time to stabilize the property and build up reserves.
Cash-Out Refinance A cash-out refinance can provide a substantial return to investors. This happens after the property is fully stabilized and any renovations are complete. With higher occupancy and increased income, the property’s value rises, allowing for a refinance based on this new value. The sponsors can then withdraw some of the property’s equity as cash, which is distributed to the investors. Sometimes, this can even return your initial investment, allowing you to reinvest it elsewhere while still retaining your ownership stake in the property.
Profit from the Sale of the Property When the property is sold, the proceeds are used to pay off any remaining mortgage, debts, bills, and taxes. The remaining profits are then divided between the investors and the sponsors according to the terms outlined in the Private Placement Memorandum (PPM) signed at the start. This final payout might take a few months as all debts are settled before investors receive their share.
Summary: As a passive investor in a multifamily syndication, you can expect:
Regular cash flow distributions, typically monthly or quarterly.
A cash-out refinance may return your initial investment partway through the project.
A share of the profits when the property is sold.
Investing in multifamily properties offers benefits like steady cash flow, tax advantages, and property appreciation. It’s a way to diversify your portfolio beyond traditional stocks, bonds, and mutual funds, and can be a good protection against inflation.
Have questions about how apartment syndications work? Reach out to us! Schedule a call to connect and get your questions answered.
