5 Mistakes To Avoid When Investing in Apartments Syndications

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Over the last couple of years, apartment syndications have become increasingly popular among real estate investors. Generally speaking, when done correctly, investing in apartment syndications can generate lucrative passive income for investors… hence their newfound popularity. However, some investors erroneously begin investing in multifamily apartment syndications without fully understanding the process and the intricacies of this type of investment.
Below we will discuss the top 5 mistakes you should avoid when investing in multifamily apartment syndications to protect your real estate portfolio.

1. Thinking and buying too small. The whole point of investing in multifamily apartment syndications is to gain access to larger deals that you would not be able to afford independently. However, some investors invest in apartment syndications without thinking big. Specifically, some investors will pass up lucrative apartment syndication deals in favor of investing in single-family homes or multifamily units that hold less than five rental units.

However, generally speaking, deals where you depend on only a few renters for your cash flow, cannot compare to larger multifamily assets. While it is true that single-family homes are easier to purchase, they are terrible investments in terms of generating consistent rental income. As such, investors should focus on larger multifamily apartment buildings, properties comprising of more than 16 units. These larger multifamily properties will generate enough cash flow to make the deal worthwhile and financially beneficial.

2. Not conducting enough research and due diligence. Before committing to investing in apartment syndications, investors should take the time to understand the process. You should aim to become familiar with the process and understand major aspects of the deal.

Apart from understanding the apartment syndication process, you must also vet the actual property you are considering. This means looking at the local laws and regulations, property taxes, local market conditions, net operating income, property expenses, cap rates, and so forth to evaluate what factors may affect the property’s performance and profitability and if it’s worth the risks.

To that point, you should accept the fact that you will have to look at multiple deals before you can settle on one good project. Generally speaking, 90% of the deal you will look at will not fit your investment criteria or fit your investing goals and strategy. That means you may have to review 100+ deals to find one or two that are a good fit.

Overall, understand that finding great apartment syndication deals is a job within itself. You have to be on the market every day looking at deals, constantly networking, and consulting with your team. However, this is a part of the process that you can’t afford to skip over (literally).

3. Not understanding the entire apartment syndication agreement or business plan. One of the biggest mistakes you can make when investing in apartment syndications is not understanding the entire agreement and the business plan. Specifically, you should understand every term in the agreement, and if you don’t, consult your team or your lawyer to help you gain clarity. In general, you want to ensure that you are receiving a fair deal with little to no surprises. You want to understand how the profits are split between the sponsor and the limited partners, etc. You also want to understand the unique risks associated with the deal.

Overall, if you are unclear about the terms of the agreement or the business plan, reach out to the syndicator or sponsor to answer your questions. If the syndicator sponsor is reluctant to answer your questions or is unavailable, this may be a red flag that this is not a sponsor you want to work with on this deal

4. Not Focusing on your long-term goals. Some investors do not realize that investing in real estate syndications is a long-term journey and not a short-term investment strategy. As such, investors must look at the big picture and be prepared for their cash to be locked into the investment for up to 10 years. In other words, real estate syndications are not liquid investments.

With this in mind, investors should ask the syndicator the appropriate questions to get a firm grasp on the projected returns of the project over the next few years to ensure that the syndication meets their short and long-term investing goals. Lastly, investors must ensure that they understand the sponsor’s exit strategy.

5. Not taking advantage of lucrative tax benefits and deductions. One of the biggest advantages of investing in real estate syndications over other forms of passive investments like REITs is that you can take advantage of various tax deductions. Some of the most common deductions for investors in apartment syndications include property appreciation, property taxes, operating expenses, mortgage interests, and repairs. As a passive investor, your tax deductions and benefits will be based on your proportional share of ownership in the project.

Specifically, passive investors receive K-1 tax forms which report any gains or losses from the project. Generally speaking, investors typically see a loss after completing their taxes. Investors can use this loss to offset other passive gains within the investor’s investment portfolio. This is especially true for high-income earners.

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