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Quite often, operators (i.e., general partners) only talk about the positive aspects/advantages of investing in a multifamily syndication. At JP Acquisitions, we believe in being fully transparent with our current and potential investors and seek to educate them the best we can. Thus, this post will dive into the disadvantages of investing in a multifamily syndication from the perspective of a passive investor (i.e., limited partner).
That being said, overall, investing in a multifamily syndication as a passive investor can be a good way to gain exposure to the multifamily real estate market without having to actively manage the property yourself. However, it is important to understand the risks involved and to carefully consider a syndicator’s track record and experience before investing. I’ll note that the disadvantages of investing in a multifamily syndication as a passive investor are largely the same as the disadvantages of investing in a syndication as a general partner. The largest difference is that passive investors have the added disadvantage of having even less control over the investment (hence why they are called “limited partners”). You’ll notice that the overall theme of the disadvantages boils down to control and the lack there of it as a passive investor. Nevertheless, with this in mind lets jump into this post.
The Disadvantages
1. Lack of Control: As a passive investor, you have limited control over the management decisions of the syndication. The success of the investment is largely dependent on the skills and decisions of the sponsor. For this reason, it’s critical that an investor does their homework on the syndicator and understands their strategy, track record/experience, etc. The syndicator’s experience and strategy are especially important during market downturns such as the one we find ourselves in as of the time I’m writing this. Economic downturns, local market fluctuations, and other external factors may affect property values and rental income.
2. Limited Exit Strategies: Multifamily syndications typically have a predefined exit strategy, such as selling the property after a certain period. If market conditions are unfavorable or if the business plan doesn’t go as expected, it could impact the returns and the ability to exit the investment profitably.
3. Dependency on Syndicator’s Expertise: Your returns are heavily dependent on the syndicator’s ability to execute the business plan, manage the property effectively, and make sound financial decisions. If the syndicator lacks experience or makes poor decisions, it can negatively impact the investment. For this reason, it’s always recommended that an investor does their research on the group they are investing with, and that cannot be stressed enough. It’s not too uncommon to hear of incompetent operators or even scammers who appear to have their ducks in a row and investors getting burned as a result.
4. Fees and Expenses: Syndications often come with various fees, including acquisition fees, asset management fees, and profit-sharing structures. These fees eat into your overall returns, and it’s crucial to carefully review the fee structure before investing. It’s important to mention that fees are a necessary part of syndications because they help to incentivize the operator to perform well in addition to helping them pay for their operating costs. Some examples of operating costs that syndicators have to pay include salaries, office leases, pursuit costs, etc.
5. Lack of Liquidity: Real estate investments, especially in syndications, are typically illiquid. Your money may be tied up for several years, and it may be challenging to access your investment capital before the planned exit strategy. Thus, you need to think carefully about your financial situation prior to investing in a syndication.
A more liquid and passive way to invest in real estate is through real estate investment trusts (REIT) which are publicly traded on stock exchanges. However, REITs have a slightly different set of advantages and disadvantages than traditional real estate syndications.
Conclusion
Before investing in a multifamily syndication, it’s crucial to conduct thorough due diligence, understand the risks involved, and carefully review the offering documents provided by the syndicator. Consulting with financial and legal professionals with expertise in real estate can also provide valuable insights tailored to your specific situation. Nevertheless, having an understanding of the disadvantages laid out in this post makes you a more informed investor.
If you have any questions regarding the terms and concepts in this post or previous ones, please reach out to either me (tedi.nati@jpacq.com) or someone on our team so we can help explain further. If you’re interested in investing with us at JP Acquisitions, you can contact us via email (contact@jpacq.com), LinkedIn, Instagram (jpacquisitions), or our investor portal to set up a meeting.
As always, I hope you enjoyed reading this post as much as I have writing it. Best of luck!
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About the Author
Tedi Nati is the Managing Partner of JP Acquisitions. In his role he is responsible for broker outreach, establishing deal flow, underwriting, marketing, investor relations, and assisting in the closing process. In addition to his role at JP Acquisitions, he is an Assistant Equity Underwriter at Cinnaire, a non-profit Community Development Financial Institution (CFDI). In his role at Cinnaire, he is responsible for assisting the underwriting team in evaluating and structuring real estate equity investments and assessing the risks and mitigants associated with such. Tedi earned his Bachelor of Science in Finance from DePaul University, where he graduated Summa Cum Laude. In his free time he enjoys reading, looking for multifamily deals, and working out.
Make sure to always do your own research before making any final decisions on buying/investing real estate, stocks, or other securities. I am not a CPA, attorney, insurance, or financial adviser and the information in this blog post shall not be construed as tax, legal, insurance, construction, engineering, health and safety, electrical or financial advice. If stocks or companies are mentioned, I sometimes have an ownership interest in them – DO NOT make buying or selling decisions based on my posts alone. If you need such advice, please contact a qualified CPA, attorney, insurance agent, contractor/electrician/engineer/etc. or financial adviser.