Why I Invest in Apartment Buildings, and Why You Should Too – Yes, Even Now!

This post first appeared on the ClaraInvestments.com at https://clarainvestments.com/why-i-invest-in-apartment-buildings-and-why-you-should-too-yes-even-now/

When it comes to investing in apartment syndications, most people I talk to have no idea what it entails. One reason is that it's typically limited to accredited investors (explained below). Another reason is that traditional financial advisors don't make money by offering these investments. Consequently, you rarely hear about them. However, institutional capital, private equity, family offices, and other "smart money" pour billions into this asset class. In this article, I will explain the pros and cons of multi-family syndication investing compared to more traditional investments. I invite you to subscribe to my newsletter to receive the next article on this topic.

What are Syndications? Syndications involve a group of people pooling their capital to purchase a larger property. The process is led by an operator (also known as a syndicator or general partner) who identifies, underwrites, and manages the asset. Operators raise capital from limited partners (investors like us), primarily for the down payment and execution of the business plan. Investors receive quarterly dividends and, after a typical 3-10 year hold period, profit from the sale of the property.

Reasons Why I Invest in Apartment Syndications:

1. Better Returns: Based on my personal experience with apartment syndications, I have found that they offer better overall returns than the stock market while also providing the predictability of cash flow typically associated with bonds. In other words, they combine the best of both worlds. I typically target an internal rate of return (IRR) of 15-20% per year over the entire investment. The return is composed of a cash dividend (typically 7-9% per year) and profit from the asset sale at the end of the hold period. This crushes a pure stock and bond portfolio and is also less variable. While you won't experience a 10X increase in your investment, doubling your money over five years is quite reasonable.

2. Inefficiency = Opportunity: Real estate offers higher returns because it operates in an inefficient market. Skilled operators can identify unique assets or strategies in their local markets. This is much harder to achieve in public stock, bond, or REIT markets, where individual investors have to compete directly with global investment firms and their computer algorithms that dominate trading. In my opinion, real estate presents a fairer playing field for the average investor.

3. Less Hassle than "Do It Yourself" Real Estate: While it's possible to achieve similar or even better returns by buying smaller properties individually (e.g., flipping, short-term rentals, buy and hold), scaling becomes challenging. Once you surpass 5-10 properties, it becomes a lot of work. As I discussed in my previous post, it's important to consider your return on time. For busy professionals, syndications offer a hassle-free alternative. Although you do need to invest time upfront in vetting the deals and operators, it eventually becomes truly passive "mailbox money."

4. Solid Fundamentals: I am specifically referring to residential apartments, which are considered a fairly safe asset class. This should not be confused with office buildings or malls, which face significant headwinds. Housing is an essential human need, and despite a recent increase in apartment construction, there is still a significant shortage of housing supply. This shortage will support strong demand and occupancy for years to come. While we shouldn't expect, or welcome, the insane 20% annual rent increases we saw in recent years, moderate growth is likely due to the lack of supply and favorable household formation trends.

5. Tax Benefits: Real estate offers significant advantages over other assets, including leverage from debt and tax benefits. Although I will dedicate a whole post to this topic, the summary is that the tax advantages can be substantial. Thanks to new rules on accelerated bonus depreciation, it's possible to receive a significant portion of your investment back in the form of tax deductions in the first year alone. Last year, this reduced my tax bill by $30,000. While the IRS will eventually recapture this savings when the property is sold, having the money now allows for the time value of money and potential reinvestment. An accountant specializing in real estate can help maximize this benefit.

Factors to Consider Before Jumping into Syndications:

1. Accredited Investor Requirements: Private syndications are typically limited to accredited investors. Since these investments are largely unregulated, the government protects investors they consider to have "limited financial knowledge" from investing in these and similar asset classes. The Securities and Exchange Commission (SEC) defines "accredited" as someone with an annual income of at least $200,000 (or $300,000 with a spouse) or with a net worth of at least $1 million (excluding primary residences). These restrictions, along with typical investment minimums ranging from $50,000 to $100,000, limit the opportunities for less established investors. Congress is currently considering modifying these rules to allow more investors to participate.

2. Lack of Liquidity: The biggest downside of multifamily syndications is the lack of liquidity. They are long-term investments, and if you need the cash before the property is sold, you may be out of luck. It's essential to be fully aware of this limitation. Syndicators typically tell you the targeted hold period in advance, allowing investors to plan accordingly. But the illiquidity may not be suitable for everyone.

3. Operator Selection: Not all operators are created equal, and this is especially true in recent years. Many inexperienced syndicators have entered the market to capitalize on the profit potential. Some of them used short-term, variable debt, which has now caused significant trouble due to the massive spike in interest rates. This creates both risk for those syndications and opportunities for savvy investors who can purchase otherwise quality properties at a discount. I will dedicate the next newsletter to this topic, but for now, it's crucial to understand the importance of being very selective about the syndicators you work with. Sign up here to receive my thoughts on the best operators.

In conclusion, multifamily syndications offer numerous advantages and can serve as a valuable complement to a larger portfolio of stocks and bonds. The potential returns, combined with the passive nature of this investment, make it highly attractive. However, like any significant investment, thorough research and due diligence are crucial. Take the time to vet the syndicator, analyze the asset, and understand the investment plan before committing your capital. In the next article, I will delve deeper into syndicator selection. Make sure to subscribe to receive it.

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