6 Ways to Invest in an Apartment Syndication
Having helped optometrists acquire equity in over $200m in large multifamily assets over just the last few months, we thought it was important to provide some technical guidance on how one may invest in an apartment syndication. While the most common way that people invest in our syndications is as an individual, there are actually several different vehicles through which one can invest. Actually, we’ll touch on 6 different ways in this article
Before we break these down, let us first mention we encourage every investor to consult their legal, tax, and financial counselors to help make the decision that best aligns with the particular circumstances and state laws.
Individual Investor
Again, this is the most common way in which investors enter an apartment syndication. And, this is perfectly ok because one very important benefit of syndications: liability protections. All investors in apartment syndications are buying equity as “limited partners.” As such, the limited partners are given contractual/structural protections against liabilities at the property. While an investor’s original capital has risk exposure, there is no further risk. Lenders, vendors, or tenants cannot sue and hold limited partners to extract capital beyond what’s invested in the deal. It’s the “general partners,” or syndication sponsors, that assume that level of risks.
Joint Tenants with Rights of Survivorship
Many married couples believe they must invest in this type of distinction in order to invest as a couple. That’s not necessarily true. A spouse can invest and have their other spouse sign the investment documents as a joint investor. If the one spouse were to pass away, most states’ laws would dictate that equity be passed to the surviving spouse. However, it most often would have to pass through probate. At the end of that process, the full equity is passed to the spouse. However, if a couple were to invest as “joint tenants with rights of survivorship,” once the first spouse dies, all of the equity in the syndication transfers to the survivor without having to pass through probate.
Limited Liability Company (LLC)
You can also invest in an apartment syndication as a corporate entity, like an LLC. Some investors believe they must use an LLC to provide additional protections against liabilities arising from the syndication/property operations. As we touched on earlier, that’s not true. Investors are limited partners that are afforded liability protections. Some investors may choose to use LLCs to invest in syndications, rather, to protect their investment against liabilities arising in other areas of their personal/professional lives. Could investing a large sum through a distinct LLC into a syndication protect that money from lawsuits seeking damages from that investor elsewhere? Potentially. Best to consult an attorney if that is the goal. Still, others form an LLC specifically to invest in numerous real estate opportunities and then expense the appropriate costs of running/coordinating the activities/operations of that LLC. We would still encourage investors to consult with their accounting professional in that situation.
Self Directed IRA (SDIRA)
One of the most surprising ways to invest in an apartment syndication with New Sight Capital is through a “Self-Directed IRA” (SDIRA). Most people think they must invest in stocks and mutual funds with their IRAs. However, that is not always the case. The key is to understand who is the custodian for your IRA. When going the more common route of IRAs, the custodian is a large financial institution that allows you to buy and sell securities. These institutions do not allow inventors to put their money into alternative assets. However, you can transfer the funds from these types of IRAs into a SDIRA where the investor makes the decisions on what types of investments are secured. There are two primary modes of SDIRA: custodian-based and “check-book” SDIRAs. There are many platforms that allow you to run your SDIRA through custodian to ensure all the appropriate regulatory and documentation requirements are being met. The investor still decides when, where, and how much they want to invest in a syndication but communicates through the custodian to release the funds and ensure compliance. The custodian typically charges a small fee for the service. The checkbook SDIRA is a little different in that the IRA sets up its own LLC and the investor “manages” the LLC and can write checks from the IRA-LLC to invest in syndications. It’s more streamlined but doesn’t come with custodial supervision so investors would want to make sure they are following the rules. In either case, all of the proceeds from the syndication flow back to the SDIRA and not to the individual investor.
Family Trust
Over the past few months, we have seen more investors using personal or family trusts to invest in our syndications. The benefits, structure, and execution of trusts are well beyond our scope of expertise. We would encourage all investors interested in this route to consult with tax, legal and financial planning professionals.
1031 Exchange
Technically, this is not actually an investor entity as much as a way to utilize funds. Real estate investors understand that, while there is considerable tax efficiencies on distributions due to the power of depreciation, eventually there will be a capital gains tax bill when the asset is sold. The good thing is that, as of now, the capital gains tax rate is well below most investor’s regular income tax rate. However, no one really likes to pay taxes. In real estate, investors can take the capital gains from one sold property and invest it in another property and defer capital gains taxes. This is called a “1031 Exchange.” It does not eliminate the capital gains, but it defers it till the 2nd asset is sold (or deferred again if doing another 1031 and so on). The key with 1031s is preparation, following the rules, and timing. There are plenty of guidelines and requirements for doing a 1031 exchange and professional assistance should be consulted—plus one will have to go through a “qualified intermediary.” So, can anyone 1031 their capital gains into an apartment syndication? Not exactly. A 1031 into a syndication is more layered. The 1031 investor will be established as a Tenant-in-Common (TIC) in the syndication. The lender would need to approve the TIC. There is also considerable legal work done in the process. As such, most syndications will only accept 1031 exchange funds if over a certain amount. This will also depend on each syndication and we can help investors establish whether or not it’s a viable option.
Hopefully, you’ve found value in this article. Have you registered with us yet? If not, please register by clicking here and we’ll send you our “Intro to Syndications” video, as well a give you access to our upcoming offerings.
