Are Apartment Syndications new? No, but have you heard of the JOBS Act of 2012?
While most people aren’t experts on the JOBS Act of 2012, it can help explain a little about the historical path of apartment syndications. Many new potential investors ask: “why haven’t I really heard about apartment syndications before?” While the collective pooling of capital from investors is not a new concept, there’s 3 major reasons why they may be “new” to you:
#1: Jobs Act of 2012
Up until 2012, operators could only raise capital from very traditional sources or highly wealthy individuals. However, the JOBS Act of 2012 drastically changed how these investments could obtain capital. In essence, it intentionally created more flexibility in capital markets and it also sought to “democratize” these investments by opening them up to more individuals by creating two classes of investors: accredited and “sophisticated” (non-accredited). And even though this was in 2012, widespread use of syndications as a way to democratize investor access to these investments has taken time—partly because of the other two reasons I’ll touch on next.
#2: Advertising Restrictions
While the JOBS Act of 2012 may have democratized these investments, there are still considerable regulations that dictate how these investments can be advertised. Apartment syndications are not treated like IPOs for companies getting newly listed on the stock market. There’s a lot of rules that prevent operators from filling the airwaves and online advertising world with invitations to invest in these offerings. The result is that awareness will always be more limited than other traditional investment classes. This becomes more apparent when you consider that most syndications operate under 506b and 506c exemptions. 506b offerings can accept nonaccredited and accredited investors. However, 506b offerings cannot be advertised to the general public. Operators must first establish a relationship with the investor before presenting them with any offerings. Conversely, 506c offerings can be advertised to the general public. However, 506c offerings only accept accredited investors.
#3: Stigma associated with real estate
The housing crash of 2008 gave most of us a very sour taste when it came to real estate. While the ride up was great, the crash that came afterwards saw many of our homes decrease in value by 50% or more. And, for years afterwards, the average investor would cringe when they heard about any investment in the real estate space. However, there was (and still is) the incorrect assumption that all real estate is created equal. In fact, the way that a single family home is valued is much different than how an apartment complex is valued. The single family home is really valued in relation to the sale of nearby comparable properties. If Susie’s house sells for X amount and my house is similar then my house is probably worth about the same. However, large multifamily properties are valued like a business. Specifically, these properties are valued based on their profit. Historically, when home prices have crashed, large multifamily properties have held their value or even increased in value because renters still need housing and that drives profit which drives valuations. The challenge for many operators of apartment syndications is fully educating potential investors on how this difference makes apartment syndications a much better alternative to traditional real estate investments.
Want to speak with us about apartment syndications? CLICK HERE to schedule a 30 minute time with Caleb Bryan, Director of Investor Relations
