004: The Untold Wealth Strategy: Syndicated Real Estate Secrets Explained!

What is a Syndicated Deal - Part Two

Today we continue our discussion on syndicated deals. In Part One, we defined a syndicated investment, explained why you should care, discussed who's involved, and explored topics like what a "waterfall" is. If you missed that episode, please go back and listen for context.

Now, let's dive into the details of how you get paid.

How Do You Get Paid?

Once you've invested in a syndicated deal, there is typically a waiting period before you start receiving returns. This period can vary depending on the sponsor's terms and the nature of the investment. For example, properties requiring significant renovation might delay returns for up to a year. But, usually, after a predefined period, investors start receiving monthly or quarterly distributions.

In our previous episode, we defined the concept of "preferred return" or "pref." It's essential to understand that the actual distributions can and often do vary from the pref. So, if you're expecting a fixed 8% return based on the pref, that's not always the case due to various factors affecting profitability.

For a clearer picture of potential earnings, investors should consult the pro forma, which provides the sponsor's estimation of future returns. This document, typically part of the deal packet, offers projected returns for each deal year, including the sale at the end.

Value-Add Deals

Many multifamily deals we handle at Arete Investing are termed "value-add deals." We're significant proponents of these because they involve enhancing the property's value through capital improvements. Think renovations in common areas or upgrades to apartment units. However, these projects can be capital-intensive, affecting occupancy rates temporarily.

A good sponsor can forecast the pace of renovations and its effect on profitability. This foresight is reflected in the pro forma.

Refinancing Opportunities

Refinancing, often considered the "Holy Grail" of syndicated investments, is a pivotal aspect to understand. The process lets sponsors leverage increased property values to withdraw equity, which is then distributed to investors tax-free. Not all deals opt for refinancing, but it can be highly beneficial, sometimes returning significant portions of an investor's initial contribution.

Exit Strategies and Timelines

Understanding the typical timeline for a syndicated deal is crucial. After the acquisition phase, renovations might take 18-24 months, followed by a stabilization period of approximately 12 months. Subsequent to this, the sponsor may evaluate refinancing or selling opportunities, which can also span 12-24 months.

External factors, like market shifts or unexpected events like the COVID-19 pandemic, can impact these timelines. However, most syndicated deals aim for a 3-10 year timeframe, averaging around five years.

Tax Implications

One of the reasons we favor syndicated deals is the favorable tax treatment. The ability to depreciate real assets means that returns can often be received tax-free or deferred for many years. Furthermore, when the property is eventually sold, investors usually face long-term capital gains taxes, which can be significantly lower than taxes on regular income.