Multifamily can be a great asset class in the real estate world, and multifamily syndication can allow non-institutional investors to scoop multifamily buildings with a decently high yield. By pooling resources, investors can acquire and profit from large-scale rental properties, such as apartment complexes, which might be otherwise inaccessible individually. But is it really worth doing? Let’s break down what multifamily syndication is, why it might make sense for you, and some real world examples of how it might work.
What is multifamily syndication?
At its core, multifamily syndication is a partnership in which multiple investors combine their capital to purchase and manage multifamily properties. This collaborative effort allows participants to share the risks and rewards of real estate investment.
Who plays a role in the syndication of multifamily?
- General partners (GPs) or sponsors: These individuals or entities are responsible for identifying investment opportunities, securing financing, and overseeing the property’s day-to-day operations. They invest their expertise and time, often contributing a portion of the capital.
- Limited partners (LPs) or passive investors: These investors provide the majority of the capital required for the acquisition but have a passive role, meaning they aren’t involved in daily management. In return, they receive a share of the profits generated from the property.
Common deal structures
In a typical syndication deal, the profits are distributed between GPs and LPs based on predefined terms. For instance, there might be a preferred return for LPs (e.g., 8% annually) before profits are split, often in a ratio like 70/30, favoring the LPs. This structure ensures that passive investors receive returns commensurate with their investment while incentivizing sponsors to manage the property effectively.
How does multifamily syndication work?
Multifamily syndication follows a structured process. Sponsors first identify a property with strong potential and then structure the deal by outlining investment terms and projected returns. Once capital is raised from investors (LPs), the property is acquired and actively managed by the sponsor, who oversees leasing, maintenance, and operations. Investors receive regular distributions from rental income, and after 5-7 years, the property is sold or refinanced, with profits distributed among investors before the syndication is dissolved.
Stages of syndication with timeframes and investor roles
| Stage | Timeframe | General Partner Role | Limited Partner Role |
|---|---|---|---|
| Identifying a Property | 1-3 months | Research and due diligence | None |
| Structuring the Deal | 1-2 months | Define terms and prepare documents | Review and commit funds |
| Raising Capital | 2-4 months | Present to potential investors | Invest capital |
| Acquisition and Management | Ongoing (5-7 years) | Oversee operations and management | Passive oversight |
| Distribution of Returns | Quarterly/Annually | Allocate profits as per agreement | Receive returns |
| Exit Strategy | End of investment period | Sell or refinance property | Receive share of proceeds |
Comparing the benefits and challenges of multifamily syndication
Multifamily syndication offers several advantages, making it an attractive investment strategy for those seeking passive income, tax benefits, and portfolio scalability. However, just like any real state investment, it comes with challenges, such as high initial investment requirements and limited liquidity.
| Benefits | Challenges and Risks |
|---|---|
| Diversification and passive income – Diversification – Pooling resources allows investors to partake in larger properties, spreading risk across multiple units and locations. – Passive income – LPs earn regular income distributions without the responsibilities of property management. |
High barriers to entry – Minimum investment requirements of $25,000–$100,000 – Some deals require accredited investors |
| Scalability and leverage – Scalability – Syndication enables investors to scale their portfolios more rapidly than they might individually. – Leverage – By combining funds, investors can access better financing options and invest in higher-value properties. |
Limited liquidity – Funds are locked in for 5-10 years |
Why do so many wealthy people choose multifamily, even beyond the syndication advantages? We spoke to Mark Charnet, the founder of American Prosperity Group, about his thoughts.
Wealthy people use multifamily as a real estate strategy to bring in rent against their mortgage. The home can be depreciated, giving current tax breaks to the owner. Also, the rent may be raised in the future, will may allow a quicker reduction in the mortgage, or the availability for another purchase. As a primary residence, albeit a multi-family, the entire mortgage interest may be deductible too.
Tax benefits and cost segregation advantages
One of the biggest advantages of multifamily syndication is the tax benefits it provides to investors. Real estate investments offer several ways to reduce taxable income, making them an attractive option for those looking to maximize returns while minimizing tax liability. Two key strategies that help investors optimize tax benefits are depreciation deductions and cost segregation studies, both of which can significantly impact an investor’s bottom line.
Depreciation deductions
Depreciation is a tax benefit that allows property owners to deduct the cost of their property over time. The IRS classifies residential rental properties, including multifamily buildings, as having a 27.5-year depreciation schedule. This means that investors can spread out deductions for wear and tear even though the property itself may appreciate in value.
For example, if a multifamily property is valued at $1 million (excluding land), an investor could claim approximately $36,364 per year in depreciation deductions under the standard straight-line method. This deduction lowers taxable income, allowing investors to offset rental income and reduce their tax liability.
Cost segregation
Cost segregation is an advanced tax strategy that accelerates depreciation deductions by breaking down a property into different asset classes. Instead of depreciating the entire property over 27.5 years, cost segregation studies allow investors to classify specific components, such as flooring, fixtures, and HVAC systems, into shorter depreciation schedules of 5, 7, or 15 years. You might even be able to get a good idea of things, but using AR & VR Technologies in Real Estate, that can break down your house.
This approach front-loads depreciation deductions, creating a larger tax shield in the early years of ownership. The increased deductions can enhance cash flow, allowing investors to reinvest in additional properties, pay down debt faster, or use the tax savings for other financial goals.
How cost segregation enhances returns
- Accelerated tax deductions – More depreciation upfront means lower taxable income in the first several years of ownership.
- Increased cash flow – Less tax liability translates to more cash in hand for investors.
- Higher return on investment (ROI) – Investors can reinvest tax savings into new properties or capital improvements.
- Strategic exit planning – Syndicators and investors can use these deductions strategically before selling or refinancing the property.
Comparing multifamily syndication to other real estate investments
Multifamily syndication is an attractive option for those looking to invest in large-scale rental properties with minimal hands-on involvement. However, alternatives such as direct ownership, Real Estate Investment Trusts (REITs), and real estate crowdfunding provide varying levels of control, liquidity, and risk.
| Investment Type | Initial Investment | Control & Management | Liquidity | Tax Benefits | Risk Level |
|---|---|---|---|---|---|
| Multifamily Syndication | $25K–$100K | Low – Passive investment | Low (5-10 years) | High (cost segregation, depreciation) | Moderate – Dependent on syndicator performance |
| Direct Ownership | $200K+ | High – Full control over property | Moderate – Can sell but takes time | High (depreciation, cost segregation, mortgage interest deductions) | High – Market volatility, tenant risks |
| REITs | Low ($1000+) | None – Managed by REIT company | High (buy/sell anytime) | Limited – No depreciation benefits for investors | Moderate – Stock market fluctuations |
| Real Estate Crowdfunding | $500–$5K | Low – Passive investment | Low (funds locked for years) | Moderate – Some tax benefits, but limited compared to direct ownership | High – Newer platforms with varying regulations |
Which investment strategy is best?
Choosing between these real estate investment options depends on an investor’s financial goals, risk tolerance, and desired level of involvement. Multifamily syndication is ideal for those seeking passive income, strong tax benefits, and long-term appreciation, while REITs and crowdfunding work better for those prioritizing liquidity and flexibility.
Let’s take a look at two different investor profiles and how their real estate investment choices play out. One is going the multifamily syndication route, totally hands-off, while the other is all-in with direct ownership, managing the property themselves. Both approaches can be profitable, but the experience (and effort) is completely different.
“Multi-family real estate can be a promising undertaking. There are a variety of multi-family property types that can cater to different investor styles. These properties range from small-scale duplexes to larger-sized apartment complexes, condominiums, and townhomes. For investors interested in multi-family real estate but uncertain about navigating the acquisition process, joining a multi-family real estate syndication can be a viable alternative.”
Gina Stoddard, Chief of Staff at Broad Financial
Example 1: Diego goes with multifamily syndication
Diego is a busy consultant with a packed schedule. He knows real estate can be a great investment, but he has no time for tenants, maintenance, or property management. Instead, he decides to invest passively by joining a multifamily syndication deal. He invests $50,000 as a limited partner (LP), meaning he owns a share of the property without any of the day-to-day responsibilities.
Over the next five years, Diego receives quarterly rental distributions while benefiting from cost segregation tax deductions, which help reduce his taxable income. At the end of the investment period, the property is sold, and he receives his share of the profits.
| Investment strategy | Multifamily syndication (passive investment) |
|---|---|
| Initial investment | $50,000 |
| Investment length | 5 years |
| Cash flow | Quarterly rental distributions |
| Tax benefits | Big depreciation write-offs through cost segregation |
How Diego’s investment performs
In this syndication deal, Diego earns a preferred return of 8% annually, which provides him with a steady passive income. Since cost segregation is applied, he also benefits from significant upfront tax deductions, which boosts his cash flow.
By the end of the investment period, the property is sold for a 2x equity multiple, meaning he gets back double his initial investment.
- Annual rental income: $4,000 (8% return on $50,000)
- Tax savings from cost segregation: ~$10,000 per year (Years 1 & 2)
- Total rental cash flow over 5 years: $20,000
- Total tax savings over 5 years: $20,000
- Property sale profit: $100,000
Final results after 5 years
Diego’s total return from the investment adds up to $140,000, meaning he nearly tripled his initial investment.
Example 2: Mike buys a rental property
Mike is a hands-on investor who wants full control over his real estate investment. He’s willing to handle tenant issues, maintenance, and property management if it means maximizing his returns. Instead of joining a syndication, he buys a single-family rental property outright.
He puts down $50,000 and takes out a 30-year mortgage for the remaining $150,000 to purchase a $200,000 home. Over the next five years, he collects monthly rental income while benefiting from standard depreciation and mortgage interest deductions. At the end of five years, he sells the property for a profit.
Mike’s investment details
| Investment strategy | Direct ownership (self-managed rental) |
|---|---|
| Initial investment | $50,000 down payment + mortgage |
| Investment length | 5 years |
| Cash flow | Monthly rent after expenses |
| Tax benefits | Mortgage interest deduction and standard depreciation |
How Mike’s investment performs
Mike collects $1,500 in rent each month, totaling $18,000 per year. However, he also has expenses, including his mortgage, property taxes, and maintenance, which reduce his net cash flow.
Since he owns the property directly, he can depreciate it over 27.5 years, creating tax write-offs that help lower his taxable income. Additionally, the property appreciates at an estimated 5% per year, increasing its value over time.
- Annual rental income: $18,000 ($1,500/month)
- Annual expenses (mortgage, taxes, maintenance): $12,000
- Annual net cash flow: $6,000 ($500/month)
- Standard depreciation deduction (27.5 years on $200,000 property): ~$7,273 per year
- Property appreciation (5% annual growth, resale after 5 years): ~$255,000 value
- Loan paydown after 5 years: ~$25,000 equity gain
Final results after 5 years
By the end of five years, Mike has built up equity in the property, collected rental income, and saved money on taxes.
Side-by-side comparison: Diego vs. Mike
Both Diego and Mike made smart real estate investments, but their approaches couldn’t be more different. Diego took the passive syndication route, earning solid returns without lifting a finger. Meanwhile, Mike managed his own rental, dealing with tenants and maintenance while building equity.
Below is a breakdown of how their investments performed over five years, showing cash flow, tax benefits, and overall returns. While their final numbers are close, the experience and effort required were completely different.
Final thoughts
Both multifamily syndication and direct ownership can be great investment strategies—it all depends on how much control and involvement you want. Diego made solid returns passively, while Mike built equity through hands-on management. Whether you prefer a hands-free approach or want full control, understanding the trade-offs will help you make the best choice for your financial goals.
FAQ
What are the biggest risks in multifamily syndication?
The biggest risks include market downturns, poor management, and illiquidity. Since your money is locked in for several years, you can’t just sell your share whenever you want. The best way to reduce risk is to research the syndication team, analyze the deal structure, and ensure the investment aligns with your timeline and goals.
How do syndication investors get paid?
Investors typically receive quarterly or annual distributions based on the rental income generated by the property. Additionally, when the property is sold (usually after 5-7 years), investors get a share of the profits. The syndication agreement outlines the payment structure, often including a preferred return (like 7-8%) before profits are split between investors and sponsors.
Can you do cost segregation on a rental property you own yourself?
Yes, cost segregation works for both syndications and personally owned rental properties. If you own a rental property, you can get a cost segregation study to accelerate depreciation and reduce taxable income. This strategy is beneficial if you have high earnings and want to lower your tax bill in the early years of ownership.
