If you’ve seen my content online, you know that I’m a big believer in multifamily investing. I think it’s a fantastic asset class that provides the best risk-adjusted returns. For those that don’t have the time or operational expertise, investing in a syndication could be a great play to get direct exposure without having to be on the front lines. Yet, like any investment you can make, there are times when this is not necessarily the best move for an investor to make.
So when should you not invest into a syndication? Let’s start with the probably the most important factor to consider, which is liquidity. Most syndications are structured on three to seven year timelines, which means your invested equity could be tied up for that duration. Ideally, the operator has some sort of plan to return equity sooner (through a cash out refinance or earlier sale if the market allows for it), but that’s never a guarantee. If you feel like you’ll need the invested cash at some point, don’t invest it (hence why you should never invest emergency funds).
The second scenario of when you should think twice about investing in a deal is control. When you invest as a capital/limited partner, your role as you would expect is… limited. The general partners are the ones on the ground who call the operational shots and make the key decisions. If you’re someone that wants to get involved actively, then this may not be the vehicle for you. You want to invest when you have faith and trust in an operational partner and are comfortable letting him/her steer the wheel.
The third scenario is when the business plan and financials of the project don’t align with your own goals. Having exposure to multifamily in your portfolio is fantastic, but even within the multifamily space there are a lot of variations. Some deals are more cash flow heavy whereas others are prioritize equity growth, building quality, or location (i.e if you invest in a class A building in a class A market, your return structure will look a lot different than class B building in a class B market). If the goals of the particular project don’t align with your strategy, then you should pass on the investment and wait for the right opportunity.
Make sure to evaluate these scenarios before making an investment. This can be a great investment vehicle that can generate some fantastic returns, but make sure not to put yourself in any risk!
