How long is my investment illiquid in a Multifamily Syndication?
Every investment has its pros and cons and a savvy investor is familiar with them for each of the investments in their portfolio. If you have followed our blog for any amount of time then you are probably familiar with many of the pros in real estate investing. These include higher returns, tax benefits and lower risk than what is seen in the stock market as well as many other investment options.
One question we are often asked about investing in syndications is how long will a particular investment be illiquid? The answer to this question is of course highly dependent on the particulars of a given syndication. We will therefore talk in generalities. Most sponsors seek to exit syndications in a time frame of 3-7 years with 5 years being the historical average. Factors which can effect the hold time of a property include the complexity of the business plan, current state of the economy and the ability of a sale to generate the overall returns promised to investors. In recent years past, many sponsors have exited projects sooner (think 2-3) years due to the nature of the real estate market while most sponsors now are telling their investors that 5 years may be the new norm once again. Most sponsors will agree that once the projected equity multiple can be achieved with a sale for investors that it is likely to dispose of the property. However, this depends of the returns objectives of the business plan and the interest of the investors in receiving on going cash flow as opposed to higher returns in a shorter period of time.
Is the illiquid nature of a syndication a pro or con?
The answer to this question may seem like a strike against real estate investing since less flexibility is often viewed as a negative in the investing world. However, consider a scenario where a high income earner such as a doctor is investing in real estate. This individual likely has two problems: limited time and an outrageous tax bill each year. For someone like this, the ability to make an investment decision for a given amount of money every five years is actually a positive as it keeps them from having to take the time to search for a new investment and the tax benefits are more potent as he is not concerned about capital gains as often. Therefore, we must conclude that the illiquid nature of real estate can be a positive for some and a negative for others.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please check out our free ebook "Achieving Financial Freedom Through Multifamily Investing."