Sources of Funding for Apartment Syndications
If you have purchased a home for your personal residence, then you will be familiar with the two sources on money needed to make a real estate purchase. The debt on a home is source through a bank or lender of some type while the down payment or equity is made through funds of the purchaser. Prior to 1934, the current concept of the home mortgage didn’t exist in the United States (at least as an option for most Americans). However, the Federal Housing Administration (FHA) began creating programs that would allow folks to purchase and eventually own their own home. This resulted in a couple of things. First, a larger number of Americans were able to purchase a home than before, and second the prices of these homes began to increase drastically since the ability to leverage debt meant that people who previous could buy a home could now afford to buy an even more expensive one. Today, on a typical single-family home a buyer can put 20% down and receive a mortgage for the remainder and sometimes even less providing it is their personal residence.
In the multifamily world, debt sourcing is surprisingly similar to the structure of single-family lending described above. A lender (often backed by a federal agency), will provide somewhere around 65%-80% of the funds needed to purchase the apartment complex and the rest must be brought as a down payment. In real estate syndication, this down payment is provided by limited partners (LPs). The incredible thing about being a LP is that it allows you to participate in the benefits of real estate investing without having to do any work such as maintenance or tenant management like you would have to as a landlord of a single family home. These tasks are instead managed by the general partners (GPs). The GPs source the apartment deal, handle the acquisition and execute the business plan for the apartment complex throughout their ownership. The syndication model is therefore a powerful tool for folks wanting to invest in commercial real estate without needing to be involved in all the intricacies or have a time commitment to the project.
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