Updated: Mar 7
I’ve worked with many passive investors on a variety of multifamily properties over the years, and I’ve noticed that those who are new to multifamily investing aren’t aware that there’s an actual process to follow before agreeing to the deal and submitting their funds. To make it easier for new passive investors, I’ve developed a step-by-step process that will make investing in real estate syndication much easier.
Step #1: Navigating and Signing the PPM
Before I discuss the PPM (Private Placement Memorandum) and how it applies to your investment, I’d like to suggest a few other steps that you should take before you agree to anything. You’ll want to start by reviewing the investor package, which includes valuable information about the deal, the syndicator and his or her past projects, along with information about the team that’s in place to execute the business plan.
You’ll also want to do some due diligence on the market that the property’s located in. It doesn’t matter where the property is located, as long as you’re investing in a strong market. Syndicators are purchasing properties all over the country; so don’t be surprised if you receive a deal that it’s on the other side of the U.S.
How can you determine if the property is in a strong market? Is it showing population and job growth? What about rent growth? Does it have a high median income? What is the average vacancy rate in the city? Finally, you’ll want to be sure that it’s located in a landlord-friendly state, meaning there isn’t any rent control in place or that evicting a non-paying tenant doesn’t require an act of congress. You don’t want to be involved in a long and costly legal battle to evict a tenant.
After vetting the market, it’s time to turn your attention to the PPM. Be prepared to wade through a lot of information, as a PPM is a lengthy document. The PPM has four main sections, and each one has its relative importance.
First up is the Offering, which includes information about the general partner, a description of the property and the syndicator’s business plan. Often, you’ll find the Offering attached as an appendix to the PPM.
The second section is Warnings and Disclosures, outlining the risk factors that the investment includes, such as losing money or not meeting the monthly projections. In all probability the syndicator doesn’t expect this to happen, but the warnings are there to ensure that the investor is willing to accept a certain amount of risk when investing.
The third section will cover Distributions, which includes descriptions on the type of shares involved. An example would be Class A or Class B shares, and who is given those shares. It’s often based on the deal’s equity split. There will also be a distribution schedule, which discusses when the Limited Partners are paid, which is either monthly or quarterly. I prefer to pay monthly.
The final section covers the Operating Agreement. Remember, the Limited Partners and General Partner are all members of an LLC, and the Operating Agreement discusses how the company is run. If you’ve gone through the PPM and did the proper vetting of the property and the syndicator, it’s time to sign the PPM. Before you do, however, there are a few key issues to consider that are designed to help protect you in case something goes south on the deal.
One of these is whether or not you’ll be able to sell your shares in