If you’re investing in multifamily real estate, knowing who you’re investing with is just as important as knowing what you’re investing in.
In one of my recent webinars, I sat down with attorney Kyle Swafford, who specializes in syndications, to break down what passive investors need to look out for. We covered legal and tax considerations, key risks, and current market trends that could impact your investments in 2025 and beyond.
If you’re a passive real estate investor—or thinking about becoming one—keep reading to find out how to vet sponsors (aka operators) and minimize risk in multifamily syndications.
The Big Question: How Do You Know Who to Trust?
Investing in multifamily syndications can be a great way to build wealth, but there’s one major challenge: how do you know if the sponsor you’re investing with is actually experienced?
If you’re not careful, you could end up with an operator who 1) doesn’t have experience in the current market conditions and thus isn’t underwriting deals properly or 2) doesn’t have a track record of success.
And as a limited partner (LP), once you’re in the deal, you have no control.
So how do you make sure you’re putting your money in the right hands? Here’s what Kyle had to say:
How to Vet Sponsors the Right Way
When evaluating a sponsor, you need to dig deeper than their marketing materials. Here are the key questions you should be asking:
- What’s their real experience?
If a sponsor claims they’ve done 5,000 doors, ask, “How many of those deals were you actively managing?” It’s easy to be a minority partner and claim the whole deal, but that doesn’t mean they know how to run a syndication.
- Have they operated similar properties?
A sponsor who has only handled small multifamily properties (20-50 units) might not be prepared to handle a 200-unit apartment complex. Or if their deals are primarily in the Southeast, they might be unfamiliar with markets in the Midwest. Ask if they’ve worked on a deal of similar size and in the same market.
- Who’s on their team?
If the sponsor is new, that’s not necessarily a deal-breaker—but they need to have experienced partners. Ask who they’ve partnered with and whether those people have a strong track record.
- What are the biggest risks in this deal?
Every investment has risks. Ask what the biggest potential problems are and how they’re mitigating them. If they struggle to answer, that’s a red flag.
- What’s their debt strategy?
Variable interest rates can be a killer. Make sure the sponsor has a plan for dealing with interest rate changes and that they’re underwriting conservatively.
Market Trends: Is Now a Good Time to Invest?
The market has shifted, and some investors are nervous. But according to Kyle, right now could be one of the best times to buy for 3 reasons:
The first reason is that sellers are more willing to negotiate. In 2022, sellers were still asking for COVID-era prices. They’ve come down some now and they’re more realistic and willing to work with buyers.
The next reason is that lenders are offering flexibility. Banks don’t want foreclosures, so they’re working with owners to restructure loans instead of forcing sales.
The last reason is that opportunities are starting to open up as a result of the previous two reasons. The deals that were overpriced a year ago are now more attractive. And if you’re working with the right sponsor with a business plan they’ve proven they can execute, now is a great time to get in.
How Passive Investors Can Benefit from Tax Advantages
Not only is the market more favorable for investors getting into multifamily real estate, but this asset class offers great tax advantages, meaning that you get to keep more of your money. Here are some of the tax benefits Kyle talks about in apartment syndications:
- Depreciation reduces taxable income. When you invest in a syndication, you get a share of the property’s depreciation, which can offset your rental income and even other passive income.
- Bonus depreciation accelerates those benefits. Under current tax law, investors can take extra depreciation in the first year of ownership, making the tax savings even greater.
- 1031 exchanges allow you to defer taxes. If a sponsor offers a 1031 exchange option, you can roll your profits into another deal and avoid paying capital gains taxes.
- Be aware of depreciation recapture. When you sell, some of those tax savings come back as a tax bill. But if you keep reinvesting, you can keep deferring those taxes.
Final Thoughts
Investing in multifamily syndications can be a powerful way to build wealth, but only if you do it the right way. Vet your sponsors carefully, understand their debt strategies, and make sure you’re taking advantage of real estate tax benefits.
Hope you enjoyed this article.
To your success,
Michael Blank
