Syndicators and Risk Management: Educating Investors on Multifamily Syndication

by | Jun 28, 2023 | Blog | 0 comments

In a recent Wall Street Journal article titled “A Housing Bust Comes for Thousands of Small-Time Investors,” the foreclosure woes of Jay Gajavelli, the head of Applesway Investment Group, were brought to light. Gajavelli’s ownership of multiple units across Houston took a turn for the worse, shedding light on the risks associated with syndicators in the real estate market. However, it is crucial to note that this case does not represent the entire landscape of multifamily syndication, as there are many success stories worth highlighting.

Drawing parallels between the medical profession and syndication, it becomes apparent that generalizations based on a few individuals’ actions can be misleading. Just as a few doctors making poor choices does not discredit the entire medical community, the actions of a select group of syndicators should not tarnish the reputation of the entire industry. Trustworthiness and credibility depend on how syndicators handle their responsibilities and the partners they choose.

Recognizing the significance of the partnership, it becomes evident that selecting the right team is just as important as the investment itself, if not more so. 

To prevent a repeat of unfortunate scenarios like the one involving Applesway, there are three key factors to consider when assessing syndication deals:


  1. Avoid overpaying for properties: Over the past few years, property prices have surged, leading to instances of inflated payments. This phenomenon is reminiscent of the 2007 collapse when many individuals bought homes beyond their means. Syndications operate on a larger scale, emphasizing the need for cautious evaluation to avoid overpaying for properties.


  2. Emphasize cash flow: Investing in deals that immediately generate cash flow is crucial. Such investments cover all expenses, maintain substantial cash reserves, and provide regular distributions to investors. By prioritizing cash flow, investors can fortify their position against economic downturns.


  3. Opt for fixed, long-term debt or interest rate caps: The risk of failing to meet mortgage payments poses a significant threat to property investment. In recent years, adjustable-rate mortgages were popular due to low-interest rates.

However, concerns regarding potential rate hikes led to the purchase of interest rate caps, ensuring that rates do not surpass a predetermined threshold. Applesway’s failure to secure rate caps left them vulnerable to an interest rate hike from the low 3% range to a burdensome 7-9%. Protecting against such fluctuations, new deals should now focus on fixed debt with a consistent interest rate throughout the term, guarding against potential interest rate increases by the Federal Reserve.

The Wall Street Journal article exposed the poor conditions of Applesway’s properties and the detrimental impact on tenants and investors. However, it is crucial to distinguish responsible syndicators from those who neglect their duties.

Unlike the properties highlighted in the article, responsible syndicators prioritize the well-being of their tenants. They strive to provide safe, clean, and attractive living spaces, fostering a sense of home for residents. Many syndicated properties even go beyond the basics, offering afterschool programs that focus on financial education or English as a second language. In fact, some properties have earned special green loans due to their environmentally friendly and energy-efficient features, demonstrating a commitment to sustainable practices.

The unfortunate investors who suffered losses in the Applesway case deserve empathy and support. Their hard-earned money, upon which they relied to sustain their lives and support their loved ones, is no small matter. While there are avenues for leveraging tax benefits from such losses with the guidance of knowledgeable CPAs and tax advisors, it underscores the importance of selecting the right team from the outset.

Education plays a central role in empowering investors and ensuring they make informed decisions. Syndicators who focus on capital preservation and cash flow prioritize educating their investors about the intricacies and potential risks associated with multifamily syndication. By providing comprehensive educational resources, they equip investors with the tools and knowledge to navigate the syndication landscape and make sound investment choices.

Syndicators can mitigate risks by avoiding overpaying for properties, focusing on cash flow, and opting for fixed, long-term debt or interest rate caps. Responsible syndicators prioritize tenant welfare, offering safe and attractive living spaces while investing in educational initiatives. Through education and a diligent selection process, investors can participate in syndication deals that emphasize capital preservation and cash flow, ensuring a secure and profitable investment experience.


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