Do you want to invest in real estate but don’t have the money to buy a property outright or the time to manage and maintain the property? If that’s your situation, then syndications may be a great opportunity for you.
Real estate syndication is an investment strategy that helps investors access large-scale real estate projects with less risk and higher potential returns than they could achieve on their own. Syndication allows individual investors to pool their resources together to acquire larger properties, such as commercial buildings or multi-family housing units.
This type of investment offers many benefits for those looking to diversify their portfolios, gain access to more lucrative investments, and reduce the risks associated with investing in real estate. In this blog post, we’ll discuss real estate syndication, how it works, and the advantages it provides for investors.
How Does Real Estate Syndication Work?
Real estate syndication allows multiple investors to pool their resources together to invest in a real estate project. The individual investors are considered limited partners, while the person or group who puts together and manages the syndicate is known as the general partner.
The general partner takes on most of the responsibilities associated with managing and overseeing the investment, including finding and evaluating potential properties, negotiating purchase contracts, securing financing, overseeing renovations and repairs, and marketing the property. The general partner is also typically responsible for ensuring that all parties involved in the syndication receive their share of the profits.
3 Phases Of Real Estate Syndication
Real estate syndication is typically divided into three phases based on the events that take place during each phase.
- Origination: During this phase, the general partner is responsible for finding potential properties and evaluating their profitability. This includes researching local markets, analyzing financial data, and assessing the risk/reward ratio of possible investments. Origination ends when the syndication acquires a property.
- Operation: During this phase, the general partner oversees initial renovations or repairs to the property as well as implementing management policies. The operation phase will continue as long as the real estate syndication owns the property. The general partner will handle all day-to-day management activities for the property.
- Liquidation: In this final phase, the general partner is responsible for marketing the property and negotiating the sale. Once the property has been sold, profits are distributed to investors according to their respective investments.
How Do Real Estate Syndicates Raise Capital?
Real estate syndicates typically raise capital in three different ways. Often this is done through real estate crowdfunding where the sponsor pulls together a group of potential investors who pool their financial resources.
- Equity Capital: Equity funding is the most common way that real estate syndicates are financed. In this type of financing, individual investors contribute money to the project and receive shares of ownership in return.
- Debt Capital: Another way that real estate syndicates are funded is through debt capital. With this type of financing, the general partner takes out a loan from a lender to finance the project. The investors in the syndicate typically do not take on any debt and are only responsible for their equity investments.
- Hybrid Financing: Hybrid financing is a combination of both debt and equity capital. This type of funding is often used for larger projects that require more significant amounts of capital. Hybrid financing allows the syndicate to take advantage of both types of financing in order to reduce the amount of risk associated with the investment.
How Do Real Estate Syndications Pay Out?
Profits from a real estate syndication are split between the passive investors and the sponsor. Typically, the passive investors will receive a preferred return which ranges between 5-8% depending on the syndication.
Once this return hurdle is reached, the sponsor collects a percentage of the remaining profits. This provides an incentive for the sponsor to manage the real estate property well.
If you’re interested in learning more, check out our complete guide to the waterfall model in real estate investing.
What Types Of Properties Are Syndicated?
Real estate syndications typically target income-producing commercial real estate. This type of investment offers the potential for steady cash flow and long-term capital appreciation.
In some cases, syndicates can also invest in shorter-term development projects including land flipping, fix & flip strategies, and value-add renovations.
Basically, any type of real estate can be syndicated. A real estate syndication company may offer investments in individual properties or a real estate portfolio.
Here’s a list of the most common types of real estate assets that real estate syndication companies purchase.
- Apartment Buildings
- Shopping Centers and Retail
- Office Space
- Industrial Parks
- Mixed-use Buildings
- Medical Offices
- Land
Benefits Of Investing In Real Estate Syndications
Real estate syndications offer a number of benefits over traditional real estate investing. The main advantages of investing in a real estate syndication include:
- Access to large-scale investments – With real estate syndications, you can invest in larger and more expensive properties than you would be able to on your own.
- Diversification – Many investors have exposure to the stock and bond markets, but too few have real estate assets in their portfolios. Investing in a real estate syndication can provide diversification into real assets without having the hassle of managing tenants.
- Professional Management – All aspects of the investment are managed by experienced professionals who have an understanding of the local market and how it may affect the value of the asset over time.
- Long-term Capital Appreciation – Real estate syndications can provide long-term appreciation opportunities due to potential rental income increases and value appreciation over time as markets change or improve surrounding areas.
- Passive Income Potential – By investing in a real estate syndication, investors have the opportunity to receive regular distributions from rent payments collected by tenants living at the property – providing them with passive income while increasing their net worth through equity buildup.
- Tax Benefits – Investing in a real estate syndication can provide investors with tax benefits such as depreciation, the 1031 exchange, and passive loss rules. All of these benefits of real estate investing get passed on to you.
Are There Risks Involved With Real Estate Syndicates?
Real estate syndicates can be a great way to diversify your portfolio, but there are risks involved that should not be overlooked. Real estate investors should carefully evaluate these risks when making any investment decisions.
- Market Risk – The real estate market can be volatile and is subject to fluctuations in demand, supply, interest rates, and other external factors.
- Leverage Risk – Syndication investments are typically leveraged with debt financing which carries additional risk due to the associated interest payments that need to be made on a regular basis.
- Liquidity Risk – Some real estate syndications do not provide investors with immediate liquidity as they typically require a significant commitment of capital for a set period of time (generally 5-10 years).
- Management Risk – As with any investment you make, it’s important to do your due diligence and research the team behind the deal before investing in order to determine their experience level and track record in the industry prior to making an investment decision.
- Interest Rate Risks – Although syndicates can benefit from potentially low-interest rates when taking out loans; rising interest rates could significantly impact cash flow as monthly payments increase substantially over time.
Finding Real Estate Syndication Deals
Real estate syndication deals can be found in a variety of ways. Keep in mind that most syndications only allow accredited investors.
- Online Platforms – Investing platforms such as CrowdStreet and Fundrise offer access to real estate syndications that you can invest in with as little as $1,000 to $5,000.
- Networking Events – Attending conferences and industry-sponsored events allows you to meet potential syndicators and their teams who are offering current or upcoming syndication deals.
- Real Estate Agents/Brokers – Working with an experienced real estate agent/broker in your local market can also help you find potential deals through their network of contacts.
If you’re ready to start investing in the commercial real estate market through syndications, check out our review of the best real estate crowdfunding platforms. There are opportunities for you even if you’re a non-accredited investor.
Roles And Responsibilities Within Real Estate Syndications
When investing in a real estate syndication, it is important to understand the roles and responsibilities of each party involved in the deal.
Syndicator/Sponsor Or General Partner
The syndicator is the individual or entity responsible for organizing and overseeing the entire investment process from start to finish. They raise capital from investors, make all final decisions regarding the investment, and are responsible for managing the day-to-day operations of the property.
The syndicator is typically rewarded with promotion fees and a share of profits from the syndication. This arrangement rewards the syndicator for the sweat equity they put into the property syndication.
Passive Investor Or Limited Partner
Limited partners provide capital to fund the syndication in exchange for an ownership stake in the deal. They have limited control or influence over investment decisions and receive a share of profits as a reward for their investment.
Property Management Company
The property manager is responsible for managing the day-to-day operations of the real estate asset, including tenant management, rent collection, maintenance, and repairs. They are typically hired by the syndicator or provided as a service of the syndication company.
Legal Structure Of A Real Estate Syndication
A real estate syndication is typically structured as a limited liability partnership (LLP) or limited liability company (LLC) with the syndicator acting as the general partner and investors taking on the role of limited partners. The legal structure of a syndication will vary depending on the type of asset being invested in, but most syndications offer investors limited liability.
Real Estate Syndication Fees
Syndicators charge a variety of fees throughout the life of the investment. Each of these fees serves a purpose for the syndicator; either to reward the syndicator for their efforts or to provide payment for their services. These are often collectively referred to as sponsor fees.
Acquisition Fee
This is a one-time fee that is used to cover the costs of acquiring the asset and conducting due diligence.
Promotion Fee
A promotion fee is usually charged as a percentage of the total amount raised for the investment. This is to cover the costs associated with marketing and raising capital from investors.
Asset Management Fee
This is a recurring fee that’s charged to cover the costs associated with managing the asset. This can include things like property management, legal fees, and administrative costs.
Property Management Fee
This is a recurring fee that’s charged by the property manager to cover the costs associated with managing the day-to-day operations of the property.
Disposition Fee
A disposition fee is charged when the asset is sold in order to cover the costs associated with selling the property. This can include things like legal fees, marketing costs, and administrative costs.
Refinancing Fee
A refinancing fee is charged when the asset is refinanced in order to cover costs associated with the new loan. This can include things like legal fees, appraisal costs, and administrative costs.
Summary
Real estate syndications are an effective way for investors to gain access to larger deals and diversify their portfolios. Syndications are one of the best ways for real estate investors to gain exposure to the real estate market as well as to generate income on a monthly or quarterly basis.
If you’re looking to add a real estate investment to your portfolio, consider looking into a real estate syndication as a passive investment.