A short overview
You don’t need to have hundreds of thousands of dollars in the bank to be able to get into the real estate investing game. There are options that you can consider, where you can put your skills and expertise instead, and still make money from real estate. One of these options is real estate syndication. So, what is real estate syndication?
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Getting a foot in the door of the real estate investing world can be daunting. Whether you’re starting out with very little capital, or you’re looking to expand your portfolio, one of the paths that you can choose to take is real estate syndication. Investing in bigger properties is no longer limited to the super wealthy and experienced, real estate syndication has opened the door for many people to get into this world. So, let’s get down to it, what is real estate syndication?
What is real estate syndication?
In the past, real estate syndications were mostly used by very wealthy real estate investors who had a large network and could use this to form a syndication and invest in high-end commercial properties. However, gone are the days of this being an exclusive path for the wealthy and well-connected.
Real estate syndication is a real estate investing strategy where investors come together to pool their resources, both financial and intellectual, for real estate projects. This allows real estate investors the opportunity to purchase properties that they wouldn’t have to been able to on their own and provides all the benefits of owning an investment property, without having to fund the entire project as an individual.
There are two main elements to a real estate syndication and each of these is important to its’ success: the sponsor or syndicator and the passive investors.
- Sponsor or syndicator: They are responsible for the property deal itself. Their tasks include finding the property, doing due diligence, underwriting the deal, creating a business plan, arranging the transaction, taking care of the day-to-day property management and so on. Essentially the sponsors are the syndicators who will make the deals profitable so that the investors can receive their returns. Instead of offering financial investment, the sponsors or general partners will often use their skills, labor or experience to contribute to the running of the project.
- Passive investors: They are also known as limited partners and they provide the funding for the purchase of properties. However, they are not involved in the day-to-day running of the project and are instead involved on a passive basis, so they will provide capital and own a percentage of the real estate.
Real estate syndication example
Let’s look at a real-life example of a real estate syndication for the purchase of an apartment building.
You, along with 4 other investors decide to form a syndication after you find an apartment building that you’d like to buy. You use an LLC company structure and decide to split the profits evenly between the 5 of you, which works out to 20% each. Each investor is putting in different types of equity, however you agree that it all evens out to equal profits. You contribute to the syndication as a sponsor, finding the property, arranging the deal and managing it.
The property is purchased for $1million and then rented out to tenants to bring in $120,000 per year as profit. This means that each investor will walk away with 20% of that which is $24,000 per year. After 5 years, the housing market explodes, and the syndicate takes a vote on whether to keep or sell the property. 4 members vote for selling and 1 for keeping, so the property is sold. Which means that you’ll earn 20% on the selling price, which ends up being $1.3million.
Your total profits are what you’ve earned from the rental income ($24,000 x 5 = $120,000) and 20% of the final selling price ($260,000), which is $380,000.
How to invest in real estate syndications
1. Connect with other investors
Networking can be done in a variety of ways. These days, social media is popular way to go about networking and so are online searches for websites that may bring real estate investors together. Fundrise is one of the popular crowdfunding websites where you can find real estate syndications. You could also go to organized events for real estate investors or contact any real estate professionals that you may know in the industry to see if they can assist. This way, you can either find or form a real estate syndication with people you have met through referrals or word of mouth.
2. Choose your role
Sponsor: If you’re looking for a way to invest in real estate without having to do a lot of groundwork, and instead take a backseat and let your capital work for you, then you can choose to be a passive investor and simply provide funds to the syndicate for them to use on real estate deals. That way, you’re still investing in real estate, without having to play an active role.
Investor: If you can’t contribute largely to the funding side of the deal, but you’ve got the expertise and skills to help make the syndicate successful, then this could be the route for you. You can help with anything from finding the properties, to managing them and making sure that the investors get their returns. It’s a more active role that will allow those who cannot contribute a large amount financially to still be involved in real estate investing somehow.
Join venture partner: Another option is to become a joint venture partner, who essentially ensures that there is proper communication amongst the syndicators and the investors. This is useful particularly when there are multiple projects happening at once. Transparency is the key to building to trust between all partners in a syndicate and joint venture partners are vital in making this happen.
3. Decide on a structure
Each syndication will have a different structure, and this needs to be decided on at the very start by all participating investors and is crucial for tax purposes. Most syndicates are structured as a Limited Liability Company (LLC) or as limited partnerships.
Part of the syndication structure includes an agreement where all investors decide on how communication will be done, what the decision-making process looks like for the viability of each real estate deal, and how profits will be handled. These elements are necessary for general functioning of the syndicate.
Advantages of real estate syndication
- Earn a passive income: Being a part of a real estate syndication is a great way to earn a passive income and have all the legwork handled by other investors who are just as invested in the project as you, but with skills and expertise.
- Get access to different properties: This type of real estate investing allows investors the opportunity to expand their portfolio into properties that they may not have had access to before. These are typically large, expensive properties that investors often cannot pay for alone.
- Property appreciates in value: Real estate appreciates in value over time which means that investing in a real estate syndication is an investment that will appreciate in value, the longer you own it.
- Control over the investment: Unlike crowdfunding and other types of real estate investing where you only own a portion of the property, syndication allows investors the control to decide which properties they want to purchase.
- Tax breaks: There are various tax benefits that come with owning real estate and as part of a syndication you will have access to these. For example, the tax benefits for an LLC for rental property.
Disadvantages of real estate syndication
- Unreliable syndication: The biggest risk when joining a real estate syndicate is ending up in an unreliable one. Bad deals can be made, and you can lose a lot of money and/or time and effort if you aren’t careful about which syndicate you join.
- Uneven profit distribution: Some syndications may not distribute profits evenly amongst members. This can be based on what they are contributing to the deal, and as such may not be evenly distributed, which means that you may not make as much profit from the deal as someone else.
- Syndicators can make money when investors don’t: Syndicators can make money via acquisition fees, loan fees, asset management fees and so on. Which means that these fees are due, whether investors have made money or not.
- Misalignment between syndicators and investors: Sometime syndicators and investors aren’t in alignment, whether that be about a property purchase, management or anything else. This can be due to the different levels of commitment being made by each type of syndicate member, or from a difference of opinion. Either way, ructions in a syndicate can ruin real estate deals if they aren’t sorted out quickly.
Final thoughts - Should you invest in a syndication?
If you’re wondering whether you should participate in a real estate syndication, ask yourself these questions:
- Do I have enough capital on my own to purchase the property I’d like to?
- Do I have the skills, time and expertise to manage a property if I purchase it?
- Can I build wealth by purchasing more properties right now on my own?
If your answer to these questions is no, then a real estate syndication could very well be a good investing solution for you to be able to purchase properties that you wouldn’t have been able to otherwise, and diversify your portfolio. As with most investments, choosing the right path revolves largely around your personal situation and weighing up the pros and cons of the particular strategy.