Are you a newbie or a seasoned investor who wants to take your real estate investing to the next level? In a real estate syndication deal, money is raised from a large group of like-minded investors to purchase real estate investments. A commercial real estate syndication is a way for investors to pool their funds together in order to buy a larger and more stable asset than any of them could on their own.
In most cases, real estate syndication is used to purchase larger real estate investments, which are usually commercial properties. Examples of the kinds of properties investors purchase through syndication include:
- Large tracts of land for development or farming
- Large multifamily apartment complexes
- Self-storage facilities
- Mobile home parks
- Hotels
- Hospital and medical facilities
- Industrial parks
How Does Syndication Work in Real Estate?
Most real estate syndication deals consist of two distinct but equally important groups of people: syndicators and investors. The project sponsor or syndicator is usually a real estate development or management company that is made up of a team of successful real estate investors or professionals.
They seek investment opportunities that are geared toward their area of specialization. Sometimes they buy vacant land and build from the ground up, but in many cases, they identify an existing project that has potential upside in revenue or appreciation value.
Usually, these opportunities will be in markets at the beginning of a growth cycle that the investing community at large has not picked up on. Imagine trying to find a fishing hole. Ideally, you want a place that’s stocked with fish but hasn’t yet been overrun by dozens of anglers who already have lines in the water.
Once the sponsors have scouted out an opportunity, they will figure out how much of their own funds they’re willing to commit to the project in relation to its total cost. The capital syndicators need to complete the project minus their original contribution is what they will try to raise via syndication.
At this point, you might be wondering why the syndicators don’t just borrow money to complete their deals. First, debt service and bank interest eat into profits. Second, not all syndication deals meet bank underwriting requirements. So, syndicators raise capital by recruiting investors instead of borrowing. Each investor will receive an equity share in the syndicated deal. Some syndication deals will involve bank loans, but syndicators try to limit borrowing to a minimum.
Real estate syndications can help investors achieve the benefits of owning an investment property (cash flow, appreciation, tax breaks) without the work or stress of being a landlord themselves.
Who’s Involved In Real Estate Syndications?
There are two key players in any real estate syndication investment: the syndicator(s) and the passive investors.
1. The Real Estate Syndicator
Real estate syndicators, also referred to as general partners (GPs), are responsible for structuring and operating the real estate syndication. Primary duties of the general partner(s) would consist of:
- Underwriting the deal.
- Completing thorough due diligence on the property.
- Arranging the financing.
- Negotiating with the seller.
- Building a business plan.
- Finding investors.
- Raising capital for the transaction.
- Working with the property management team.
- Asset management.
- Handling investor relations.
A real estate syndicator handles everything from finding the property, arranging the transaction, and operating the asset upon closing. The syndicator’s role is to execute the business plan and deliver strong returns to the passive investors in the real estate syndication.
2. The Passive Real Estate Investor
The passive investor’s role in the real estate syndication is to provide a portion of the capital needed to acquire the property. In exchange, passive investors receive ownership shares of the property.
By owning a piece of the real estate property, passive investors receive monthly (or quarterly) passive income distributions from the asset, as well as a return on their investment upon selling it all while achieving equity pay down, appreciation, and real estate tax benefits.
A Sophisticated Investor
A sophisticated investor has enough knowledge and/or experience in investing in alternative investments such as real estate, oil, or precious metals. They may have made previous investments outside the stock market or perhaps they attended an investing seminar. Whether or not they have actual investing experience, the person has the ability to make an informed decision about a particular syndication offering.
TYPES OF REAL ESTATE SYNDICATION
There are two primary types of real estate syndication: 506(b) and 506(c). They are more commonly referred to by which investors are generally allowed to invest: accredited and non-accredited investors.
506(B)
Under the 506(b) status, you’re allowed to raise from an unlimited number of accredited investors and from up to 35 non-accredited investors, meaning you could take capital from anyone willing to invest with you so long as you can prove that you had a pre-existing relationship. You are also restricted from advertising the offering to the public, so you must source investors from your list or circle of influence.
506(C)
The 506(c) offering is for accredited investors only. An accredited investor is defined as a person having an annual income exceeding $200,000 (or $300,000 for joint income) for the last two years with the expectation of earning the same or a higher income in the current year or having a personal net worth exceeding $1,000,000. Businesses can also be considered accredited and may invest in securities offerings but must have assets in excess of $5,000,000. The benefit of running a 506(c) offering is that you can openly market the offering to the public.
The Benefits Of Real Estate Syndications
There are various benefits of opting for a real estate syndication investment.
- Passive Income: Investors can earn monthly or quarterly passive income distributions from their investments.
- Hassle-Free: Investors can invest in real estate without the hassles of managing tenants or toilets.
- Tax Benefits: By owning a piece of the real estate, tax benefits are passed down to investors through their K-1 tax filings.
- Appreciation: Like any piece of real estate, the value of the property should gradually increase over time, increasing the return on investment (ROI).
- Control: Unlike real estate investment trusts (REITs) or crowdfunding platforms, investors can choose which specific properties they want to invest in.
- Diversification: Investors can spread their capital across multiple real estate syndications.
The Challenges Of Real Estate Syndications
There are many perks when it comes to investing in real estate syndications. However, as with any investment, nothing is risk-free. When it comes to investing in syndications, the most challenging and risky decision an investor will make is who they choose to invest with.
As an investor, you must ensure that you are working with an experienced and trustworthy real estate syndicator before jumping into an investment. When seeking a real estate syndication company, it’s important to thoroughly vet that company before moving forward.
How To Invest In Real Estate Syndication Deals
So, how do you set out on the search for the perfect real estate syndication deal? To find just the right deal, there are a few things that you could do.
First of all, make sure you actively network with other investors, preferably those interested in a similar asset class as you are. Building relationships with like-minded investors can help you find recommendations for reputable real estate syndication companies that are trustworthy and have a solid track record in the industry. Attending events organized on Meetup.com, interacting in Facebook groups, and going to real estate conferences are great ways to meet other investors, expand your knowledge, and ultimately find your first deal.
As mentioned above, a real estate syndicator will do most of the heavy lifting, from finding the deal, structuring the real estate syndication, and executing the business plan. As a passive investor, your primary role is to identify the real estate syndicator(s) that you can trust to partner with and make sure the syndicator’s credentials are bona fide.
CONCLUSION
When done correctly, syndication deals offer tremendous upside, allowing both syndicators and investors to get a lot of bang for their investment buck. If you’ve been wanting to get involved with commercial real estate for passive income but were put off by seven- and eight-figure purchase prices, syndication may be the perfect investment vehicle for you.
Consider the risks and your investment goals carefully as you would do with any investment. But if you like the deal points, and you can handle the downside (hold period, potential loss of income), the right syndication deal could be a perfect addition to your investment portfolio.
As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.
How Does Syndication Work in Real Estate?
Most real estate syndication deals consist of two distinct but equally important groups of people: syndicators and investors. The project sponsor or syndicator is usually a real estate development or management company that is made up of a team of successful real estate investors or professionals.
How do I choose a sponsor for apartment syndication?
When choosing a sponsor for apartment syndication, it is important to consider their experience, track record, and reputation in the industry. You should also consider their investment strategy and the types of properties they have invested in previously. It is also a good idea to talk to other investors who have worked with the sponsor in the past.
What is the role of the sponsor in apartment syndication?
The sponsor is responsible for leading the syndicate and managing the property. This includes sourcing and acquiring properties, conducting due diligence, managing the finances and day-to-day operations of the property, and generating returns for the investors. The sponsor is typically a seasoned real estate investor with experience in the multifamily space.
