Most investors don’t have the financial resources to invest in real estate property. That’s the advantage of a real estate syndicate. In this investment model, you pool your money with other investors to purchase properties you might not have been able to afford on your own.
Additionally, you won’t have to shoulder the burden of managing the property alone. Here’s what you can expect from real estate syndication.
How Does Real Estate Syndication Work?
What exactly is real estate syndication? Typically, it involves at least one sponsor (sometimes called a syndicator) who will identify and manage the investment property on behalf of the investors.
These investors pool their money to form a real estate syndicate, which allows them to invest in property that might otherwise be out of their financial reach.
As a result, each member of the syndicate contributes equity to the investment property. They’ll also reap the benefits of this investment in a manner consistent with their investment stake.
Income commonly comes from rental yield, equity appreciation and certain tax benefits such as deductions for depreciation or mortgage interest. The agreement ends with the sale or refinance of the property.
Reasons for Real Estate Syndication
For investors, real estate syndication places real estate investing within easy reach. Since even a small investment property can be hundreds of thousands of dollars, joining a real estate syndicate allows investors to afford properties they could not afford otherwise.
Additionally, investors who already have money in the stock market can enjoy the diversification that comes from investing in real estate properties.
A syndication deal is also beneficial to the sponsor. They can use the cash inflow from syndicate partners to finance larger investment purchases. Sponsors also collect fees from investors, which gives them income alongside the profits from the investment itself.
Partners and sponsors gain the benefits of diversified risk. With more money to invest, real estate syndication can invest in diverse property types to minimize risk. Additionally, investors can invest in multiple geographic areas to take advantage of multiple markets.
Structure of Real Estate Syndication
Real estate syndicates are structured either as a limited partnership (LP) or a limited liability company (LLC). In an LP, two or more general partners set up and manage the syndicate, and investors serve as limited partners with less liability regarding the investment amount.
In an LLC, every member receives limited liability while the company is governed by at least one manager. The managers can be members, though they can also be external. An LLC is more flexible in that members can decide on how profits are distributed, whereas, in an LP, distributions must be proportional to ownership stakes.
Types of Real Estate Syndication
Real estate syndicates can take one of three specific types — debt syndication, equity syndication and hybrid types. Here’s an overview of each.
Debt Syndication
In debt syndication, investors pool their money to provide loans to property owners or developers. The real estate syndicate functions as a real estate lender, and income is derived from the interest on the loan. The loan agreement can either be fixed or capped, which can influence the financial rewards of syndicate members.
The advantage of this model is that you’ll receive reliable income from owners and developers. The downside is that interest payments aren’t high, and you won’t receive any rewards if the property is sold.
Equity Syndication
In equity syndication, investors pool their money to purchase ownership of a real estate property. These investors become equity owners, receiving money from rental income or appreciation from the sale of the property.
Equity syndicates provide strong returns, especially in areas where rent runs high. The flip side is that the ROI isn’t fixed and may fluctuate based on the property’s performance.
Hybrid Syndication
In a hybrid syndication, investors use their resources to purchase the property as well as offer loans to property owners and developers. They may receive money from rent and resale of the property and income from the interest on real estate loans.
The advantage of this approach is that it combines the best features of the other two syndicate types. The only downside is that the relative income from these varied sources may be lower than if you’d simply committed to one of the other models.
Steps Involved in Real Estate Syndication
To join a real estate syndication deal, you’ll need to complete the following steps.
- Set a budget for your real estate investment
- Search online or go through a real estate investment group to find an opportunity
- Provide your personal info to the syndicator to reserve your spot in the deal
- Review the private placement memorandum (PPM)
- Send in or transfer your funds to the syndication account
- Monitor your investment over time and make adjustments as needed
The most important step is to perform due diligence in evaluating an investment opportunity.
The PPM is invaluable in this regard, as this legal document will outline the details of the investment deal. You’ll find information about the property itself, the business plan and risks involved so you can make the best choice about your investment.
Potential Challenges and Risks
No investment strategy is without risk. Real estate syndication can bring high upfront costs depending on the deal, and there’s no guarantee of strong investment returns. And some syndicators charge high fees that can take a bite out of your investment. You can navigate these risks by:
- Performing due diligence to understand your investment agreement
- Compare syndicators to find the best terms and fees
- Diversifying your investment portfolio with other asset classes
- Diversifying your real estate investments with different property types or locations
To find the best real estate syndicators, you can search online or go through a real estate investment company. You may be able to find reviews or testimonials from other investors to understand exactly what you’re getting into.
Real Estate Syndication vs. Other Investment Options
How do real estate syndicates stack up against other investing options, such as real estate investment trusts (REITs)?
On the one hand, a REIT is more easily accessed since these investments are traded on major stock exchanges. In addition to greater liquidity, REITs tend to have lower investment thresholds, making them more accessible to investors while still offering an average rate of return of around 10% to 12%.
Real estate syndicates offer greater equity ownership without having to actively manage the property. And because you’re investing in specific properties, you’ll have more control over where your money goes. These benefits can also translate into higher rates of return for syndicate investors.
Experience a Wider World of Investing Options
Real estate investments can provide a reliable way to round out an existing investment portfolio and can even be used when planning for retirement. Real estate syndication provides a low-cost way to jump on board with these high-value investment options.
For investors who research their options carefully, real estate syndicates can be a gateway to a broader world of investing opportunities.
Frequently Asked Questions
Are real estate syndicates worth it?
Real estate syndicates offer the potential for strong returns without the burden of actively managing the property. While syndicates aren’t as simple as REITs, they typically offer greater chances of high returns.
How profitable is real estate syndication?
The exact profit of real estate syndication varies by location and the type of syndicate. Equity syndicates often gain strong returns from the cost of rent, though debt syndicates can also receive consistent returns from interest payments.
What are the 3 phases of real estate syndication?
During the origination phase, syndicators identify the opportunity and then manage the property during the operation phase. The liquidation phase involves the sale or refinance of the property.