A real estate syndication is when a group of investors pool their funds to acquire a real estate property. Real estate syndications often invest in larger properties that require significant capital, such as apartment buildings, mobile home parks, industrial buildings, office buildings, land, self-storage units, and other real estate assets.
In a way, you can think of real estate syndication as the original crowdfunding before crowdfunding became what it is today. Syndication and crowdfunding are similar; both require multiple investors to pool funds for a specific goal.
Why Do People Invest in Real Estate Syndications?
Investors invest in real estate syndications for the same reason they invest in other assets—to make money.
Real estate investing provides many great opportunities to make money and diversify a portfolio. However, real estate investing is inherently complex, so investors who are not experts in the field may want to invest in real estate without knowing the ins and outs personally.
On the other hand, investors who have experience in real estate investing may not have the time to find additional deals or have a limited amount of liquid capital to work with, so syndication becomes a better option.
Whatever the case, investors who participate in real estate syndication earn cash flow without property management headaches which is a great setup.
Who’s Involved In Real Estate Syndications?
There are two important types of players in each real estate syndication investment: the syndicator(s) or General Partners and the passive investors or Limited Partners.
The Real Estate Syndicator(s)
Real estate syndicators, often known as General Partners (GPs), are in charge of organizing and running the real estate syndication and acquiring and managing the property. The GPs typically have substantial real estate experience and know what it takes to handle and manage a real estate property successfully. The primary responsibilities of the general partner(s) include:
• Finding the property
• Analyzing and underwriting the property
• Finding investors
• Raising capital for the property
• Getting the property under contract
• Completing thorough due diligence on the property
• Arranging the financing
• Negotiating with the seller
• Building a business plan
• Closing the property
• Managing renovations
• Working with the property management team to lease the property
• Manage the asset
• Manage investor relations
As you can see, the GPs in the syndication manage everything from finding the property to raising the capital and running the asset once the transaction is complete.
The GPs have equity in the game and want to execute the plan flawlessly to maximize profits. Still, they realize they wouldn’t have been able to do the deal without the other investors, so they also have an obligation to deliver excellent returns to the investors.
Investor or Limited Partner
The non-GP investors are often known as “investors” or “Limited Partners (LPs).”
LPs contribute their funds to the syndication to help acquire the property, but after that, they play a passive role and do not manage the property directly like the GPs.
LPs are often interested in owning property to make a return on their capital, but they generally don’t want to deal with the day-to-day operations of running the property. LPs who participate in a syndication receive monthly or quarterly income distributions from the asset and a return on investment when they sell it. As a result, investors will often pay the sponsor fees in exchange for their expertise.
Why Participate in Real Estate Syndication?
Considering a real estate syndication might be a profitable tactic for people wishing to leverage their funds and gain access to real estate deals that they might not be able to acquire on their own. They might also be a profitable tactic for people who don’t know much about real estate investing or want the responsibilities that come along with being a landlord, but still want to include some real estate in their portfolio.
What are the Benefits of Real Estate Syndications?
There are several advantages to investing in real estate through syndication. Some of those advantages include:
- Diversification. Investors can add a new asset class to their portfolio in general and also spread their money across different regions and different types of properties through different real estate syndications.
- Passive Income. Investors receive passive income dividends from their assets on a monthly or quarterly basis.
- Appreciation. The value of the property, like any other piece of real estate, should steadily improve over time, boosting the return on investment (ROI).
- Hands-Off Investing. Investors may invest in real estate without dealing with the headaches of managing tenants or repairing broken appliances.
- Tax Advantages. By owning a piece of real estate through a syndication, investors receive tax advantages through their K-1 forms for tax filings.
- Control. Unlike REITs, investors can select which individual properties they wish to invest in by working with different syndicators.
However, like all investments, investing in real estate syndications doesn’t come without challenges.
What are the Challenges of Real Estate Syndications?
The most difficult and challenging decision an investor will make when it comes to syndications is with whom to invest. Some of the challenges include:
- No Control. As a passive investor or Limited Partner, you don’t have much—if any—say in how the property is operated. The General Partners do all of that, which can be great if it’s run well, but stressful if your money is locked up in a property and the property is not being managed well.
- Longer Timelines. Investors who invest in real estate syndications usually need to invest their money for five to seven years. During this time, the capital they invested in the deal is locked up.
- Varying Degrees of Communications. As a passive investor or limited partner, your knowledge of what’s going on with the property is limited to how well and frequently the General Partners communicate with you. If the team of GPs doesn’t make a point to send you regular updates, you may feel like you’re in the dark a lot of the time which isn’t a great way to feel about your investment.
Because of these challenges, it’s critical to vet the general partners of the deal operating the syndication you’re considering. Proper vetting, although tiresome and time consuming, will save you a lot of regrets and headaches down the road.
Eligibility Criteria For Investing In Real Estate Syndications
If you want to invest in a syndication, you must qualify as an Accredited Investor or a Sophisticated Investor.
To qualify as an Accredited Investor as an individual, you must have a net worth over $1 million (excluding the primary residence) or an income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years with reasonable expectations to earn a similar income during the current year.
To qualify as a Sophisticated Investor, you must be able to demonstrate a higher level of financial literacy and savvy. This is typically demonstrated through a higher level of wealth, expertise, and net worth so that the SEC believes you are qualified to engage in more complex forms of investing opportunities on your own behalf.
Real Estate Syndication Summary Deals
There are many important real estate investing definitions, and real estate syndication is one of them.
As you can tell after reading this article, real estate syndications can be complicated. Here’s an overview of the fundamental components you need to understand:
- A real estate syndication is when a group of investors pool their funds to acquire a real estate property.
- Investors often invest in real estate syndication to:
- Invest in a property that they probably aren’t able to purchase on their own.
- Invest in real estate in a passive, hands-off way
- Diversify their investment portfolio
- There are two key players in every real estate syndication:
- Syndicator(s) or General Partners
- Passive investors or Limited Partners
- To invest in a real estate syndication, you typically need to be an Accredited Investor or a Sophisticated Investor