There comes a time in every successful real estate investor’s life when resources become tapped, and you reach the limit of how much you can grow on your own. If you are finding yourself in this situation, real estate syndication may be just what you’re looking for.
What is Real Estate Syndication?
Real estate syndication (also called property syndication) is a partnership between multiple investors that combine their capital, resources, and skills to buy and manage a property that they could not afford on their own. Combined, individuals and companies have much more buying power than what they would be able to manage on their own.
Within a real estate syndicate, there are typically two roles: the syndicator (also called the sponsor) and the investor.
For people who are great at scouting and managing properties but don’t have much capital, the syndicator role may be best. The syndicator scouts and secures properties with a contract and typically manages the investment too. Often, the sponsor may put in some money (5-10%), but other times their contribution is solely in the form of time and effort.
It’s common for the syndicator to earn an acquisition fee— similar to a commission for bringing in the deal. The fee is typically around 1%. Other members of the syndicate provide the money to buy, renovate, and/or operate the property. The syndication is complete when it’s stabilized or sold in a predetermined exit strategy. Those other members expect a passive income from the property after an initial investment. Whether the sponsor puts in a lot of money or not, they also get a piece of the deal. But, before they get paid, sponsors give their other investors an annual “preferred return,” which can be as high as 10%.
Real estate syndications are generally structured as a limited liability company (LLC), or a limited partnership. In these instances, the sponsor is called the managing member of the general partner. The investors are called limited partners or members.
The sky is the limit when it comes to terms of a syndication agreement. It’s wise to seek guidance from an experienced real estate attorney to help you put together the most sound contract to protect all parties. You should make sure that voting rights and communication requirements are clearly laid out in the contract, so everyone is on the same page.
Proceed with Caution
We know it can seem exciting and even ideal to be a sponsor, but remember that you will have a lot of responsibility to your investors. Your investors rely on you for your expertise and diligence and for you to be responsible with their investment to make their ROI as high as possible. This means you should be skilled in managing the asset, reporting, and accounting.
When you take on a project in which you seek investor capital, make sure you execute it flawlessly. Your role as the sponsor is to fix any issues as they pop up. Remember, your investors play passive roles, and they don’t want to deal with the day-to-day headaches that come with owning an income property— they pay you a premium to handle it all. So, keep that in mind and be prepared to deal with risks as they come along.
Why do People Choose Real Estate Syndication?
The biggest reason investors choose to participate in real estate syndication is to have access to deal flow. Most investors don’t have the time to search and underwrite hundreds of properties to find a gem that they can acquire. By getting involved in syndication, investors have access to the deal flow provided by companies across the country who do so for a living, granting investors the ability to invest in real estate without the hassle of property management.
Benefits of Real Estate Syndication
Investing in a real estate syndication has many benefits, including:
- Diversification: Syndication allows investors access to much more diversification than they would be able to achieve on their own. This is because real estate syndication investors are able to pool their money with other investors to purchase multiple properties. This strategy allows investors to experience the benefits of real estate diversification without the need to shell out millions of dollars.
- Access to large investment opportunities: Commercial properties are among the best real estate investment opportunities. But, these properties come with insane price tags. With real estate syndication, you can afford the steep prices because you are not going at it alone, allowing you to invest in opportunities you otherwise would not have been able to.In fact, the majority of commercial real estate today is purchased using some form of a syndicated structure.
- Passive investment:If you want a passive investment opportunity, real estate syndication is the option for you. But, if you don’t want to be passive, you have that option too. Syndicated structures have a fund sponsor or manager who is in charge of the fund’s performance and day-to-day operations and needs.
Real estate syndication is an excellent way for people to access investment opportunities they otherwise would never have been able to, while choosing to earn passively or not. Contact us today to find out how to get started.