Real estate syndication is an investment method that allows investors to pool their money and share in potentially massive profits. At some point in your life, you may find it hard to generate more cash flow on your own. This could be when real estate syndication comes into play.
This post will dive deep into covering exactly what real estate syndication is. On top of that, you'll also learn about some basic real estate syndication statistics, important considerations, and what makes this kind of investment so appealing for many investors across the world. Let's jump right in.
What is Real Estate Syndication
In short, real estate syndication is when a group of investors comes together to pool money and efforts in order to invest in real estate. By forming these kinds of partnerships, real estate syndicators achieve more together than what they could as individual investors.
When a group of real estate investors comes together to partner up and take on a large project, it's called a real estate syndicate. In real estate syndicates, there are usually two parties involved: the sponsors and the group of investors.
Commonly, the sponsors put in around 10-20% of the equity but are in charge of almost every part of the deal. On the other hand, the group of investors need to put up 80-90% of the money in the deal but are otherwise very passive investors.
Real estate syndications used to be closed off to the public. To invest in these kinds of deals, you either had to have money, know someone, or both.
Nowadays, however, real estate syndication is a bit more accessible. There are lots of different platforms and real estate crowdfunding services that allow regular people like you and me to access real estate syndication.
That said, these sites are referred to more as Crowdfunded real estate. You can check out sites like Fundraise, Crowdstreet, Yieldstreet, or Diversyfund to see what I mean.
How Does Real Estate Syndication Work?
Usually, real estate syndication deals are structured as a limited liability company or a limited partnership. The sponsors act as the general partners (or GPs) and the investors are limited partners (or LPs).
This setup is very similar to that of private equity funds. In fact, there are some private equity funds that focus exclusively on real estate syndication!
Once the partnership is set up, the sponsor will go out and look for deals. Once they find a good one, they will do the due diligence on it to determine if it really is worth their money. If they decide to go through with it, they will call on the LPs for money.
The resulting pool of money will then be used to invest in the property. It's up to the sponsor whether to invest in commercial properties, apartment buildings, or a different real estate project completely.
Let's say you're a passive investor with $100,000 to spare. You decide to invest in a real estate syndication deal with 8% estimated return. This means that (if all goes well) you will receive cash flow of $8000 per year for the duration of the investment, and then once it's sold, you will get all of your original capital back along with any appreciation.
So, if the deal goes well, profit is generated in 2 ways:
- Rental property income (rental income)
- Appreciation (the price of the building rising)
As a limited partner on the deal, you would receive $8000 for every year that you were invested in the syndication. After all the limited partners are paid, the rest of the money is split up. This is done via a pre-agreed-upon structure. If the split is 80/20, that means the investors would receive 80% of the remaining money and the sponsors would receive 20%.
So, let's say there was $500,000 left after all the LPs are paid. $400,000 goes to the investors (again) and the sponsors get $100,000.
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Real Estate Syndication Statistics
Here are some statistics on real estate syndication:
- From 2009 – 2012, over $63 billion was raised for private real estate investing.
- The average real estate selling price in the same period was aroun $15 million.
- The average preferred return is 8.5%, with 5% being low and 12% being high.
- More than 47,000 investors participated in real estate syndication in this time period.
- Sponsors made an average of 1% in acquisition fees and between 2-9% in property management fees.
Why Real Estate Syndication?
At this point in time, you may be thinking “this sounds awesome, but what does it have over other investments? Why shouldn't I just park my money in the stock market?” This is an excellent question. Here are some of the ways that real estate syndication beats out other investment types.
For one, a real estate syndication lets you have focused access to a group of investments. When you invest in a REIT or the general stock market, you put your money in tons and tons of investments. With real estate syndications, your money will typically go to only a few investment properties which is also where you will get most of your passive income.
In fact, it's not uncommon for you to know exactly which properties your money is going to. Plus, you'll know exactly what's going on behind the scenes.
This leads us to our next point. With real estate syndications, you have a one-on-one relationship with the general managers! In no other investment (unless you're starting your own business) will you have such a personal relationship with the people managing your money. Knowing the people managing your money is huge because it helps you determine who to trust (and who not to trust).
Finally, the last piece of the puzzle is that with real estate syndications, you're far more in control. Let's say you invest in an Apple or Google stock. How much control do you really have over the operations of the company? Chances are, not too much.
But with real estate syndications, even if you're just an LP, you still have a say in which properties you think should be purchased and how things should be run. This is unheard of in other investment vehicles.
What Are the Requirements?
Like almost all good things in life, real estate syndication was not openly available for everyone. Prior to the JOBS act of 2012, you needed to be very wealthy to even consider real estate syndication. In fact, even if you were rich, you also needed to know someone who would let you in on the deal to invest.
After the JOBS act, real estate syndication is a little more accessible. You don't always need to be an accredited investor, although some platforms and funds may require it (so your options just may be slimmer). Also, watch out for minimum investments.
If you're lucky, you MAY be able to find a fund that offers a minimum investment as low as $10,000. This means you'll only need to put up $10,000 to take part in the fund. Chances are much more likely though that you'll encounter funds with minimums anywhere from $25,000 to $50,000. A lot of real estates funds are pretty big in size ($10-250 million fund), so they'll clearly be looking for a sizable contribution.
The one workaround is if you take part in a crowdfunding platform. This basically lets you pool your money with even more people and so you could find some which have a low minimum. (For example, Diversyfund has a minimum of $500!) Regardless, just keep in mind that the smaller the ratio of your money: purchase price, the less of a return you'll receive.
Pros and Cons of Real Estate Syndication
Before making any investment, it's important to learn the advantages and disadvantages. The same applies for real estate syndication. Here are all the pros and cons of real estate syndication you should keep in mind before allocating any capital.
- Diversification of your portfolio – real estate syndication offers an easy and relatively hands-free way for you to add real estate to your portfolio. This way, you can have exposure to the housing markets without having to break out the hammers and drills and do the dirty work.
- Some guarantees – the preferred return gives you some sort of guarantee for your capital. Basically, if you don't receive your preferred return, the sponsors aren't seeing any money. This motivates them to work especially hard to at least hit the preferred return target.
- Experience – let's say one day you want to be more hands on and get into real estate full-time. You might be too scared to jump right in but real estate syndication lets you test the waters. With syndication, you can get a feel of how investing in real estate works and learn from high-profile investors.
- Tax advantages – as a real estate syndicator, you stand to benefit from many tax advantages. One such advantage is depreciation. Depreciation lets you write off phantom losses in the books without actually losing any money. Pair this with cost segregation and you've got a tax advantage machine!
- Synergy – through real estate syndication, you're able to access the minds and expertise of brilliant people. They, in turn, can also learn from you. Together, a real estate syndication team is more than the sum of its parts.
- Potential lack of control – even though you have more of a personal relationship with the sponsors, at the end of the day there is still a bit of a hands-off approach with real estate syndication. If you're not comfy with how the sponsors are running the show… tough luck!
- Lack of liquidity – with real estate syndications, once you're in, you're in for the long run. Most investments don't close until 5-10 years out. For that time period, your money will be inaccessible (lest you face penalty charges).
- Volatility in the market – there is a chance that you pay the acquisition fee, do your research, back a team, and the market just suddenly crashes. If this were to happen, there is nothing to stop you from losing all your money.
Considerations Before Diving In
So let's say you do decide to make the jump into real estate syndication. Here are some final considerations you should take a look at before making an initial investment.
- The people – the most important component of real estate syndications is the team. Before investing with any team, make sure you look into their track record. Have they taken on larger projects than the current one being proposed to you? What other potential investors are they courting? Do you personally know these sponsors?
- Cashflow likeliness – a major part of the profits are going to come from the cashflow. You'll want to check the projected cashflows and make sure they are actually likely to be realized.
- Exit strategy – like Stephen Covey says “begin with the end in mind.” What is the exit strategy that this syndication group is planning? Are they planning to sell to private investors? Do they have connections with big hedge funds and/or private equity funds?
These three are just the starting point. If you're really to get into real estate syndication, you'll want to do lots of your own due diligence before diving in.
So there you have it: a comprehensive overview of real estate syndication! By now, you know exactly what it is, how it works, and some of the pros and cons.
Like all investments, do your own research before blindly putting money in. That being said, real estate syndication DOES have the potential to provide you with stable and healthy returns in the near-medium term (if you're willing to stay illiquid for a while).
Who knows… maybe real estate syndication will be your start to becoming the proud owner of a real estate empire 😉
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