Real estate syndication is an old-time real estate investing strategy that has been revitalized by modern technology. Real estate syndication could be the solution if your network is exhausted, but you still want to expand your portfolio.
Real estate syndicators collaborate with a group of persons to complete real estate transactions. The investments are frequently far more extensive than a single investor could make on their own, and the earnings are substantially larger than traditional real estate investments.
In this article, we’ll define real estate syndication, explain how it works, and discuss the many options so you can decide if it’s the correct investment for you.
What is Real Estate Syndication?
A real estate syndication, often known as “property syndication,” is a joint venture between numerous investors to undertake a real estate project. The investors combine their funds and resources to purchase a property that they could not afford to buy individually. They also collaborate to manage the property if it will be rented out.
In a nutshell, real estate syndication is just another word for “real estate partnership.” These partners’ legal structure is often a Limited Liability Company (LLC) or a Limited Partnership (LP). Congress introduced real estate syndication through the JOBS act in response to criticism that the most wealthy investors exclusively pursued real estate projects. Real estate syndication is a good place to start if you want to understand how to put together a real estate venture.
How Does Real Estate Syndication Work?
Real estate syndication transactions are often organized as a limited liability company or a limited partnership. The sponsors serve as general partners (or GPs), while the investors serve as limited partners (or LPs).
This arrangement is very similar to that of private equity funds. In fact, some private equity funds specialize solely in real estate syndication.
Once the partnership is established, the sponsor will search for deals. When they find a good one, they will do their research to see if it is truly worth their money. If they decide to go ahead with it, they will seek funds from the LPs.
The money collected will subsequently be utilized to invest in the property. It is up to the sponsor to determine whether to invest in commercial properties, apartment buildings, or a distinct real estate project.
Who Can Participate in Real Estate Syndications?
There are two critical players in each real estate syndication investment: the syndicator(s) and the passive investors.
- Syndicator or Sponsor: The syndicator, sometimes known as the “sponsor,” is one of the most visible participants in the real estate syndication process. The syndicator is in charge of acquiring, rehabilitating, and administering the property. These are often individuals that have prior real estate expertise and are well-versed in what it takes to handle and manage a real estate property successfully.
- Investor or Limited Partner: The investor or investors are the other significant players in a real estate syndication. They are also referred to as Limited Partners. Investors contribute the capital for property acquisition, but they play a primarily passive role. These real estate investors may be interested in owning property to profit from a percentage of the earnings, but they will typically delegate day-to-day management to the sponsor, who has earned more direct experience. As a result, investors will often pay the sponsor fees for their expertise.
What Is the Eligibility Criteria for Investing in Real Estate Syndications?
Real estate investors must guarantee that they meet the conditions to join a syndicate. Several real estate syndications are organized following one of two SEC Regulation D;
According to exemption 506 (b), for real estate syndications involving up to 35 people in a single transaction, the investor must be sophisticated, requiring adequate financial education. Furthermore, sponsors may only solicit funds from an existing client base under this exemption. Thus, if a real estate investor is interested in a syndicated agreement, they must first create a relationship with the sponsor. Signing up on the sponsor’s website is an excellent approach to begin this relationship.
According to exemption 506 (c), real estate syndicate investors must be accredited. To become accredited, an investor must meet at least one of the following requirements:
- A net worth of $1 million excluding his or her home or primary residence
- An annual income of $200K or more for single individuals with the anticipation of earning the same amount in the current year
- A combined annual income of $300,000 or more for married couples with the expectation of obtaining the same amount in the current year
What Are the Benefits of Real Estate Syndications?
Aside from the obvious profit potential, there are numerous advantages to real estate syndication. The most compelling are listed below:
- Passive Income: Investors might get passive income distributions from their investments monthly or quarterly.
- Hassle-free: Investors can make investments without having to worry about managing tenants or facilities.
- Tax Advantages: By owning a piece of real estate, investors receive tax advantages through their K-1 tax filings.
- Appreciation: The property’s value, like any other piece of real estate, should rise gradually over time, raising the return on investment (ROI).
- Control: Apart from real estate investment trusts (REITs) or crowdsourcing systems, investors can choose which properties they want to invest in.
- Diversification: When you engage in real estate syndications, you can pool your money with other investors to buy multiple properties. This strategy enables you to enjoy the benefits of real estate diversification without spending hundreds of thousands of dollars.
What Are the Challenges of Real Estate Syndications?
As you are aware, nothing in investing is certain; there are always possibilities for things to go wrong.
The most common risks of investing in syndications are:
- Less liquidity: Syndication shares are typically not traded on secondary markets in the same way that shares of a company or REIT can, limiting their liquidity.
- Passive investors have little control: Cash investors must frequently relinquish control of the asset to the sponsor. If the property underperforms, the passive investors have few options for forcing improvements; however, they can replace the sponsor in extreme cases.
- Property Failure: Investors who contribute most of the funds for the property are exposed to significant financial risk if the property fails. Even if they can recoup some of their money through the personal recourse guarantee, they will still lose a significant amount.
- Hidden fees: Real estate syndications come with several fees and extra costs that can be difficult to understand. Some of these charges are one-time, while others are recurring. These costs may include an acquisition fee, asset management fees, property management fees, etc.
How to Invest in Real Estate Syndication Deals
While the timetable for each project varies, the general procedures for investing in a real estate syndication are the same:
Step 1 – Determine Whether or Not to Invest in Real Estate
This is possibly the most critical stage of all: deciding whether or not you want to invest in real estate. You’ll need to consider your total portfolio, goals, and if investing in real estate can help you achieve those goals.
Step 2 – Establish Your Investing Goals
When you’ve decided to invest in real estate, consider what you hope to gain from it. Do you want to make a long-term or short-term investment?
You may try a fix-and-flip or buy and keep a small rental property if you’re not afraid to experiment and put in some sweat equity, or if you want to pick your own tenants, cabinets, and flooring. Real estate syndication, on the other hand, maybe a better choice if you want a more set-it-and-forget-it type of investment.
Step 3 – Look For An Investment Opportunity That Is a Good Fit
If you’ve established that real estate syndication is the most excellent fit for you at this moment, the next process is to identify a syndication opportunity that works for you. Just as there are numerous real estate assets in which you can invest personally, there are multiple real estate syndication projects accessible, ranging from ground-up construction to value-add assets and even turnkey syndications.
Deal sponsors often provide some version of the following materials to help investors understand investment opportunities:
- Executive summary
- Detailed investment summary
- Investor Webinar
These are the primary resources that will provide you with a comprehensive overview of the asset, market, deal sponsor team, business plan, and projected financials.
Step 4 – Secure Your Spot in the Deal
One thing to remember about real estate syndications is that investing in the deal is done on a first-come, first-served basis.
This is especially critical for hot market deals with strong deal sponsors. That’s why it’s crucial to conduct preliminary research to determine how much money you want to invest and what you’re searching for in an investment opportunity.
Step 5 – Review the Private Placement Memorandum (PPM)
The signing of the PPM is the first legal step after you’ve decided to invest in a deal. This is a legal document that details the investment opportunity, the risks associated, and your position as an investor in the project. It is often reasonably extensive.
The PPM is not the most enjoyable document to read, but you must do so to grasp all aspects of the investment opportunity completely. As part of signing the PPM, you’ll need to decide how you wish to hold your shares of the entity that owns the asset. You can often decide whether you want your cash flow payouts sent via check or direct deposit.
Step 6 – Deposit Your Funds
After you’ve finished the PPM, you’ll need to send in your funds or the amount you’re investing in the deal.
Typically, you will choose to send a check or wiring in your funds. Before wiring in your funds, double-check the wiring information and notify the deal sponsor that your funds are on their way so they can be on the watch.
What Factors Should You Consider Before Investing in a Property Syndicate?
Before investing in a property syndicate, consider the following factors:
Type of property- Is it new construction or an existing property? If it is development potential, there is usually no return for the initial period while it is being developed. In order to increase returns, a development opportunity is subjected to increased risks.
- Duration: The length of a high yield secure investment is crucial, and your goals define it. Long-term investments will yield net capital gains.
- Management: While you can hire a professional manager to manage the property syndicate’s affairs, successful investment requires your time and effort.
- Government Policy: Government policies can impact the returns and gains on property investment. The majority of these changes are out of our control, but you should be aware of policy-making trends.
- Yield: Consider the expected returns regularly. Check if this periodic return meets your current and future cash flow needs.
- Costs: Consider additional expenses such as insurance. Examine management fees, marketing fees, and exit fees.
- Tax Advantages: Most high yield secure investments that generate an income or gain will incur taxation costs. It is recommended that you speak with an accountant to better understand these fees and the best solution for lowering your tax liability.
- Exit Strategy: There may be times when you need to exit a property syndicate for various reasons. Consider the most probable or obvious reasons and ensure that the agreement includes provisions for these contingencies.
- Reinvestment: You may decide to reinvest some or all of your earnings in the syndicate to boost the value of your property syndicate investment. Take into account how the contract will allow for reinvestment.
Why Invest in Property Syndicates in Australia?
Australia’s property market is robust, resilient, and expanding. With natural births and migration increasing the population, there will be greater demand for housing, commercial offices, and industrial spaces in the future. As urban areas become more crowded and more people move away from the city, new developments will be built to accommodate the growing population.
Investing in property in Australia is ideal because of secure lending arrangements, firm government policy, and tax benefits. A property syndicate allows you to invest in the real estate market more quickly and gain access to higher yields and more substantial capital gains from large-scale developments. This will assist you in developing a diversified portfolio with reasonable returns, allowing you to reach your financial objectives more quickly.
What Is the Difference Between a Retail Property Syndicate and a Wholesale Property Syndicate?
In a retail property syndicate, the retail investors are allowed to invest. A retail property syndicate investor’s minimum investment is usually $10,000, which is significantly less than a wholesale property syndicate investor’s minimum investment. A property company that offers retail property syndicates must provide a Product Disclosure Statement. Furthermore, a single responsible entity is appointed to run the syndicate and comply with ASIC’s investment rules (under an Australian Financial Services License).
A wholesale property syndicate only accepts wholesale investors. The minimum investment required by investors is typically higher than that needed for a retail property syndicate (sometimes $200,000 or more. In contrast to a Product Disclosure Statement, a wholesale property syndicate necessitates the issuance of an Offering Memorandum.