Real Estate Syndication Investing 101- Introduction to Syndication and How They Work
by | Feb 17, 2022
Many real estate investors ventured in residential real estate flips, rental homes, or duplex investment. For someone to invest in a syndication deal, you need to be a part of an inner circle or know someone who is doing a syndication deal because the SEC banned public advertisements of real estate syndication deals.
Fortunately, public advertisement of these real estate opportunities is now allowed by the SEC. It serves as a great opportunity for people to be educated about passive real estate syndication.
But what is really real estate syndication? How does it work? Why should I invest in a syndication deal? What does real estate syndication look like?
- What is Real Estate Syndication?
First, let’s define syndication. Technically, syndication means the transfer of something for control or management by a group of individuals or organizations. In real estate, syndication happens when a group of investors pools their funds and expertise to buy a large real estate asset together.
For instance, you have $50,000 set aside for investing. You can invest in an individual rental property but it would take a huge amount of time to find that property, negotiate contracts, run the inspections, study the numbers, take a loan, invite tenants and manage it. To bypass these obligations, investors do a real estate syndication,
Real estate syndication allows you to put your money into real estate without doing the heavy lifting yourself. What you can do is invest as a passive investor and wait for other investors to put money into the deal.
By pooling your resources, the group would now have enough funds to buy an asset larger than rental properties, like a whole apartment building. The passive investor doesn’t have to do any of the work for the property. The syndicator or sponsor team handles the daily management of the asset actively and gets a small share of the profit in return.
When done right, real estate syndications are mutually beneficial for everyone involved.
- How do syndication deals work?
Now, you’re curious to see how the details in a syndication deal will work out.
There are two main groups of investors who come together to form a real estate syndication: the general partners and the limited partners.
The previous section mentioned a team that would work on the day-to-day management of the asset for a small share of the profit. That syndication team is made up of general partners (GPs), They do the groundwork of finding and vetting for properties and creating the business plan. Essentially, all the work that you need to do as an owner and landlord will be done by the general partners.
Meanwhile, the limited partners are passive investors who invest their money into the deal. The limited partners have no active involvement or responsibility in managing the property.
Syndication can only work when the general partners and limited partners roll together. The general partners need to find a great deal and a team that will execute the business plan. The limited partners put their personal capital into the deal, which makes it possible to acquire the property and fund the renovations.
Together, the general partners and limited partners join an entity (typically an LLC) that holds the underlying asset. Because the LLC is a pass-through entity, you get the tax benefits of direct ownership.
Once the planned renovations are complete, the general partners will sell the property, return the capital to the limited partners, and split the profits.
- What’s in real estate syndication for you?
Here are the reasons why people decide to invest in a real estate syndication:
- Not enough time, energy, and resources to be a landlord,
- Want to invest in physical assets than paper assets,
- It is a more stable market.
- Prefers the benefits that come with real estate investing.
- Regular cash flow distribution checks.
- A better investment for retirement funds.
- You want to make a difference in local communities.
For busy professionals, real estate syndication is the easiest way to invest in large-scale, physical real estate assets without the commitment of time or mental energy, while making a positive influence on the community and taking advantage of interest and tax benefits. This opportunity for passive income through real estate syndication absolutely sounds appealing.
4. What does real estate syndication look like?
We know that you’re getting more engrossed in this discussion about real estate syndication but you probably think that it’s unimaginable. Let us show you what it looks like.
Dylan and Danica worked together in finding an apartment community in Houston, Texas. Danica, who’s living in Houston, will work with real estate brokers in the area to find a great property that matches their condition. They find one property worth $1o million.
When Dylan analyzed the numbers to make sure that the deal is profitable, they found out that the asset has a huge potential.
However, their funds are not enough to cover the purchase of the property. To buy it, they have to put together a real estate syndication offering, create a business plan and investment summary for their potential investors, and work with a syndication lawyer to structure the deal.
Then, Dylan and Danica start looking for limited partners. When their friends, Erik and Diane, knew about the offering, they contacted Dylan and Danica to invest their personal capital in the deal. Other people who learned about the offering invested a minimum of $50,000.
When the pooled funds are enough to cover the downpayment and renovation costs, the deal closes. Danica coordinates with the property management team for improving the property, making sure it is done on budget and on schedule. Within this timeframe, Danica and Dylan send out updates and cash flow distribution checks to Erik, Diane, and all their passive investors on a monthly basis.
Once the renovation is complete, Danica and Dylan decide when it’s time to sell the property. The property’s worth has increased to $15 million after 3 years. Their passive investors receive their original capital plus their split of the profits according to the original deal. In this case, a 70/30 split was agreed upon at the outset of the syndication (70% to investors, 30% to Danica and Dylan),
During the renovation and hold period, each passive investor should have received their monthly cash flow checks. Once the property is sold, they will get their initial capital investment back and their portion of the profit split.
Now that you’ve learned the process of real estate syndication, are you still going to wait for 10 years to make your money move?
We recommend that you do thorough research to your heart’s content and never put all your eggs in one basket. With this knowledge in your reach, you are well on your way to creating financial freedom for yourself and your family. Keep going!