Real estate syndication is a type of investment strategy where multiple investors pool their money together to purchase a real estate asset. The property is then managed by a sponsor, who’s responsible for making sure that it’s well-maintained and profitable. By gathering the financial and intellectual resources of investors and sponsors, real estate syndication allows for the purchase of larger and more expensive real estate assets than would be possible for a single investor. While there are some risks involved in this type of investment strategy, it can be very profitable if done correctly.
For many, investing in real estate is a great strategy for building long-term wealth. Not only does real estate tend to appreciate in value over time, but it also provides a hedge against inflation. And because properties are physical assets, they provide a tangible sense of security that most other investments can’t match. But buying and managing individual properties can be time-consuming and risky. That’s where real estate syndication comes in.
Real estate syndications allow investors to own a property without the hassle of being a landlord. In this guide, you’ll learn everything you need to know about real estate syndication, from how it works to the benefits and risks involved.
How does real estate syndication work?
A real estate syndicate involves a group of investors pooling their money to purchase or develop a real estate property. This type of real estate investment provides an opportunity to invest in large commercial real estate projects that would otherwise be out of reach for most individual investors.
Real estate syndicates are usually managed by a sponsor (also known as a syndicator or general partner), who’s responsible for making capital decisions about the property, hiring contractors, supervising progress, etc. The general partner typically invests their own money in the syndicate and also receives a percentage of the profits.
The remaining profits are distributed to the investors, who are known as limited partners. Investors typically contribute the bulk of the capital for the real estate investment but take a passive role in the deal.
Real estate syndication can be an attractive investment for both general and limited partners. For limited partners, syndication offers the chance to earn high returns without having to manage the property themselves. And for general partners, syndication provides a way to raise the capital needed to purchase larger properties.
The three phases of real estate syndication
Real estate syndication deals typically occur in three stages.
- Origination. The first step of the real estate syndication process is where the sponsor (general partner) identifies investment opportunities, negotiates the property purchase price, and look for real estate investors who are interested in the project. This phase is complete once the passive investors commit and invest their money in the deal.
- Operation. The operation phase starts when the property is officially acquired, and the sponsor begins carrying out day-to-day operations like property management.
- Liquidation. The liquidation phase happens when the investment property is refinanced or sold. If the sponsor is able to successfully execute the business plan, investors can typically cash out with a profit during this stage.
Pros and cons of real estate syndication
Real estate syndication can be a great way to get your feet wet in real estate. But this investment strategy also comes with some downsides. Let’s look at the pros and cons of real estate syndication to help you decide whether it’s the right move for you.
Here is a list of the benefits and drawbacks to consider.
- Provides a passive income
- Eligible for certain tax benefits
- Allows for investment portfolio diversification
- Access to unique investment opportunities
- Strict eligibility criteria
- Illiquidity of real estate assets
- Not all deals work out
- Passive income. Real estate syndication investors can often earn passive income on a monthly or quarterly basis. This provides a steady cash flow that can be invested into other opportunities.
- Tax benefits. Investing in real estate properties often allows investors to receive tax benefits. For example, investors can avoid taxes by rolling over capital gains from one real estate investment to another using a 1031 exchange.
- Diversification. Because a single-asset real estate’s returns aren’t typically strongly tied to the performance of the stock market, prices won’t fluctuate as much. So by putting some of your money in real estate syndications, you can build a more diversified and stable investment portfolio.
- Access to unique investment opportunities. Without a real estate syndication investment, many investors may not have the knowledge or the funds to build or purchase commercial properties. However, with the help of syndicators who have extensive experience in real estate development, investors can access unique opportunities that offer both the potential for high returns and the convenience of a hands-off investment.
- Eligibility criteria. To be eligible to participate in a real estate syndicate, you must be a sophisticated or accredited investor. In other words, you must have had an annual income of $200,000 ($300,000 together with a spouse) in each of the past two years. If you don’t fit this qualification, you can also have a net worth of over $1 million.
- Illiquidity. Another downside of a syndicated real estate investment is that it’s a rather illiquid asset. Unlike a real estate investment trust (REIT) that you can easily buy or sell on a securities exchange, investment properties are illiquid for the entire holding period. Depending on the deal, the holding period can range anywhere from 5 to 10 years.
- Not all deals work out. While the potential for high returns is certainly there, there’s also a chance that a real estate syndication deal falls through and the investor loses their money. So be aware of the risks before investing in a syndication deal.
Is a syndicate a good investment?
While there are some risks associated with investing in a syndicate, such as the loss of control over the property, these risks can be mitigated by carefully researching the opportunity and working with experienced professionals.
Overall, a real estate syndication can be a good investment for those looking to diversify their real estate portfolios and potentially earn high returns. However, for this to happen, every investor should perform their due diligence before committing capital.
If you’re still not sure whether a real estate syndication investment is right for you, consider speaking with an investment advisor first.
REIT vs. real estate syndication: What’s the difference?
Real estate investment trusts (REITs) and real estate syndications are both investment vehicles that offer investors the opportunity to invest in large-scale commercial real estate projects. But there are a few key differences between these two types of investments you should be aware of.
For one, when you invest in an REIT, you’re essentially investing in a company that owns or funds various real estate properties. On the other hand, real estate syndications only involve a single asset at a time. Also, REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividend payments, while there’s no such requirement for real estate syndications. Another major difference between the two is that REITs are usually traded on major exchanges like NYSE, while syndications are only available to accredited investors.
Overall, both REITs and real estate syndications can be viable ways to get started in commercial real estate investing. That said, it’s important to understand the key differences between these two types of investments before making a decision.
Are real estate syndications risky?
Though real estate syndication offers the potential for high returns, it also comes with a certain amount of risk. As a passive investor, you’re relying on the experience and expertise of the syndicator to manage the investment effectively. If the syndicator doesn’t do a good job, you could potentially lose your initial investment.
So before taking the plunge and investing your hard-earned money into a syndicate, perform your due diligence and research the deal carefully.
Is real estate syndication profitable?
Yes, real estate syndication can be a profitable investment strategy. One of the most popular online syndication platforms, Crowdstreet, claims to have produced an 18.8% internal rate of return (IRR) for investors since 2014.
Of course, even with these amazing returns, not all real estate syndication deals work out well. But if you’re careful and choose wisely, real estate syndication can be a great way to earn high returns on your investment.
How do real estate syndicators make money?
Real estate syndicators primarily make money from fees and distributions. Fee income typically come in the form of an acquisition fee, which is around 1% to 3% of the property purchase price.
Distributions can be generated from operations, refinance, or property sales. Of course, the amount of money an investor may receive from a real estate syndication will depend on any property value changes.
Can you lose money with real estate syndication?
Yes, you could lose money with real estate syndication, especially if you’re dealing with a dishonest sponsor (real estate syndicator). Bad market conditions or a bad deal can also lead to losses.
Can an LLC invest in a syndication?
Yes, a limited liability company (LLC) can invest in a real estate syndication. In fact, many real estate syndication investors choose to form LLCs, or limited liability companies, primarily because it can protect your personal assets if your investment property is sued. So if you’re considering investing in a real estate syndication, you might also want to look into how to set up an LLC as a real estate syndication company.
- Real estate syndication is a type of investment where multiple investors pool their money together to purchase a real estate asset.
- Syndicates are typically managed by syndicators (also known as sponsors or general partners) who are responsible for finding investors, raising capital, property management, etc.
- There are three phases of a real estate syndication deal: origination, operation, and liquidation.
- Real estate syndication allows for the purchase of larger and more expensive commercial properties than would be possible for a single investor.
Perform your due diligence and diversify your portfolio
Before committing to a real estate syndication deal, it’s important to do your research. Not all deals are created equal, and some may be riskier than others. So, don’t put all your eggs in one basket.
Diversify your real estate portfolio by exploring other investment options such as REITs. If you need help with investing or managing your money, consider consulting with a professional financial advisor who can point you in the right direction.
View Article Sources
- Real Estate Syndicates and Investment Trusts — California Department of Real Estate
- Real Estate Investment Trusts (REITs) — U.S. Securities and Exchange Commission
- How to Finance Investment Property — SuperMoney
- What is Leverage in Real Estate? — SuperMoney
- What Is A Participation Mortgage? — SuperMoney
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- What are the best options for parking huge amounts of money? Your Investment options. — SuperMoney
- What is a Leveraged Loan? — SuperMoney
- Investing In Real Estate Pros and Cons: 2022 Update — SuperMoney
- What is a Straight Loan in Real Estate? — SuperMoney
- What Is The Role of a Subagent in a Real Estate Transaction? — SuperMoney
- What Does Free and Clear Mean in Real Estate? — SuperMoney
- How Many Jobs Are Available in Real Estate Investment Trusts? — SuperMoney
- Beginner’s Guide to Investing — SuperMoney