Guide to Real Estate Syndication
What is syndication in real estate? Simply put, real estate syndication is an efficient way for several small investors to come together and afford a large-scale property with a hefty price tag. Syndication lets investors work on larger, potentially more profitable projects than they could have afforded on their own. By working together as a syndicate, they can combine financial resources and aim for much higher results.
What is Real Estate Syndication?
Real estate syndication is essentially just a partnership. It’s a financial deal between multiple investors who pool funds to purchase a property that would otherwise be financially unattainable. In addition to investing as a group, syndicates typically also have a sponsor, who might manage the properties that are purchased.
The more money a property makes, the higher the profit margin will be for the investors. Working together also allows for collective use of other resources aside from monetary input.
Real Estate Syndication Roles
There are two primary roles in real estate syndicate investing. Individuals in these roles work together to create a unified group that can effectively manage all the operations of the project they’ve invested in. Each role has distinct duties and responsibilities that must be taken care of if the project is to be successful.
Syndicator / Sponsor
The syndicator or sponsor has the task of being the most hands-on with the property. This is the person who will acquire the property and likely oversee or make any of the necessary renovations that might be needed. It’s often also up to the sponsor to manage the property so it can operate efficiently and eventually begin to turn a profit or can be sold for a profit.
There are two types of investors in a real estate syndication.
Limited partners are primarily in the project for the return they’ll receive on their initial investment. They pay the sponsor a fee to manage the day-to-day operations of the property.
A joint venture partner is also known as an equity partner. As third-party investors, they maintain transparency between the other investors and the sponsor. They may provide a large portion of the capital to invest and also provide the sponsor with assistance when it comes to finances.
How Does Real Estate Syndication Work?
The syndicator takes on most of the actual responsibilities of maintaining a project on a day-to-day basis. He or she might locate a property and then take the necessary steps to make sure all of the goals of the syndicate are achieved. As the profits begin to roll in, investors will receive their percentage of the profits.
Real Estate Syndication Structure
It's important to understand how a real estate syndicate is structured. In many cases, an LLC or Limited Liability Corporation, is the best option. The syndicate agreement will detail how the group will communicate, what voting rights each person has, and how the profits will be distributed among the investors. The structure of commercial real estate syndication is essential in protecting its members.
Profiting from Real Estate Syndication
The amount an investor receives in profits will normally depend on what role they play. Since syndicators have more hands-on responsibilities in dealing with the property, they might receive a higher percentage of the profits.
For example, a syndicator could receive as much as 25% to 30% of the profits, while the investors share the remaining 70% to 75%. Actual percentages will vary from group to group, but it’s typical and common for the syndicator to get the highest percentage.
An acquisition fee can be paid to the syndicator for finding and acquiring the property. In most cases, it’s approximately 1% to 5% of the initial value of the transaction. The amount that’s agreed upon should be in line with the syndicator’s skills and abilities. It’s important that they be compensated fairly.
Asset Management Fees
There’s always the option of duties being taken over by a property management company, or the syndicator can choose to perform those duties themselves. If they decide to become the property manager, they’ll receive the fees that would have otherwise been used to pay a professional property management company.
Cash Flow & Appreciation
The way commercial real estate syndications are set up will determine how a property’s cash flow and appreciation are managed.
If the property is to be flipped and sold, any appreciation would be divided up among the syndicator and the investors (after, of course, recouping all original investments), according to their written agreement. If the syndicator is going to maintain the property and manage it, the investors will continue to split any future profits, compensating the syndicator for his or her time and effort.
Real Estate Syndication Example
A good, simplified example of how a real estate syndicate might work is: An investor (real estate syndicator) finds a complex that’s $20m. Financing 80% means you’d need to come up with $4m to put down. Let’s say 50 people pool $80,000 each to make up that initial down payment. As a result, each of the investors will have an equal share in the property and get equal shares from the profit that’s turned annually. If the syndicator manages the property, they would be compensated first, before any of the other investors are paid out.
What does syndication mean in real estate? Essentially, a syndication is really just a fancy, formal name for a partnership. By choosing to participate in real estate syndication investments, you’ll be able to get in on much, much larger real estate deals than you would be able to on your own.
A successful syndication deal actually increases your profit potential over time. The increase in profit can be much greater because you’re able to merge your resources with others who are also looking to combine financial efforts to increase their ROI.
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