A real estate syndication is essentially referring to the partnership between an expert, or team of experts, and a group of investors who collaborate to acquire larger assets that otherwise could not be attained on one’s own.
The first is the sponsor(s) (the experts) who source the deal. In a real estate syndication, the sponsors are responsible for all the heavy lifting such as building relationships with brokers, underwriting and negotiating deals, picking the right property manager, paperwork, pooling resources for purchase, and so on.
The investors are simply responsible for bringing money to the deal (equity). Generally, the investors fund 80-95 percent of the equity needed for the deal.
One of the cool things about real estate syndication is that both the sponsor(s) and the real estate investors are able to make significant profits. Here is a breakdown:
- An acquisition fee at time of closing (2-3 percent of the purchase price)
- A yearly management fee
- A percentage of the rental income and equity from appreciation
- Majority share in rental income. Many sponsors will also offer a preferred return to the investors in the range of 5-10 percent.
- Majority share in equity from appreciation at time of sale (65-75 percent)
The hold period for a typical investment is 5-10 years. During this period, investors can take advantage of all the benefits of owning real estate. The investor experiences strong cashflow, most of which is tax- free due to the depreciation expenses most often being higher than the income. At the time of sale, investors have the option, via the sponsor, to roll all the capital gains into the next project tax-free! This is called a 1031 exchange and it is an incredible way to build wealth without the burden of paying taxes on that sum. Your liability as an investor is limited to the capital you put into the deal, thereby removing many of the fears that often coincide with smaller real estate ownership.
As a passive investor or limited partner in a syndication deal, you also have the benefit of leveraging both debt and other people’s money. In pooling your money alongside others, you experience the benefits of economies of scale, larger tax incentives, lower capital risk, oftentimes better financing, and third-party property management. A hundred thousand dollars won’t get you very far on your own, but leveraged alongside 50 other investors and money from the bank (also called debt) can pave the way to some really sweet deals!
Is real estate syndication right for you?
In any investment, there must be an allocation of time, capital, or both. The syndication vehicle can make a great choice for busy professionals, high-income earners, or retirees looking for a passive approach to real estate investing. This group of folks typically has the capital to invest but not willing or not motivated to spend the time sourcing and managing deals on their own. Most investments into private real estate syndications start at $50,000-$100,000.
For those who are in a season where they have more time than capital to allocate, real estate syndication is a great vehicle to accelerate the wealth-building process.
Unlike purchasing a stock, we can leverage our investment dollars 3-to-1 when purchasing real estate (in most cases). For example, on a million-dollar real estate purchase, the bank will allow us to conservatively borrow 70 percent of the purchase price. That means we can buy that property for only $300,000.
Imagine your returns if you raised the other needed $300,000 from family and friends… that would be considered an infinite return! This active approach to real estate syndication, however, will take a significant amount of energy and time and I warn young investors all the time of trying to approach this business as a “side hustle.”
With less inventory of affordable homes on the market, now is a great time to start investing in rental real estate in America.