Many real estate investors get their feet wet in residential real estate first. Whether those initial investments are fix and flips, standard rental homes, or duplexes, that’s a great start.
We recently met somebody who’s been in the real estate game for ten years and had never even heard of real estate syndications before.
That’s pretty common.
Until recently, SEC regulations did not allow real estate syndication opportunities to be advertised. To be a part of these investment opportunities, you had to be part of an inner circle. You had to know somebody doing a deal to invest in one.
Today, the SEC allows specific opportunities to be publicly advertised, opening the gates for more people to learn and invest.
Maybe you’re new to this term and wonder:
- What is a real estate syndication?
- How does real estate syndication work?
- Why should I invest in a syndication deal?
- What would an example real estate syndication look like?
Let’s start with the basic terms.
What is a real estate syndication?
The term syndication means “pooling of resources.” A real estate syndication is when a group of people pool their funds and expertise together to invest in a real estate asset. Instead of buying smaller properties as individuals, they put their funds together and buy a more significant investment (like an apartment).
Let’s pretend you have $50,000 for investing beyond other savings, retirement, and emergency funds. You could invest in an individual property. However, that would also require time to find a property, negotiate the contracts, do the inspections, run the numbers, get the loan, find the tenants and manage the property.
That’s a lot.
But, likely, you don’t have the time or energy to deal with such an obligation. This is why most assume real estate investing is too complicated and takes too much work. So they stop right there.
Real Estate syndications are an alternative that allows you to still put your money into real estate without having to do all the work of finding properties yourself. Instead, you can invest $50,000 in a Real Estate Syndication as a passive investor.
So let’s say you contribute $50,000, maybe a friend has another $50,000, somebody else puts $100,000 in, and so on. By pooling resources, the group will have enough to buy not just a rental property but something much bigger, like an apartment building.
As a passive investor, you don’t have to do any work managing the property. Instead, a lead syndicator or sponsorship team does the day-to-day management and all the active labor; in return, they get a small share of the profits.
When done right, real estate syndications are a win-win for everybody involved.
How does the syndication deal work?
Well, now that you’re interested in the behind-the-scenes details of syndications. Let’s see how this shakes out.
First, two main groups of people come together to form a real estate syndication.
The general partners and limited partners are the passive investors.
The prior section mentioned a team that will take care of all the day-to-day management in exchange for a small share of profits. That syndication team comprises the general partners (or GPs). They do all the legwork of finding and vetting real property and creating a business plan. Essentially they do all the work you would be doing as an owner or landlord of rental property on a massive scale.
The Limited Partners or LPs are the passive investors, others like you who invest their money in the deal.
Limited Partners have no functional responsibilities in managing the asset. Therefore, a real estate syndication can only work when general and limited partners come together.
The general partner finds a great deal and creates an efficient team to execute the intended business plan.
Limited Partners invest their Capital in the deal, which makes it possible to acquire a property and fund the renovations.
Together, the general and limited partners join an entity usually called an LLC, and that entity holds the underlying asset. Because the LLC is a pass-through entity, you get the tax benefits of direct ownership.
Once the deal closes, the general partners work closely with the property management team to improve the property according to the business plan.
During this time, the limited partner investors receive regular and ongoing cash flow distribution checks, usually monthly or quarterly.
Once all the plan renovations are complete, the general partner sells the property, returns the limited partner’s Capital, and splits the profits.
So, why should you invest in syndication?
Now that you’ve understood real estate syndications let’s talk about what’s in it for you.
There are several reasons that passive investors decide to invest.
Here are a few top reasons:
- You want to invest in real estate but don’t have the time or interest in being a landlord.
- You want to invest in physical assets instead of paper assets like stocks
- You want to invest in something more stable than the stock market.
- You want tax benefits that come from investing in real estate.
- You want to receive regular cash flow distribution checks.
- You want to invest with your retirement funds.
- You want money to make a difference in local communities.
Those are just a few.
Real Estate syndication is a nearly perfect way for busy professionals to invest in large-scale physical real estate assets without the commitment of time and excessive mental energy while positively impacting the community and earning interest and tax benefits.
This opportunity for passive income sounds better and better, right?
An example is real estate syndication
Okay, so you’re interested, but you’re asking yourself if this is real.
Here’s an example of what real estate syndication deals would look like:
Let’s say that Jane and John are working together to find an apartment in Dallas, Texas.
Jane lives in Dallas, and she works with a real estate broker in the area to find a great property that meets her criteria, and after looking at a bunch of properties, they find one listed at $10,000,000.
John takes the lead on underwriting (i.e., analyzing the deal to ensure it would be profitable).
They determined that this property has a ton of potential.
Since Jane and John don’t have enough money to purchase a $10M property, they decided to put together a real estate syndication offer. First, they create the business plan and investment summary for prospective investors and work with a syndication attorney to structure the deal. Then, they start looking for limited passive investors who want to invest money in the deal.
Each passive investor invests a minimum of $50,000 until they have enough to cover the downpayment as well as the cost of renovations.
Once the deal closes, Jane works closely with the property management team to improve the property and complete the renovations on budget and schedule.
During this time, Jane and John send out monthly updates and cash flow distribution checks to their passive investors.
When the renovations are complete, Jane and John determine that it’s an excellent time to sell the property, and it goes for $15 million after three years.
Each passive investor receives their original Capital plus their profits split according to the original deal. In this case, a 70/30 split was agreed upon at the outset of the syndication. The investors receive 70%, and Jane and John receive 30%.
At this point, each passive investor has received monthly cash flow checks during the renovation and their initial capital investment back once the property has sold. Plus their portion of the profits from after the sale.
A pretty sweet deal for little to no work.
In conclusion, now that you know the ins and outs of real estate syndication, including what it is, how it works and how little effort on your part it requires, and how simple it can be for you to begin receiving your first passive income checks. Don’t wait ten years to make a move.
We always recommend you research until you’re comfortable and that you’re not putting all your eggs in one invested basket, so to speak.
Now that you’re armed with this knowledge about real estate syndication, you’re now miles ahead of most other investors. So keep at it.