Last Updated: February 2024
Real estate syndication is a fancy title for describing the process of using investor pooled capital to purchase and reposition real estate. While the structure of each syndicate can vary greatly, syndications usually follow a repeatable process: origination, operation, and liquidation. In a syndication investment system, there are always two main parties: Sponsor(s) and Investor(s). Sponsors act as the overall manager for the deal, while Investors simply provide the capital.
What is Real Estate Syndication Investing?
Real Estate Syndication Definition
Real estate syndication is an investment strategy where a group of investors pool their money together to invest and profit in real estate projects. The syndicate is typically organized and managed by a sponsor, who can also be called the syndicator, asset manager, general partner (GP), or operator. The investors, who can also be called a Limited Partner, provide the capital needed for the project. Real estate syndication investing can provide investors with access to larger, more complex real estate projects that would be difficult to individually invest in. Additionally, syndication can offer investors a passive investment opportunity, allowing them to benefit from rental property investing without the need for active management or property ownership responsibilities.
How Does a Real Estate Syndicate Work?
A real estate syndicate generally works by following the three key stages of “originate, operate, and liquidate“. In the originate phase, the syndicate sponsor identifies and sources potential investment opportunities, conducts due diligence, and structures the syndicate. Once the property is acquired, the syndicate enters the operate phase, where the sponsor manages the property, handles day-to-day operations, and works towards achieving the investment objectives. Finally, in the liquidate phase, the sponsor executes the exit strategy, which may involve selling the property or utilizing other means to monetize the investment and distribute profits to the syndicate investors. Throughout the process, the syndicate sponsor communicates with investors, provides updates, and ensures transparency in operations and decision-making.
Two Most Common Syndicate Structures
Straight Split – As the name suggests, straight splits are structured to split all of the returns (cash flow and profits) to investors with consistent percentage. A common split for this is 70/30, which means that no matter the amount of returns the investment generates, 70% is distributed to passive investors and 30% is distributed to the syndicators.
Waterfall – As the name implies, waterfall structures are designed to act like an actual waterfall, where investment cash flow has to hit a certain threshold, after which the revenue gets distributed between the sponsor and investors. In this type of structure, the investors get the first X% of the returns, with sponsors only receiving distributions if the returns are above the X% threshold.
Important Real Estate Syndication Terms
Sponsor – A sponsor refers to the individual or entity that initiates and manages the investment opportunity. The sponsor typically identifies and acquires the real estate asset, structures the syndicate, raises capital from investors, and oversees the entire investment process, including property management and eventual exit strategies.
Private Placement Memorandum (PPM) – A PPM (Private Placement Memorandum) is a legal document provided to potential investors that outlines the details and risks of the investment opportunity. The PPM contains information about the investment structure, property financial projections, terms and conditions, and legal disclosures, providing investors with the necessary information to make informed investment decisions.
How to Invest in Real Estate Syndications?
Investing in real estate syndications offers individuals an opportunity to participate in larger-scale real estate projects and potentially achieve attractive returns. Before handing over your hard earned capital, there are several considerations such as evaluating sponsors and deals, understanding investment terms, and the potential benefits and risks. Here are the steps to invest in real estate syndications.
1. Define Your Investment Goals
The first step in investing in real estate syndications is to define your investment goals. Determine how much capital you have to invest, expected returns, and what level of risk you are comfortable with. This will help you align your investment strategy with syndicate opportunities that match your criteria.
2. Find a Reputable Syndication Sponsor
Research and identify a reputable syndication sponsor that has a proven track record of success in the industry. Look for sponsors that have experience in the type of real estate project you are interested in. Research their past performance, track record, and reputation within the industry. Review their investment strategies, alignment of interests with investors, and their ability to execute successful projects.
3. Evaluate the Investment Opportunity
If you’ve found a reputable sponsor, then you can proceed to their offerings. If you are unable to find a sponsor, you can always seek out the deals directly. Online listing platforms, investment seminars, networking events, and recommendations from experienced investors can be a great way to source good deals.
4. Perform Due Diligence
Once you’ve found a deal you like, you can start the due diligence process. This can include evaluating the quality of the sponsor’s track record, management team, business plan, exit strategies, contingency plans, property, location, rental demand, downside risks, and the potential for financial return. If the property already exists, review financial statements such as rent rolls, income statements, balance sheets, leases, and property inspections.
5. Review the Legal Documentation
Review the legal documentation associated with the investment opportunity. The sponsor should provide a private placement memorandum (PPM). The PPM outlining the investment structure, risks, and potential returns. Review the operating agreement and subscription agreement to ensure that you understand the terms of the investment, financial projections, fees, distributions, and legal obligations. Seek professional advice if needed.
6. Determine Investment Amount
Determine the amount you are willing to invest in the syndication opportunity. Consider your personal financial situation, risk tolerance, and diversification strategies. Ensure you have sufficient funds available for the investment, including potential capital calls or other ongoing obligations.
7. Commit to the Investment
Once you have completed your due diligence and feel confident in the syndication opportunity, commit to the investment by signing the necessary documents (called a Subscription Agreement) and fulfilling the subscription process as outlined in the PPM or instructions provided by the syndicate sponsor. Work with a reputable attorney or financial advisor to ensure that the transaction is legally binding and properly structured.
8. Monitor Investment Performance
Regularly monitor the performance of your investment. Stay informed about updates and progress from the syndicate sponsor. Review financial reports, distributions, and property updates. Stay engaged and maintain open communication with the sponsor and other investors.
9. Collect Returns
As the owner of the syndication investment, you will start collecting returns from the project. Make sure to keep accurate records of returns and expenses, and stay in communication with the syndication sponsor to ensure that the investment remains profitable.
10. Exit Strategy
Understand the exit strategy of the syndicate investment and prepare for when the event comes. Be aware of the projected investment duration and the potential methods of exit, such as property sale, refinancing, or distribution of profits. Evaluate your options and make informed decisions based on market conditions and your investment goals. This can include tax planning as well as use of proceeds planning.
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Pros & Cons of Investing in Real Estate Syndicates
While there are several benefits to investing in real estate syndications, there are also some potential drawbacks that investors should be aware of. We take a look at the pros and cons of both below.
Pros of Syndication
- Access to Larger Projects – One of the primary advantages of investing in real estate syndications is the ability to access larger, more complex real estate projects that may be difficult to invest in individually. By pooling resources with other investors, syndication participants can invest in larger projects with potentially higher returns.
- Passive Investment – Real estate syndication investing can offer a passive investment opportunity, allowing investors to benefit from real estate investing without the need for active management or property ownership responsibilities like replacing an apartment toilet.
- Diversification – Investing in real estate syndications can provide diversification to a portfolio, as it offers exposure to real estate without the need to manage properties directly. This can help to hedge against market volatility and provide a stable, consistent source of income.
Cons of Syndication
- Limited Control – One of the main drawbacks of investing in real estate syndications is the limited control that investors have over the project. While the syndication sponsor handles project management, investors may not have a say in certain aspects of the project, such as property management or tenant selection.
- Potential for Risk – Real estate syndication investing can carry a higher level of risk compared to other types of real estate investment strategies such as note investing. Investors should conduct thorough due diligence on the syndication sponsor and investment opportunity to evaluate the potential for risk and return.
- Illiquidity – Real estate syndication investments can be illiquid, meaning that investors may not be able to easily sell their ownership stake in the project. This can limit the investor’s ability to quickly access their capital or react to changes in the market.
Real Estate Syndication FAQ
How Long Is My Capital Committed in a Real Estate Syndicate?
The commitment period for capital in a real estate syndicate can vary widely, typically ranging from 5 to 10 years, depending on the project’s nature and the exit strategy. Investors should be prepared for their capital to be illiquid during this period.
Are There Any Tax Benefits to Investing in a Real Estate Syndicate?
Real estate syndicates often offer tax benefits, including deductions for depreciation and mortgage interest, which can offset income and reduce tax liabilities. Additionally, long-term capital gains and the potential for 1031 exchanges offer further tax advantages.
How Is a Real Estate Syndicate Different from a REIT?
A real estate syndicate differs from a Real Estate Investment Trust (REIT) in that syndicates typically involve direct investment in a specific project or series of projects, offering potentially higher returns and more direct control, whereas REITs offer diversified exposure to real estate markets through publicly traded real estate stocks or private equity shares, providing liquidity but with less direct influence over investment choices.
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