Real Estate Syndication

Real estate syndication allows you to invest funds into a real estate property without taking full responsibility for the investment. A group of investors combine assets, including capital, expertise, and resources, to acquire an investment property. The profits are allocated based on the agreement once the property is rented, sold, or refinanced.

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What is real estate syndication?

Real estate syndication is when multiple investors share resources to purchase an investment property. Real estate investing can be profitable but often requires sufficient cash flow, capital, and a strong understanding of the real estate market. A real estate syndication allows you to enter into a professional partnership with others to share in the risks and rewards of a real estate investment.

Investors participate in syndication deals to acquire a wide range of properties, including:

• Residential rental property
• Storage facilities
• Shopping or retail property
• Multi-family units

The most common use of syndication is to raise money for commercial real estate projects. Commercial projects tend to be riskier because of the higher capital requirements, making them a good option for real estate syndications.

How does real estate syndication work?

Real estate syndication requires finding a good general partner or team that works well together and pooling funds. Many potential investors work with a sponsor team, which is a company that helps identify other potential investors interested in a syndicated real estate project.

A sponsor team may include other like-minded investors, accredited investors, real estate developers, property managers, real estate lawyers, and licensed realtors.

The best way to find assets suitable for a real estate syndication project is to work with a sponsor. These accredited investors typically have connections to unlisted properties or networks that help them find the best deals. Creating strong investor relations can also help you find future investment opportunities.

It's important to note that real estate syndications aren't the same thing as real estate investment trusts (REITs.)

While both allow investors to generate passive income, a REIT is typically on a much smaller scale. Additionally, REITs may be available to non-accredited investors. The Securities Act and 506(b) laws do allow some non-accredited investors to participate in real estate syndications, but there are limits.

Real Estate Syndication Structure

A real estate syndication team often includes the following members:

• Sponsors – The sponsor is a real estate syndication investor in charge of investment strategy and decision-making. Sponsors are active investors who are responsible for locating the property, completing loan requirements, overseeing necessary renovations and repairs, identifying ways to raise capital, and any necessary property management responsibilities.
• Investors – A passive investor supplies capital toward the real estate property but isn't involved in the day-to-day decision-making. A limited partner investor may be more involved in the real estate investment decisions but maintains less liability and control than the sponsor.
• Managing entity or joint venture partner – The managing entity is the liaison between the partners. A joint venture partner in a real estate syndication maintains a specific role in the partnership, also limiting their liability to that particular position.
  

Who is involved in real estate syndications?

A typical real estate syndication is made up of sponsors and investors. Sponsors are project organizers who typically have previous real estate experience. Investors are individuals who invest capital into a larger project. Investors may be active or passive, depending on their expertise and the agreement.

The sponsor is sometimes referred to as a General Partner (GP), and the investor is known as the Limited Partner (LP.) This refers to the payout split. Most syndication projects are set up as a straight split, which means the GP and LP share in profits via a split, which is a percentage agreed upon before investing.

The most common straight split is 80% to GPs and 20% to LPs, but a 70/30 split may also be possible.

Types of Real Estate Syndications

There are also three types of real estate syndications, which are important to know before investing. The different real estate syndication types refer to how profits are earned and include the following:

Equity Syndications

In an equity syndication, investors share resources and capital to obtain partial ownership of a property. Each partner owns a percentage of equity, which is typically determined before the deal closes. Equity investors and sponsors can earn profits via appreciation once the property is sold or refinanced.

Debt Syndications

Debt syndication is combining resources to lend to other real estate investors. Property owners or land developers rely on these loans to purchase property, especially larger ones like multi-unit rentals. Debt syndication is similar to crowdfunding in that investors pool funds to help another investor acquire a profit-making project.

Hybrid Syndications

Hybrid syndications typically include a mix of equity and debt syndications. Some syndication projects lead to earned equity in a property, whereas others may only pay out a percentage of the borrowed funds.

Pros and Cons of Real Estate Syndications

Entering into a real estate syndication comes with both pros and cons. It's crucial to consider these to decide if real estate syndication deals are right for you.

Pros

Some pros of real estate syndications include:

• Low minimum investment – As a real estate syndication deal includes multiple partners, there is a lower minimum investment required of each investor. This makes it a good investment opportunity for those with limited funds or whose capital is tied up in other projects.
• Portfolio diversification – A real estate syndication investment is an excellent way to diversify your portfolio with other lower-risk, lower-reward potential investments. While a syndication deal can be riskier, it also offers the potential for more reward.
• Low liability – Real estate syndications are typically structured into a limited liability company (LLC), which shields investors from a good degree of risk. This means your other assets and investments aren't at risk.
• Passive investing – One of the biggest pros of a real estate syndication deal is that it's an excellent opportunity for more passive investors. You don't have to have prior real estate experience to profit from a syndication deal.
• Larger projects – As real estate syndications use capital from multiple investors, this may allow for larger-scale projects. You could potentially invest in multiple properties, multi-family units, commercial buildings, or industrial real estate.
• Tax benefits – With real estate syndications offering attractive tax benefits, you could potentially use this investment type to reduce your tax liability.
  

Cons

Some of the considerations of real estate syndications include:

• Illiquidity – Real estate syndication investments are typically illiquid, which means you may not have the option to cash out when you wish.
• High-risk – As with any investment, not all deals will make money. Investors can limit their risk by carefully choosing projects and sponsors.
• Limited control over assets – A syndication offers less control over a specific real estate deal than when compared to acquiring real estate investments on your own.
  

Cash Out Refinance

There is another way to use your home equity to secure funds for investment properties — cash-out refinancing. A cash-out refinance occurs when you replace your current home loan with one that has a higher balance. The difference between these two is given as cash that you can use.

For example, perhaps you have lived in your primary residence for many years, and you only owe $50,000 on the principal. With a cash-out refinance, you can replace that loan with a new one for $100,000, which gives you $50,000 in cash to work with. However, there are usually closing costs and other fees that would decrease that amount.

DSCR Loans

A debt-service coverage ratio loan is the perfect way to finance rental properties. Rather than being approved based on your income, a DSCR loan broker will evaluate the projected income of the rental property in question to determine whether the loan is approved.

Though they will also look at your cash reserves and debt-to-income ratio, a property that has a great rental income history is more likely to be approved for DSCR financing. 
Other funding methods are available for your real estate investment if you are not interested in using a

HELOC on an investment property or your home. You could go with conventional financing through home loans from a bank, credit union, or private lender.

If you know other investors through personal connections, it is possible to secure financing from individuals or real estate investing groups who want a piece of your rental income.

Figuring out how to pay for your next investment property depends on your goals for the property, your current income situation, and the structure of your debt repayment plan. Whether you choose an unsecured personal loan, a home equity loan, or a HELOC, the financing method will impact your long-term financial goals. 

How to Invest in Real Estate Syndication Deals

If a real estate syndication is right for your investment goals, you can initiate the process with the following steps:

Meet the minimum investment amount requirements

Many sponsors require investors to meet specific financial requirements. The minimum investment amount varies, depending on the sponsor and intended project. Crowdfunding offers all the benefits of syndications but with a lower investment and acquisition fee. However, with a lower investment comes a lower reward.

Additionally, the Securities and Exchange Commission (SEC) limits the investment of some real estate syndication projects to accredited investors.

Reviewing securities laws before you buy or sell securities, including in property syndication deals, is always a good idea. Investors who want to earn more through real estate syndications can do so by choosing a larger real estate syndication team.

An individual investor may need a minimum annual income and net worth to qualify for these deals. Typically, the requirements of investing in real estate syndications include at least one of the following:

• A yearly income of at least $200,000 or at least $300,000 for a couple. This income must be within the last two years, and the investor must be on track to earn the same in the following year.
• A net worth of at least one million dollars, not including your primary residence.

Choose the real estate syndication type

Real estate syndications are available through a few different methods. You could use real estate crowdfunding to acquire your first real estate asset. Real estate crowdfunding involves buying into a real estate project rather than acquiring physical property. Depending on your professional connections, you could also create your own real estate syndication deal.

You'll also want to choose the real estate investing project type carefully. While syndication may be ideal for traditional investment opportunities, including residential rentals, it can also be used for acquiring commercial real estate.

The easiest way to invest in a real estate syndication is to work with a sponsor. This passive, hands-off approach allows you to profit from a property without investing too much time or resources.

Carefully choose your real estate investing team

When it comes to any real estate investment, choosing the right team is crucial. You want to select a general partner with a good track record, as your sponsor is directly responsible for choosing the property and negotiating a good deal. Of course, reviewing the contract before investing gives you a clearer idea of how much you can expect to earn.

You should also explore your financing options. Visio Lending offers many affordable, easy financing options that can help you acquire your first real estate investment.

Are syndications good real estate investments for you?

Real estate syndications may be a good investment strategy for some investors. Syndication allows for a high-risk, high-reward investment, which may be a good addition to your real estate portfolio. Syndications can be a suitable option for a more passive investor, too, since you can rely on the expertise of others to make important real estate decisions.

FAQs About Real Estate Syndications

Q: How profitable is a real estate syndication?

A: A real estate syndication can be a profitable investment. You can more accurately predict your profits by viewing the private placement memorandum (PPM.) Of course, the profitability of these investment opportunities depends on your financial goals.

Some real estate syndication investors aim to generate cash flow, whereas others want long-term equity growth. Most real estate syndication deals have a profit share between 80/20 and 70/30.

Q: What are the three phases of real estate syndication?

A: The three phases of real estate syndication include origination, operation, and liquidation. During origination, the sponsors identify a suitable property that meets their investment criteria. The sponsor then performs due diligence, negotiates a fair market value for the property, and provides potential investors with financial reports.

Once the property is acquired, due diligence is complete, and sponsors are done raising capital, the origination phase is complete.

Operation is the second phase, which includes any necessary improvements to the investment to make it profitable. This may involve building commercial properties on a vacant lot or renovating a residential property. These necessary land improvements were a part of the initial business plan, so most investors are already aware of where their funds are going.

During liquidation, the property is sold. Profits earned are then divided between investors based on the split agreement. Sometimes, the liquidation phase will end when the property is refinanced, and limited partners are given the option to exit the investment.

Q: What is the average annual return of a real estate syndication?

A: According to Forbes, the average annual return of real estate syndications is between 7% and 10% per year. The average expected annual return of real estate syndication projects varies, depending on your member role, initial investment, and success of the rental property. Of course, your returns also depend on profit-sharing agreements.

Real estate syndications also pay out in a few different ways. Sponsors may earn a property management fee or acquisition fee when they're able to acquire an ideal commercial real estate syndication project. The sponsor also earns a flat percentage of annualized returns that exceed a set percentage outlined in the financial reports.

Other investors or limited partners earn via rental income, property appreciation, or profits once the real estate syndicate project is sold. Many real estate syndications pay both rental income and equity.

Q: Are real estate syndications worth it?

A: Real estate syndications can be worth it when you want to invest in real estate but don't have sufficient capital or experience. Syndication is also a good option for real estate investing when you want to be more hands-off. It offers the potential to earn rental income, predictable cash flow, and build equity in a property.

Your success with real estate syndications will largely depend on your team, especially the sponsor. Of course, as with any investment, it's always important to do your own due diligence.

Sophisticated investors carefully review the LLC operating agreement or LP partnership agreement, which are the documents that allow you to learn more about your rights in property ownership.

Exploring your real estate investment lending options is also an essential part of the process. Reviewing your financing options can help you decide if syndication is your best option for investing in real estate.

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