How Do You Make Money In Real Estate Syndication?
Real estate syndication is a creative way for investors to pool their financial and intellectual resources. They use the money and skills to invest in bigger projects they could not invest in or manage on their own.
Syndication has been around for a decade now. But the practice has gained popularity with the birth of crowdfunding. The advent of REG A+ has opened the syndication idea to a bigger audience. Its possibilities are immeasurable.
To take part in real estate syndication, you take up one role, as a syndicator or an investor.
A syndicator hunts for potential investment deals. Raises the money to finance the deal, and manages the investment property profitably for the investors to reap attractive returns.
What about the investors? They are the limited partners who take the hands-off role and contribute the required capital to buy the investment property.
Every syndication deal is structured differently. Your returns depend on the business plan, the general partner, the projected profits, and the risk profile of the investment.
A syndicator or an investor, gives you two ways to earn from a real estate syndication. Let’s learn how each of the parties makes money from syndication.
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Ways a Real Estate Syndicator Makes Money
Real estate syndication is about making it big using other people’s capital. As a sponsor, ensure everyone in the syndication walks away happy. How do you achieve this? Do it right and generate maximum returns while providing investors with above-market returns.
To benefit fully, find a good deal and set up a simple capital structure that rewards you for putting the deal together. Be a generous sponsor and leave enough profits for your capital investors. By letting your investors come first, you will get referrals, new projects, and ongoing success.
Here is how you will make money:
#1: Acquisition Fee
This is a one-time charge paid on the successful acquisition of a new property. It covers sourcing for properties, screening them, and managing the entire process of closing the deal.
Your fees can be from 1% to 5% of the purchase price, depending on the size, scope, and earning potential of the property.
#2: Asset Management Fee
This a continuous annual charge paid for overseeing the operations of the property. It is a percentage of the collected monthly income or a standard rate per unit.
The percentage rate is from 2% to 3%, while the standard rate per unit is $200 to $300 annually. They pay you to ensure the investment project performs excellently, as per the business strategy.
#3: Equity Ownership in The Deal
As a syndicator, you have a share in the property’s ownership. The end goal of any investment is to sell it at an appreciated value.
You then split the profits realized as per the ownership structure. Assuming your structure is 70/30. You walk away with 30% of the profits and 70% goes to the investors.
#4: Refinance Fee
Depending on the business structure, a property may require refinancing or not. If it does, the investors pay you for the effort you input to refinance the commercial property.
#5: Loan Guarantor Fee
As much as commercial mortgage loans are asset-based, they require a guarantor to sign off the loan. You might use a person with a high net worth to sign off in order to get favorable financing terms or sign it yourself.
The guarantor fee you receive depends on the type of loan. Debt can either be recourse or nonrecourse.
A recourse debt allows the lender to collect what is owed for the debt even after taking the loan security.
With a non-recourse financial obligation, the loan provider pursues nothing other than the loan security. The loan guarantor fee is outrageous for a recourse loan than a nonrecourse debt.
Ways The Investor/ Limited Partner Makes Money
As an investor, don’t do click investing, just because a syndicator shows they offer a high return on investment. Vet the sponsor. Comprehend their character and their business model to ensure they are worth your investment.
Research extensively and partner with the right company with a proven track record. Here is how you will make money from real estate syndication:
#1: Preferred Returns
These are the cash dividends you receive for the period of the syndication. The amount is based on the income collected from the investment property. It ranges from 6% to 9%. As a limited partner, you are paid before the syndicator gets their share.
You receive preferred returns on a monthly or quarterly basis. However, this is not a guarantee. When the project is not performing, the return can accrue. You are paid later on or when the syndicator sells the property.
#2: Profit Splits
When a property under syndication is sold, the syndication realizes profits. The syndicator splits these profits as per the ownership structure of the syndication. If the structure is 70/30, as the investors you receive 70% of the profits. The syndicator takes 30%. The 70% profits are shared among the investors. The share you receive is based on what you own.
Let us break it down in an example.
As an investor, you join a real estate syndication and invest $100,000. The preferred rate of return is 8%. In a month you will receive (8%/12) * 100,000. This is equal to $667 per month. If the syndication lasts for 5 years, you will have $40,000 passive income from the project.
After the elapse of the syndication period, the property is sold at $5 million. With a 70/30 ownership structure, you will have $3.5 million to split amongst yourself as investors as per your percentage of ownership.
A real estate syndication makes the impossible possible in the real estate industry. Whichever role you take in the syndication you stand to make money from the project.
A sponsor equipped with skills but with capital scarcity gets access to funds. An investor with capital without investing skills gets to invest and earn passively.
Depending on the syndication structure, a general partner or a limited partner, you enjoy a share of the profits. Join or start a real estate syndication to deal on a much larger scale.
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