Real Estate Syndication: Complete Guide
“Coming together is a beginning. Keeping together is progress. Working together is a success.” This famous quote by Henry Ford describes real estate syndication in a nutshell.
Most real estate business starts small. As an investor, your desire is to see your business grow at a fast rate. When working individually, it can take years to trade big in real estate investing.
Do you have to wait for that long to accelerate the growth curve of your real estate business? Definitely not. The solution is getting into a real estate syndicate.
With a real estate syndicate, you can invest without doing the job yourself. Interesting, right? Let us dig deep into real estate syndication.
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What is real estate syndication?
This is a real estate investing strategy where investors unite to fund a big real estate project. The investors combine their expertise and resources to buy a property. They also manage the property if they rent it out.
Through a real estate syndicate, investors increase their purchasing power. They achieve what is not possible on their own. Also, they get a chance to invest on a much larger scale. You can get into a syndicate for any of the following reasons:
- Shortage of capital to buy a given real estate property.
- You have the money but you have no time and experience in managing properties.
- The desire to build your real estate wealth.
How does real estate syndication work?
In real estate syndication, there are two roles. The syndicator( sponsor) and the investor. The role you take up depends on your skills, experience, abilities, and the amount of capital you have.
With the expertise of accounting and reporting in real estate, you can be a syndicator. In most cases, experienced real estate companies are the sponsors. A syndicator plays the role of:
- Hunting for a suitable property and acquiring it through a contract
- Securing enough financing for the property
- Handling routine property management
- Updating the investors about the property
You are fit for an investor role if you have adequate capital. Better yet, you want to take part in real estate investing as a passive partner. An investor is in charge of providing cash investment. This is usually 80%-95% of the total equity capital required.
Sometimes in a real estate syndication, there is a third party involved. This is a joint venture partner. They ensure there is communication and lucidity between the syndicator and the investors. From time to time, they help in reporting.
How do you profit from real estate syndication?
In real estate syndication, your returns are determined by your role. The sponsor and the investors benefit differently.
- Acquisition fee
This is the amount paid to the syndicator for supervising the property transaction. The fee is approximated to be 1%-5% of the transaction value.
- Property management fee
If the syndicate has a rental property, the syndicator can be hired as the property manager. The sponsor is responsible for scouting for tenants, collecting rent, and general maintenance. In return, the syndicator is paid a fee of 10%.
- Rental income and property appreciation
The profit is determined by the syndicate exit strategy. If the property is to be sold, the syndicator gets a given percentage of profits.
Regardless of whether he contributed some capital or not. But if the investment is maintained as a rental property he will get a portion of the monthly cash flows.
In some syndicates, the profits are split equally. For others, the passive investors get 70% while the sponsor gets 30%. Investors are known to earn more. This is due to the huge capital contribution.
Depending on the agreement, investors usually receive 5% to 10% of their cash investment annually. Also, their returns are dependent on the exit strategy.
For a sold property, they receive a bigger share of the profits. For a rental property, they also get a good percentage of the monthly income. Depending on the syndicate agreement, they can receive their income per month or per quarter.
How is real estate syndication structured?
When establishing real estate syndication, you must first agree on your business structure. This is crucial for tax purposes. Syndications can take any of these structures:
- A corporation
This is a legal entity with the rights and responsibilities of an individual as per the law. The syndicate becomes a separate legal person from the owners.
- Limited partnership
This is formed by two or more limited partners. They are only accountable up for the amount of cash they invested. They don’t receive dividends. They gain from the direct rental income generated by the property.
- Limited liability Company (LLC)
An LLC is an amalgamation of a corporation and a limited partnership. The owners are protected from the liabilities of the company.
Another crucial component of real estate syndication is agreement. Seek the guidance of an experienced real estate attorney to make an agreement. It is wise to get one who has expertise is in syndications.
The agreement should protect all members of the syndication. An agreement should stipulate voting rights, profit distribution, and communication practices.
How do you start real estate syndication?
It is essential to know where to start from, for your real estate syndication to be a success.
The real estate syndication market has a number of rules and regulations. The laws cushion investors and ensure the market remains stable. Find out and learn about them to avoid future catastrophes.
#2: Decide on a real estate niche
Choose an investment property you want to deal with. It can be residential or commercial. There are a variety of options in real estate. Target a specific real estate market. You should have experience in the option you pick out
#3: Pick an investment strategy
Real estate investing has a pool of approaches. You can choose house flipping, wholesaling, or even renting properties. Whichever you go for, ensure you have all the information about it. Make a business plan in line with your investing program.
#4: Find investors
Make a list of potential investors. This can be family members, business colleagues, property owners, and other professionals like accountants.
You can also get prospective investors from online crowdfunding platforms. Select those that want to be part of your vision and are ready to pump capital into your projects.
#5: Look for appropriate properties
Hunt for properties that fit your investment strategy. Keep your future investors informed and updated on your search for suitable properties. Involve them in the final selection of your property choice. Secure the property by putting it under contract.
#6: Manage the property
Depending on your syndication agreement, oversee the property to generate the desired incomes. Once profits are received disburse as per the agreement.
You can pay out the investors annually, quarterly, or monthly. Prepare and keep the financial records and reports relating to your property transactions. This is for transparency and tax purposes.
How do you join a real estate syndication?
Browse through crowdfunding and syndication websites to get information about real estate syndications. You also need a real estate network to learn about syndications. Before being part of any syndication consider the following factors:
Real estate syndications usually have a list of attributes for an income investor to meet. Check if you have the qualities they are looking for.
- Track record of the sponsor
Conduct thorough research on the syndicator. Check on reviews from those who have worked with them before. You need assurance that you are making the right investment.
- Terms and conditions
Before signing an agreement with the sponsor, understand what it stipulates. Do the terms and conditions meet your investment goals? Examine the preferred returns you will gain and your voting rights. Understand the exit strategy and how the sponsor will benefit.
- Join the syndication
After analysis, if a real estate syndication meets all your investment desires go for it.
What are the advantages and disadvantages of real estate syndication?
There are pros and cons for both the sponsor and the investor.
Pros of real estate syndication
- As a sponsor you get an opportunity to deal big in the real estate industry. This is due to access to pooled financial resources you cant get on your own.
- There is reduced risk if the business structure has limited liability.
- You earn income from the acquisition and management of the property
- As an investor you enjoy passive income from preferred returns.
- You don’t need expertise in real estate and property management to invest.
- You enjoy limited liability
- It is possible to provide capital for more than one investment.
Cons of real estate syndication
- Setting up real estate syndication is expensive.
- It is tedious to pool together the required cash investment.
- An investor has limited control over the property under investment.
With real estate syndication, you transact larger and better. You have a chance of faster growth. A sponsor or an investor you enjoy rental income and profits from property appreciation. Choose your role carefully and join real estate syndication.
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