Investing money in real estate can be as straightforward or as difficult as you make it. And while most people front up the costs of real estate themselves, an alternative approach is joining a real estate syndication in order to maximize your potential returns.
This has particular interest to me as a real estate syndication can get you exposure to more markets (diversification) without higher amounts of capital.
To help you understand what real estate syndication is and how you can profit from it, we explain:
- What a real estate syndication is
- How real estate syndications are structured
- The benefits and drawbacks of real estate syndications
- How you can invest in a syndication
- How you can profit from a syndication
- A ten-year real estate syndication example
Let’s begin with a definition of a real estate syndication and the difference between the roles of a syndicator and a passive investor.
What is Real Estate Syndication?
Real estate syndication is a partnership between multiple investors. Individuals bring their skills, experiences, and capital together to purchase and manage property that they may not have been able to afford by investing on their own.
Syndications purchase and manage a broad range of properties, including apartments, mobile home parks, land, self-storage units, and other types of high-value real estate. Each syndication is different, and the members usually vote on which types of property to pursue.
Typically in real estate syndication, there are two distinct roles: syndicator and investor. We take a look at each of these roles in detail below.
Syndicator
Sometimes referred to as general partners, syndicators are tasked with structuring and operating the syndication. There is often more than one syndicator responsible for each group, and their role incorporates the following tasks:
- Composing and underwriting the terms of the syndication
- Arranging the financing of the real estate and negotiating on behalf of the other members
- Establishing a business plan, terms of engagement, and completing due diligence on the properties in question
- Looking for and negotiating with investors to finance the deals the syndication completes
- Asset and general wealth management within the syndication
The role of a syndicator is much more hands-on than that of a general investor and requires a higher level of expertise and knowledge of the real estate market. Ultimately, the syndicator is responsible for putting together the deals and attracting investors to buy into the investment opportunity.
Investor
While the syndicator is very much an active role, an investor can be passive. Investors within a syndication are required to front up the capital required to acquire real estate, and they receive shares within the properties that the syndication purchases.
Usually, investors then receive monthly or quarterly passive income distributions from the asset that they have bought into. Then, if and when the property is sold, the investors will receive a return upon their investment, providing it hasn’t been sold at a loss.
How Are Real Estate Syndications Structured?
An important thing to recognize is the fact that real estate syndications can be structured in different ways. While this can be a little confusing, providing you fully understand the structure from the start, you shouldn’t encounter any issues. Below are two of the most common ways in which real estate syndications are put together:
Straight Split
The easiest real estate syndication structure to understand is what is known as a straight split. Syndications structured this way return profits from the assets according to the ownership percentage of investors and syndicators.
For instance, it’s not unusual for syndications to offer a straight split of 80/20 between investors and syndicators, respectively. To quantify this, from a $250,000 investment, $50,000 would go to the syndicator, while the remaining $200,000 would go to the passive investors.
Waterfall
A waterfall structure provides an uneven payment distribution and is dependent on investment hurdles being met. The table below provides an example of how a waterfall structured real estate syndication might work
Return Hurdles | Investors | Syndicators |
0-6% | 6% | 0% |
5-15% | 80% | 20% |
15% | 50% | 50% |
This structure is common and usually starts with a preferred return to investors before the syndicators are able to profit from the arrangement. And as you can see from the example above, the partners will only financially benefit from the arrangement if they see a return of more than 6% on the overall investment.
It’s up to you to look for a real estate syndication that is structured in a way that works for you. Make sure you fully understand the terms of the syndication before investing, so you understand how much you stand to make and when.
What Are the Benefits of Real Estate Syndication?
Now that you have an idea of how real estate syndication works, we want to explain the various benefits of investing in one. While every syndication is slightly different, the following benefits are enjoyed by the majority of successful investors:
- Passive income: After fronting up the required capital to invest in the syndication, you will earn passive income from your investment on a monthly or quarterly basis.
- It’s not labor-intensive: Due to the role of the syndicator, investors can buy into syndications with very little hassle. Investing in a syndication is much less stressful than buying property yourself and having to deal with tenants and landlords.
- There are some tax benefits: Tax benefits are attributed to investors in syndications through K-1 tax filings (Partner’s Share of Income).
- Your investment is likely to appreciate: Real estate typically appreciates in value over time, so buying into a syndication is a good way to make money in the long run.
- Income diversification: Providing you have the funds available, you can spread your investment across multiple syndications.
Like any investment, it’s important to realize that buying into a real estate syndication could see you gain or lose money; there are no guarantees. But more often than not, investing in a real estate syndication is an excellent way to draw down equity and to see a substantial return on your investment once the property has been sold.
And the Potential Drawbacks?
As far as investment opportunities go, investing in a real estate syndication is enticing. But that being said, no investment is risk-free or without potential drawbacks. The obvious downside to property syndications is that you can lose money if the group makes a bad investment.
This is why it’s so important to select your syndication carefully and to conduct some research into the market. We explain how to choose a trusted real estate syndication in the following section.
How Can I Invest in a Real Estate Syndication [As an Investor]?
When you’re ready to invest in a real estate syndication, you need to select a company with whom to trust your money. But unfortunately, the process of investing in a real estate syndication is not overly straightforward, and it requires some research. Here are some ways to look for a company to trust with your investment:
- Increase your network: One of the best ways to find a real estate syndication is to increase your networks on Facebook and LinkedIn and to join real estate groups. You can connect directly with syndicators on such platforms and enquire about the terms of the syndication.
- Search public records: Although a little more time-consuming, you could turn your attention to public records to find out who owns properties similar to those that you would like to invest in. If a property is owned by a syndication, it will typically be owned by a company with an obscure LLC name that you can use to begin your research.
- Attend real estate conferences: Add some real estate conferences to your diary and network with like-minded investors face to face. When you make new connections, you will find that opportunities for investing in syndications are more likely to present themselves.
While finding a real estate syndication to invest in isn’t the easiest thing in the world, doing so will be well worth the effort, as the potential returns are particularly attractive.
What Returns Can I Expect from Investing in a Real Estate Syndication [As an Investor]?
Although every real estate syndication is different, Disrupt Equity states that you can expect the following returns on your investment:
- Average annualized return – 15%
- Internal rate of return – 10-15%
- Cash on cash – 7-12%
- Total return – 100% in 5-7 years
- Preferred returns – 6-10%
The return that you can expect from your investment will depend on things like asset class, the structure of the deal, and the performance of the market. You will also have to consider the structure of the syndication and how investors are paid.
Three Ways You Can Profit from Real Estate Syndication [As a Syndicator]
Real estate syndications are potentially profitable for both investors and syndicators alike. Here are three ways that you can profit from real estate syndication as a syndicator:
1 – Acquisition Fees
When you find a property for your investors to buy, you can command an acquisition fee for the service. You will be responsible for due diligence and structuring the deal, but you will then be able to pass on the charges to the investors. In most cases, acquisition fees range from 1-5% or are presented to investors as a flat fee, such as $20,000 upfront.
Getting the acquisition fee right is important as if your prices are too high, your investors are likely to look elsewhere for a syndication. But equally, don’t price yourself too cheaply, as you need to make sure your time is compensated for your work.
2 – Asset Management Fees
Next up are asset management fees, which syndicators can apply to the gross revenue accrued from the deal. These are typically no more than 2%, but they are paid to you as the syndicator for managing the project and setting the deal in motion.
But you will have to earn your asset management fees, as you are required to manage the syndicate, communicate regularly with the investors, and ensure they receive their compensation regularly, whether it’s monthly, quarterly, or annually.
3 – Equity Participation
The third way you can profit from real estate syndication is through equity participation in the project. A syndicator can earn anywhere between 5% and 50% from equity participation, and your earnings will depend on the size of the deal and your experience within the market.
If the deal is structured as a waterfall, you will have to pay out the passive investors before remunerating yourself, as introduced in one of the sections above.
Real Estate Syndication: A Ten-Year Investment Example
Now that we’ve run through all of the aspects of a real estate syndication and how it all works, we want to leave you with an example so you are clear about how it works in practice.
Let’s assume that you join together with a group of six investors to purchase a mobile home park. You are the person with experience in real estate, so you take on the role of syndicator and form a limited partnership to legalize the syndication.
You agree that the investors will receive 15% each, and you will receive 5% as the syndicator from your smaller capital contribution and 5% to manage the property. You also negotiate a 5% acquisition fee to be paid separately.
Once the property has been purchased, you will earn $50,000 as your acquisition fee. Then, when the homes are tenanted, let’s say the investment yields a profit of $120,000 each year. Thanks to your 10% stake in the syndication, you will earn $12,000 per year, earning you $120,000 over a ten-year period.
After ten years, if you decide to sell the property for $1.5 million, you will earn $150,000. So, over a ten-year period your profits will be as follows:
- Acquisition fee: $50,000
- Annual earnings: $120,000
- Profit from final sale: $150,000
Total: $320,000
Ultimately, that’s a 15% return on your investment each year, which is more than satisfactory, to say the least!
Final Thoughts
Setting up a real estate syndication is an excellent way of investing your money into real estate that you might not otherwise have been able to afford. Whether you’re an investor or syndicator, you have a great way of earning money in the long run, and it’s undoubtedly a worthwhile consideration for anyone with the capital available.