How a Real Estate Syndication Works
When you invest in real estate, having a diverse selection of properties is a good idea to help you generate more profit. For example, do not solely invest in single-family homes; invest in commercial properties or multi-family properties too. However, it can be expensive to buy these properties, and it typically requires management skills to keep them running. One way to help you with this is to join a real estate syndication. In this article, we will look at how a real estate syndication can help you with your investment properties.
What is a Real Estate Syndication?
Real estate syndications are a way for multiple investors to pool their funds to allow them to buy larger and more stable assets than they can generally do by themselves. This makes it easier for most people to invest in real estate because they can spread out their capital into multiple properties, allowing you to diversify your portfolio.
Real Estate Syndication Basics
A real estate syndication is a transaction that is between a group of investors and a sponsor. The sponsor is the operator and manager of the deal; they scout for properties, raise funds to purchase them, then buys the property and manages its operations. The sponsor typically invests between five and 20 percent of the total capital to invest in the property, and the investors cover the rest. All that the investors need to worry about is providing the funding to purchase the property.
The Benefits of Investing in a Real Estate Syndication
There are many benefits to investing with a real estate syndication. Let's take a look at the main benefits of investing in a syndication.
Invest in Bigger Assets
You only have so much capital you can invest in assets, which might hold you back from investing in bigger properties. A real estate syndication will allow you to invest in more properties and larger ones than you would have been able to by yourself. Since larger properties typically hold their value better and are more liquid than small ones, this means your capital will be better invested.
More Stability in Your Investment
If you have a single-family property and your tenant moves out, you will have no income on the property until you find a new tenant. However, when you are using a syndication, you can invest in larger multiple-family units, so losing one tenant will not make your returns plummet. You will also be able to invest in more expensive properties in better locations.
Pay Less Out of Pocket
By working with a real estate syndication, you will be able to invest in more properties, and you will not have to pay as much out of pocket for your investments while enjoying better returns.
Passive Investment Cash Flow
Since the sponsor manages everything for the investors, you do not have to worry about interacting with tenants, performing maintenance, or any of the other things that come with investing by yourself.
Tax Benefits of Real Estate Syndication
Investing with a real estate syndication is a passive investment, which has a lower tax rate than an active investment does. If your investments are in commercial property, you can also write off some of the income you earn from them as depreciation because the buildings are subject to wear and tear and age.
Potential Drawbacks of Investing in a Real Estate Syndication
While real estate syndications are highly beneficial to invest in, there are still a few drawbacks to them.
Rent Raising Increases Vacancy
When you invest in a multi-unit property, you are less likely to have too many vacancies, but there is still a risk of having too many vacancies at once, usually due to rent being raised.
Increased Construction Costs
With the prices of materials going up because of the pandemic, and sometimes poor planning, the costs of construction can go up and exceed the amount the sponsor anticipated putting into the investment. This can hurt your investment, but with the right sponsor, this can be resolved without too much trouble.
Project Delays
There are some delays that cannot be avoided, including bad weather causing delays and the political climate at the time.
The Bank Calls a Loan
This does not happen very often, but sometimes a bank can call a loan, which can impact your investment.
Sponsor Underperforming
If you do your due diligence and find a sponsor with a good track record, you can avoid this scenario, but it is something that could occasionally happen to a syndicate.
Real Estate Syndication Legal Structure
Real estate syndications are typically structured as either a Limited Liability Company (LLC) or a Limited Partnership (LP). The sponsor is either the general partner or manager of the syndication, and investors are limited partners or passive members. The LLC or LP comes with an agreement, which makes the rights of the investors and sponsors clear. It covers the voting rights, rights to distributions, and the fees that the sponsor charges for managing the investments.
Real Estate Syndication Profits
There are two ways that the sponsor and investors make money from their investments: property appreciation and rental income. The rental income is distributed to all of the investors from the sponsor, usually on a monthly or quarterly basis. As the property appreciates in value, rent can be increased, bringing the investors a higher profit on their investment.
When the investors begin seeing profits depends on how long it takes for an investment to mature, which can take anywhere from six months to ten years, depending on the syndication.
How to Find Deal Sponsors and Syndication Opportunities
There are a few ways that you can find sponsors for real estate syndications:
- Search online
- Meet with deal sponsors
- Invest in projects that you are familiar with
- Search through networking
- Visit and invest through an online investment platform
Real Estate Syndication Statistics
- Over 300,000 investors were part of syndications in 2021.
- The average size for a real estate profit was $3 million.
- Investors had a preferred return of between five and ten percent.
- Sponsor fees were between .5 and two percent; the average was one percent.
- Sponsors received a fee for property management of between two and nine percent.
Summary
Real estate syndications can be a highly beneficial way for you to expand your portfolio and gain some completely passive income. If you are interested in investing in real estate, this is one of the easiest ways to invest in it.