Back in high school, I used to play the French horn in the youth orchestra.
I loved being in the orchestra, but when I practiced that orchestral music at home, it didn’t sound like much. But, on Sunday afternoons, when the whole orchestra gathered in the basement of the music hall at the local university, we got a chance to hear the whole piece come together. And that. That was magic.
When it comes to the world of real estate investing, a real estate syndication can be quite similar to an orchestra. Taken individually, each person’s part isn’t that exciting. A passive investor puts in $50,000. A lender reviews a loan application. A property manager gets estimates on cabinet replacements.
But, when you put it all together, when you have a whole group of investors, commercial real estate syndications can create a powerful wealth-building machine that generates passive income for investors and makes an impact on local communities.
So, let’s delve into all the individuals that come together to make real estate syndications happen, from the real estate broker who brings us the property to the passive investors who invest in the project to the property manager who renovates the property, and everyone in between.
Why It’s Important To Know Who The Key Players In Real Estate Syndications Are
Playing the French horn for an orchestra is very different than playing with a marching band. The types of music can be different, the pace is different, and the instruments are different.
Just as it’s crucial to know who the other players in a band or orchestra are, it’s important to know who the key players in a real estate syndication are and what their roles might be.
You may not ever interact with these people one-on-one, but knowing who’s doing what will give you deeper insights into the real estate syndication as a whole, allow you to ask more specific questions about the team, and help you better see and understand the role you play as a passive investor.
Think Of A Real Estate Syndication Like An Airplane Ride
A real estate syndication is essentially a group investment. Instead of buying a single-family home as a rental property on your own and being the landlord, you invest in real estate syndications passively.
What that means is that you pool together your funds with those of other investors. Perhaps you might invest $50,000, someone else might put in $100,000, and so on, and together, the whole group of investors can buy a bigger commercial real estate asset together.
Think of a real estate syndication as an airplane ride. You, as one of the passive investors, are a passenger on the plane. You’ve chosen this plane because it’s going to get you to the destination you have in mind. However, you’re not responsible for flying the plane, directing the takeoff and landing, or troubleshooting anything that goes wrong.
That’s where the pilots come in. The pilots are the ones who are syndicating real estate deals. They are doing the active work of flying the plane. Both the pilots and the passengers are going to the same place, but they have very different roles in the journey.
And, in addition to the pilots, there are air traffic controllers, airport workers, flight attendants, and more, that all work together to ensure that the journey goes smoothly.
Let’s dive into some of these roles.
People in a Real Estate Syndication
Here are the key people that come together for a syndication in real estate:
- Real estate broker
- General partners
- Key principals
- Passive investors
- Property manager
- Goodegg Investments
Real Estate Broker
The real estate broker is the person or team that surfaces the asset for sale, either as a listing or as an off-market opportunity (i.e., not publicly listed).
Having a strong real estate broker on the team is crucial, as they are the main liaison between us (the buyers) and the seller of the property. The real estate broker ensures that the acquisition process for the real estate syndication deal goes as smoothly as possible.
The lender is the biggest money partner in a real estate syndication. That’s because they are giving providing the loan for the asset. The lender will do their own due diligence on the deal to ensure it’s something that they can and want to loan on. The lender will do their own underwriting, as well as an appraisal, to make sure the asset is worth what we’re paying for it.
In the airplane analogy, neither the real estate broker nor the lender is on the plane. That’s because they’re not investors in the real estate syndication deal. They have important roles in bringing the project to fruition, but they are not part of the entity that purchases the property, nor do they share in any of the returns.
The general partners are the team that leads the real estate syndication deal (sometimes they are also called the lead syndicators). They are the ones who are orchestrating the whole thing; their role is to syndicate real estate deals. They lead the acquisition of the property and head up the asset management during the life of the project as well.
The general partners work with the real estate broker to acquire the asset. They also work with the lender to secure the loan for the property.
The general partnership team includes both the sponsors and the operators (sometimes these are the same people).
The sponsors are the ones signing on the dotted line for the loan. Often, the sponsors are also involved in the acquisition and underwriting of the property.
The operators are generally the people responsible for managing the acquisition and overseeing the day-to-day operations, and they’re responsible for executing the business plan. They are the ones who work with the property management team and make sure that the renovations are going according to schedule and budget.
For a commercial loan, the sponsor is required to show a certain amount of personal liquidity. This is so, in case things go wrong, the lender knows that the sponsor has some personal capital that they can put in to keep the property afloat.
If the sponsor’s personal balance sheet doesn’t meet the requirements needed for the loan, they may bring on one or more key principals to help guarantee the loan.
Passive Investors (That’s YOU!)
This is our favorite group of people, both to work with and to be a part of.
The passive investors in a real estate syndication deal are the ones who invest their money in the project, in exchange for a share of the returns. Like passengers on an airplane, passive investors have no active role in the project. They get to passively invest in real estate, sit back, and collect ongoing passive cash flow.
See why this is our favorite group?
Once the property has been acquired, the property manager is perhaps the most important partner in the project, as they are in any real estate investing deal. The property manager is the boots-on-the-ground team that executes on the renovations and other parts of the business plan.
The property manager is not part of the general partnership. Rather, they work for a monthly management fee, working closely together with the operating team to ensure that everything in the deal is going according to plan, that investors are getting their projected returns, and that any unexpected surprises along the way are addressed.
In a real estate syndication, Goodegg is part of the general partnership. Our main role, among other things, is to take the lead on investor relations and to help raise the equity needed to acquire the property and fund the renovations.
We work with the sponsors to ensure that they are structuring the deal in a way that will be favorable to investors. We advocate on behalf of our investors, to ensure that the sponsors are being conservative in their projections, that they have multiple exit strategies, and that they will preserve and grow investor capital.
After the property is acquired, we help with ongoing asset management as needed and act as the liaison between the sponsor/operator team and the investors, helping to keep investors in the loop on updates, financial reports, and other important information.
Real Estate Syndication Projected Returns
Now that you have a better idea of who the major players in a real estate syndication are, let’s dive into the projected returns you might expect to see.
Now, we get into the numbers, I have to insert a big fat disclaimer here, for the one percent of you who will, at some point, get all up in arms because we didn’t deliver these exact returns. Yes, I see you, don’t be trying to hide.
As the title of this section suggests, these are only PROJECTED returns. Any time you invest in a deal, you should know that we cannot guarantee any returns, and there’s risk associated with any investment. This is only meant to give you a rough ballpark of the kinds of returns you might expect.
For most of the deals that we invest in, our investors receive an annual preferred return of around 7-8%. What is a preferred return, you ask? Great question.
Let’s say that the preferred return is 8%. That means that, for the first 8% of any returns on the deal, that goes 100% to the passive investors. The general partners don’t receive any of that first 8%.
This preferred return structure can provide a great alignment of interests, as general partners wouldn’t invest in a deal unless they’re confident that they can generate at least that 8%; otherwise they wouldn’t get paid.
If you were to invest $100,000 into a real estate syndication with an 8% preferred return, that means that you could expect to receive roughly $8,000 per year (i.e., 8% of $100,000), which comes out to about $667 per month.
This preferred return structure applies to the sale of the asset as well, meaning that investors get their split of the profits before the general partners take their cut.
The ongoing cash flow, of course, is just one piece of the overall puzzle. In addition to the passive income from ongoing cash flow, there’s also the profit from the sale of the asset. When you factor that in, passive investors typically see about a 20% annualized return over the life of the hold.
For the majority of our investments, this means that, over the course of a 5-year hold, our investors see roughly 8% annually from cash flow returns, plus an additional 40-60% upon the sale of the asset in year 5. This means that, when all is said and done, investors have a chance to double their money within the span of 5 years. This is the true power of syndication real estate.