I first learned about real estate syndications at a local real estate conference here in the San Francisco Bay Area. I had been investing in real estate for about ten years at that point, mainly through rental properties, and I had never heard of the term “real estate syndication” before.
Can you imagine? Ten years. And in that time, I’d never heard of real estate syndications.
But in fact, that’s pretty common. You see, until fairly recently, SEC regulations did not allow for real estate syndication opportunities to be publicly advertised. Thus, you had to be part of the “inner circle” (i.e., you had to know someone who was doing a deal, in order to invest in one).
Luckily, the SEC has since seen the huge benefits of real estate syndications and now allows certain opportunities to be publicly advertised, hence allowing more people to learn about and invest in these opportunities.
In this guide, we’ll go over all the information you need to start investing in real estate syndications, from what they are, to the returns you can expect, to the risks involved, and more. Here’s an overview of what we’ll cover:
Real Estate Syndications 101
Investing in Real Estate Syndications
Finding Real Estate Syndication Opportunities
What is a real estate syndication?
Let’s start with the basics. The term syndication simply means a pooling of resources. A real estate syndication, then, is when a group of people come together to invest in a real estate asset together. Instead of buying a bunch of small properties individually, the group of people come together and buy a larger asset together.
Let’s say I have $50,000 to invest. I could take it and invest it in a rental property myself, but I would have to set aside time to find a property, put it under contract, do the inspections, run the numbers, get the loan, then find the tenant and manage the property.
But, maybe I don’t have that kind of time or interest. This is where most people stop. They figure, real estate investing is too hard and too much work, so they stop there.
But, what few people know is that real estate syndications are the alternative that allow you to still put your money into real estate, without having to do the work of finding or managing the property yourself.
With a real estate syndication, I can invest that $50,000 into a real estate syndication as a passive investor. So I put in my $50,000, maybe you have $50,000 to invest, someone else puts in $100,000, and on and on.
By pooling our resources, we now have enough to buy not just a rental property, but something bigger, like an apartment building.
As passive investors, we don’t have to do any of the day-to-day work of managing the property. A lead syndicator or sponsor team does the day-to-day management (i.e., all the active work), and in return, they get a share of the profits. (More on this in a bit.)
When done right, real estate syndications are a win-win for everyone involved.
How does a real estate syndication work?
There are two main groups of people who come together to form a real estate syndication: the general partners and the limited partner passive investors.
The general partners (GPs) are the people who put the real estate syndication together. They do all the hard work of finding and vetting the property and creating the business plan. Essentially, they do the work that you would be doing as the owner and landlord of a rental property, just on a massive scale.
The limited partners (LPs) are the passive investors, who invest their money into the deal. The limited partners have no active responsibilities in managing the asset.
A real estate syndication can only work when general partners and limited partners come together. The general partners find a great deal and put together a great team to execute on the intended business plan. The limited partners invest their personal capital into the deal, which makes it possible to acquire the property and fund the renovations.
Together, the general partners and limited partners join an entity (usually an LLC), and that entity holds the underlying asset. Because the LLC is a pass-through entity, you get the tax benefits of direct ownership (more on this in a bit).
Once the deal closes, the general partners work closely with the property management team to improve the property according to the business plan. During this time, the limited partner investors receive regular and ongoing cash flow distribution checks (usually every month).
Once all the planned renovations are complete, the general partners sell the property, return the limited partners’ capital, and split the profits.
Can you give me an example of a real estate syndication?
Let’s say that Jane and John are working together to find an apartment community in Dallas, Texas. Jane lives in Dallas, so she works with real estate brokers in the area to find a great property that meets their criteria. After looking at a bunch of properties, they find one, listed at $10 million.
John takes the lead on the underwriting (i.e., analyzing all the numbers to make sure that the deal will be profitable), and they determine that this property has a ton of potential.
Since Jane and John don’t have enough money to purchase the $10-million property themselves, they decide to put together a real estate syndication offering. They create the business plan and investment summary for prospective investors and work with a syndication attorney to structure the deal.
Then, they start looking for limited partner passive investors who want to invest money into the deal. Each passive investor invests at least $50,000 into the deal. They continue raising money until they have enough to cover the down payment, as well as the cost of the renovations.
Once they close on the deal, Jane works closely with the property management team to improve the property and get the renovations done on budget and on schedule.
During this time, Jane and John send out monthly updates, as well as monthly cash flow distribution checks, to their passive investors.
When the renovations are complete, Jane and John determine that it’s a good time to sell. They sell the property for $15 million after just 3 years. They return all of the passive investors’ original capital, and they split the profits from the sale with the passive investors at the 70/30 split that was agreed upon at the outset of the syndication (70% to investors, 30% to the Jane and John).
What are the different types of real estate syndications?
There are lots of different types of real estate syndications. There are real estate syndications that focus on multifamily, self storage, manufactured home parks, land development, hotels, student housing, warehouses, and more. Some real estate syndications are for ground-up construction. Some are for buy-and-hold (i.e., buy an asset that’s already stabilized, and hold it for a number of years).
The real estate syndications that we do most often are value-add multifamily deals. Value-add deals involve assets that need a little love.
For example, we might invest in an apartment community whose units haven’t been updated in ten years. The kitchens are all dated, the carpets are worn, and the landscaping needs some work.
By making those improvements, we can increase the rents, which increases the income of the property and thus, the overall value.
Why invest in a real estate syndication?
Okay, now that you’ve got a decent understanding of how real estate syndications work, let’s talk about what’s in it for you. There are a number of reasons that passive investors decide to invest in real estate syndications.
Here are a few of the top reasons:
What are the returns like in a real estate syndication?
Let’s talk about one of the things people are most curious about – the returns you can expect by investing passively in real estate syndications.
There are two types of returns that you can expect from investing in a real estate syndication.
The first type of return is a cash flow return, which you would receive in the form of a check or direct deposit either monthly or quarterly from the time the deal closes through the time the asset is sold.
The second type of return is a split of the profits upon the sale of the asset. The exact split depends on each deal’s specific deal structure.
Typically, for the real estate syndication deals that we do, the cash flow returns total 8-10% per year. So, if you were to invest $100,000, you could expect about $8,000 per year in cash flow returns, or about $667 per month.
Then, at the sale of the property, you could expect an additional 40-60% ($40-$60,000), in addition to receiving your original capital back.
Altogether, when counting the $8,000 per year for five years, plus the, say, $60,000 at the sale, you would have received a total of $100,000 in returns over the course of five years, thus doubling your money in that time. When counting the profits from the sale, your average annual return over the course of those five years would have been 20%.
What’s the minimum amount I can invest?
Typically, we see a minimum of $50,000 for the deals that we do.
Your money will be illiquid during the length of the hold time (i.e., you can’t withdraw it until the asset is sold). Thus, you should only invest with funds that you don’t need access to for a while and can afford to lose.
How long is a real estate syndication?
While each real estate syndication is different, we typically see projected hold times of 5-7 years, sometimes longer.
This means that, for a real estate syndication with a 5-year projected hold time, you should prepare to have your money in the project for 5 years. You will not be able to take your money out until the asset is sold.
Who can invest in real estate syndications?
A large majority of real estate syndications are open to accredited investors only, though some are also open to non-accredited, sophisticated investors (i.e., investors who can demonstrate that they understand real estate syndications and their risks).
In order to be considered an accredited investor, you must meet at least one of two requirements. The first requirement is a net worth requirement. You must have at least $1 million in net worth, not counting your primary home.
The second requirement is an income requirement. You must make $200,000 per year as an individual, or $300,000 jointly with your spouse, have made this amount or more for each of the last two years, and intend to make this amount or more this year.
If you meet either one or both of these requirements, then you are an accredited investor.
If you’re not yet an accredited investor, there are still some real estate syndication opportunities out there for you. However, you may need to look a little harder for them. This is because the opportunities for non-accredited investors cannot be publicly advertised.
What are the fees involved?
There are two main types of fees that are paid to the general partners when you invest in a real estate syndication.
The first is an acquisition fee (typically 1-3% of the purchase price), which is paid out upon the deal closing. This is for all the work the general partners have put into the acquisition of the property.
The second type of fee is an asset management fee, which is an ongoing fee (usually 1-3%) that is deducted from the cash flow each month, for the ongoing work of managing the asset.
As a passive investor, you don’t have to write a separate check for either of these fees. These fees are already part of the underwriting. So if a deal deck says projects an 8% annual return, that’s already accounting for the fees involved. You just write your $50,000 check, and that’s it.
Can I invest in a real estate syndication with retirement funds?
Yes! In fact, this is one way that many passive investors get started with real estate syndications.
To invest in a real estate syndication with retirement funds, you need to first roll over your existing retirement funds (401k’s, IRAs, etc.) into a self-directed IRA account.
We like Provident Trust Group for their low fees and great customer service, but there are many self-directed IRA companies out there. (Note: My personal self-directed IRA account is with Provident. I am not being paid to refer them to you; I just really like them.)
Once your money is in the self-directed IRA account, you can choose what you want to invest it in, and the self-directed IRA custodian will invest it on your behalf.
For a real estate syndication, you will need to provide your self-directed IRA custodian with copies of the legal documents for the syndication (private placement memorandum, operating agreement, and subscription agreement). Then, they will send in the funds on your behalf.
Any returns you make on the investment must go directly back into the self-directed IRA account, never into your personal accounts.
What are the risks of investing in real estate syndications?
All this sounds great, but what about the risks? Great question. After all, a real estate syndication is an investment, and no investment is a guarantee.
One of the biggest risks is the risk of execution. When you invest in a real estate syndication, you’ll see glossy marketing packages, and the sponsors will answer your questions with lofty ideals.
However, when the rubber meets the road, the sponsor team needs to be able to execute on the business plan in the face of unforeseen circumstances. This is why we invest only with sponsors who have a proven track record and who prioritize capital preservation, so we know that they will protect your investments and will do what they say they’re going to do.
Another potential risk is changing market conditions. No one can predict what market conditions will be like at the end of a project’s hold time. Maybe the entire country will be in a recession. Maybe the local economy will be in a lull.
This is why it’s so important to ensure that the loan provides some buffer time. That is, if the projected hold time is 5 years, check to make sure that the loan term is for at least that long, and ideally longer than 5 years, so there’s a buffer in case we need to hold the property longer than intended.
At the end of the day, as a limited partner passive investor, your liability in the real estate syndication is limited. That means that, at worst, you could lose your original investment, but you could not lose more than that (e.g., you can’t lose your house).
What about taxes?
When you invest in a real estate syndication as a passive investor, you are a part-owner in the underlying asset. That means that you get your share of the tax benefits.
One of the biggest tax benefits is accelerated depreciation through cost segregation.
When you invest in a rental property, you can depreciate the rental property on a schedule of 27.5 years.
When you invest in a commercial real estate syndication, the sponsors will often order a cost segregation study. What this means is that a cost segregation expert will come and take stock of all the assets on the property – light fixtures, carpeting, etc. – and create a cost segregation report. That report shows which assets are eligible for accelerated depreciation.
For example, instead of depreciating the carpeting over thirty or so years, you might be able to depreciate it over 5 years. This accelerated depreciation can front load all the depreciation benefits into the first few years of ownership, which is perfect for a real estate syndication that projects a hold time of just a few years.
What’s the process for investing in a real estate syndication?
Here are the basic steps for investing in a real estate syndication, once you’ve defined your investing goals and found a sponsor you want to invest with.
*Real estate syndications are almost always filled on a first-come, first-served basis. Thus, sponsors use a soft reserve to help them determine who’s interested in investing.
By submitting a soft reserve, you are telling the sponsor you’re interested in the deal and want to invest X amount. The soft reserve does not guarantee you a spot in the deal, nor does it lock you in. You can always back out or change your mind later.
Pro tip: If you’re thinking about investing in a deal but aren’t sure whether you want to invest $50,000 or $100,000, go ahead and put in a soft reserve for $100,000. This holds your spot in the deal.
If you decide later that you only want to invest $50,000, you can easily decrease your investment amount. However, if you had put in a soft reserve for $50,000 and later wanted to increase it to $100,000, you might not be able to increase your soft reserve amount if the syndication is already over-subscribed.
What happens after I invest in a real estate syndication?
After you’ve sent in your funds for a real estate syndication deal, your active participation is done. Now you can sit back and wait for the cash flow to start rolling in.
Depending on the particular deal, you may receive either monthly or quarterly cash flow distributions, and they may start immediately, or not for a few months.
Regardless, you should start receiving monthly updates as soon as the deal closes. These monthly updates will include information on the latest occupancy and progress on the renovations.
Every quarter, you will receive a detailed financial report on the property, and every spring during tax season, you will receive a Schedule K-1 for your taxes, which will report your share of the income and losses for the property.
Where can I find real estate syndication opportunities?
As mentioned above, many real estate syndication opportunities cannot be publicly advertised. The ones that you do see publicly advertised are for accredited investors only.
So, where do you find real estate syndication opportunities?
You can do a Google search, but how do you know that the opportunities that pop up are legitimate ones, put together by experienced teams with strong track records, who will safeguard your money over a period of several years?
The answer is, you don’t. It’s extremely hard to find great real estate syndication opportunities just by doing a few Google searches.
The best way to find real estate syndication opportunities is to get out there and talk to people in the real estate investing space, and particular those in the real estate syndication space. This community is quite small, and once you get connected, you’ll easily be able to find sponsors and real estate syndication opportunities that fit with your investing goals.
How do private real estate syndications compare to real estate crowdfunding sites?
In the past few years, real estate crowdfunding sites have become quite popular as a way to invest passively in real estate. Sites like RealtyMogul, RealtyShares, and Fundrise have helped millions of people invest passively in real estate.
Real estate crowdfunding sites can be a good place to find real estate syndication offerings. However, there are a few things you should keep in mind.
First, most of these platforms require that you be an accredited investor in order to invest in their real estate syndication offerings.
Some of these platforms do offer REITs (real estate investment trusts) as an alternative for non-accredited investors. Typically, you can invest in these REITs with a low minimum investment (you can invest in Fundrise’s eREIT for just $500).
If you’re investing in a REIT, just be aware that you are not investing in a real estate syndication. Rather, you are investing in a fund.
When you invest in a REIT, you’re investing in a company that buys real estate; you don’t have direct ownership of the underlying asset yourself, like in a real estate syndication. You would likely still get good returns, you would just be investing in a bunch of assets rather than a single one, and you wouldn’t get the same tax benefits as with a real estate syndication.
Regardless, if you’re just starting out, you should definitely check out some real estate crowdfunding sites, to see what they’re all about.
What is Goodegg Investments’s role in all this?
Here at Goodegg, we know how hard it can be to find great real estate syndication opportunities. So, that’s exactly what we do. We connect investors with great real estate syndications.
We work hard to find the best real estate markets to invest in and partner with experienced sponsor teams in those markets. We’ve been in this space for a while, so we know most of the larger players and work hard to vet all of the sponsor partners we work with, to make sure they have a strong track record and know what they’re doing.
Once we find a deal with a great sponsor, a deal we’d invest in personally, we partner with the sponsor and open up that real estate syndication opportunity to our investors.
Our investors don’t pay any fees by working with us. We are merely the conduit between our investors and the sponsors. The main benefit we provide our investors is in the investing experience.
We provide a lot of resources to our investors and make sure to make ourselves available to our investors, to answer any questions along the way (sponsors can often be busy with the acquisition of the property and might not have time to answer investor questions).
We also invest in these deals right alongside our investors. In fact, we never open up a deal to our investors that we wouldn’t invest in ourselves.
If you’re interested in investing passively in real estate syndications, a great first step is to join the Goodegg Investor Club. After we get to know you, we’ll help you find real estate syndication opportunities that meet your investing goals.
Where can I learn more?
While this guide is a great start, there are still tons of things to learn before you can confidently invest $50,000 or more into a 5-year-long real estate syndication. How do you know whether a deal is good? What happens if a deal goes south? How do you decode all the lingo in an investment summary?
If you’re serious about investing in real estate syndications and want to learn all the ins and outs so that you can invest confidently in your first real estate syndication, we’ve created a course for exactly that.
Passive Real Estate Investor Academy is a 5-week online course that will walk you through everything you need to know to invest confidently in your first real estate syndication. Many of our graduates have gone on to invest in multiple real estate syndications with us and are now making thousands of dollars in passive income every month.
Real estate syndications are a great way to invest in real estate without having to deal with the hassles of being a landlord. As a limited partner passive investor in a real estate syndication, you can sit back and collect passive cash flow every month without having to worry about renovations, tenant turnover, or broken toilets.
That being said, there’s a LOT to learn when you first invest in real estate syndications. Because most real estate syndications are for commercial properties, there’s a lot to learn in the way of vetting properties, underwriting, and sponsor teams. There’s also a lot of due diligence you must do in researching markets and finding good real estate syndication opportunities.
After ten years of investing in rental properties, I can say that I’m SUPER happy being a passive investor in real estate syndications. I don’t have to do any of the work, and I get all the benefits of owning real estate. Sometimes, the returns from my syndication investments are even better than those from my personal rental properties.
Of course, investing in real estate syndications isn’t right for everyone. I hope this guide has given you some further insight into what real estate syndications are all about, so you can decide for yourself whether they’re right for you.
If you have any further questions, feel free to reach out to us anytime at [email protected]