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.
A real estate syndication is quite similar in that regard. 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, a real estate syndication turns into a powerful wealth-building machine that generates passive income for investors and makes an impact in local communities.
So, let’s delve into all the individuals that come together to make a real estate syndication 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.
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.
A real estate syndication is essentially a group investment. Instead of buying a single family home as a rental property on my own and being the landlord, I can put in $50,000, someone else can put in $100,000, and so on, and together, we can buy a bigger commercial property together.
We often compare a real estate syndication to an airplane ride. All of us, as the passive investors, are the passengers on the plane. We’ve chosen this plane because it’s going to get us to the destination we have in mind. However, we’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. 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.
Here are the key people that come together to make a real estate syndication happen:
Real Estate Broker
The real estate broker is the person or team who surfaces the property 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 buyer) and the seller of the property. The real estate broker ensures that the acquisition process for the real estate syndication goes as smoothly as possible.
The lender is the biggest money partner in a real estate syndication. That’s because they are giving us the loan for the property. The lender will do their own due diligence on the property to make sure 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 property is worth what we’re paying for it.
In the airplane analogy, neither the real estate broker nor the lender are on the plane. That’s because they’re not investors in the real estate syndication. 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 lead the real estate syndication (sometimes they are also called the lead syndicators). They are the ones who are orchestrating the whole thing. They lead the acquisition of the property and will 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 property. 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 the overseeing the day-to-day operations, and they’re responsible for executing on the business plan. They are the ones who manage the property manager 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 it were ever to come to that.
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.
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 are the ones who invest their money in the project, in exchange for a share of the returns. Like the passengers on an airplane, the passive investors have no active role in the project. They get to put their money in, sit back, and collect the passive income.
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. The property manager are the boots on the ground that execute on the renovations and other parts of the business plan.
The property manager and operator (sometimes called the asset manager) work closely together to ensure that everything is going according to plan and to address any unexpected surprises along the way.
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 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.
I guess you could think of us as the flight attendants, who prep the passengers for the journey and help make sure the passengers are well-informed and comfortable throughout the flight.
A real estate syndication, by definition, is a group investment. And it’s only through coming together as a group and pooling resources that the syndication can be successful.
There are many people who come together to make a real estate syndication happen, including:
There are also other people not mentioned here, including the inspector, appraiser, cost segregation specialist, CPA, legal team, insurance agent, and more, who work in the background to make sure that the syndication gets off the ground.
Each of these people or groups have important roles in the process. And, just as an orchestra would sound terrible if the violins decided to skip out on the concert, a real estate syndication depends on all these different players in order to be successful.