Real estate syndications
Intro to real estate syndication deals
A real estate syndication is essentially a group real estate investment.
Commonly referred to as a real estate investment syndicate, this type of investment involves bringing together a group of individuals—sometimes as many as hundreds of investors—to pool their money and purchase a property together.
A real estate syndication can be a great way to get involved in real estate investments without having to go it alone.
Rather than you investing in, say, a single-family rental property on your own, you get to pool together your money with hundreds of other real estate investors and invest in larger assets (like an apartment building) together. The property is then owned and managed by the group, with each limited partnership member sharing in the profits (or losses) generated.
When you invest passively through a commercial real estate syndication (sometimes referred to as real estate crowdfunding), you don’t have to deal with the burden of tenants, toilets, or termites.
Through each syndication deal, you get to tap into real estate markets and opportunities that would otherwise be unavailable or unaffordable to you as an individual investor.
For example, potential investors might not have enough money to buy a large commercial property outright. But by investing through a limited partnership in a real estate syndication, you can get involved with these types of deals for a fraction of the cost.
Real estate syndicates are typically led by real estate developers or sponsors who have a solid track record and expertise in commercial real estate.
Investors provide the capital needed to purchase the property and execute on the intended business plan (which can include renovating the property, leasing it up, bringing rents to market rates, and more).
In exchange for your investment, you’ll receive a percentage of ownership in the form of equity units or shares. These units entitle you to a portion of the rental income generated by the property as well as a share of the profits if and when the property is sold.
You get all the benefits of investing in real estate – cash flow, appreciation, equity, and tax benefits – without the hassles and time commitments needed to be a landlord.
What’s more, group investments in commercial real estate offers the potential for strong risk-adjusted returns and allows you to diversify outside the stock market.
How a real estate syndication investment works
A real estate syndication comes together when a sponsor team finds a great commercial real estate asset and puts together a private placement syndication offering to passive investors.
The sponsor team is responsible for all aspects of the investment, from acquisition fee to investor relations to property management.
The sponsors are the general partners, and the investors are the limited partners. Through the real estate syndication offering, passive investors can invest their capital as limited partners alongside the sponsors and share in the returns.
The minimum investment amount can vary from syndication to syndication, but it’s typically $50,000 or more.
The sponsors do all the heavy lifting – including acquisitions, underwriting, and asset management – while the passive investors invest their capital and take a split of both the ongoing cash flow and the profits upon the sale of the asset.
When you participate in a group investment opportunity as a limited partner, your commitment can last anywhere from a few years to over a decade. But the average syndication agreement has an average lifespan of 5-7 years.
During that time, the asset typically goes through a value-add strategy. That could involve anything from making cosmetic improvements to renovating and adding new amenities.
The goal is to increase the property’s value so that occupancy remains high, rent can be brought up to market value, and when the business plan is complete, the asset sells for a profit.
Are real estate syndications right for you?
Before you invest in a real estate syndication, you should first reflect on your own investing goals. Are you investing for cash flow, appreciation, tax advantages, or a combination?
A real estate syndication deal offers the potential for all of those things. That’s one reason they’ve become so popular in recent years.
But real estate syndication work isn’t right for everyone. If you have a low risk tolerance, you want to have full control over the investment, or you’re not comfortable with the idea of investing alongside other investors, a real estate syndication deal might not be for you.
You should also take a close look at the management team before investing. A real estate syndication is only as good as the people running it.
You want to make sure you’re investing with a sponsor team that has a proven track record and experience in successfully executing value-add real estate strategies.
If you’re thinking about investing in a real estate syndication and craving that passive role, you’ve got to put in your sweat equity up front – researching and learning about all the risks involved.
Once you’re comfortable with the risks and you like the idea of partnering with experienced real estate professionals, real estate syndications can be a great way to grow your real estate portfolio.
A real estate syndication can allow you to diversify into multiple asset classes and markets without having to do a ton of work, but you won’t have the same level of control as you would if you were to invest in, say, a rental property.
Another thing to keep in mind is that real estate syndications are long-term investments. If you’re looking for a quick flip or a way to make some fast cash, real estate syndications are not for you.
It can take years for the asset to be fully renovated and stabilized, and then there’s the holding period after that.
Who is eligible to invest in a real estate syndication?
Due to SEC regulations, many real estate syndications (including most of the ones we do) are open to accredited investors only.
There are multiple ways to qualify as an accredited investor, but the most common ways are based on net worth or income.
To qualify via your net worth, you must have over $1 million in net worth, not counting your primary home.
Or, you can qualify based on your annual income. To qualify via your income, you must make $200,000 or more per year (or $300,000 together with your spouse), have done so for the last 2 years, and believe you’ll make the same or more this year.
Tax benefits of real estate investing
One of the biggest benefits to investing in real estate is the tax advantages. When you invest in a real estate syndication, you are essentially purchasing shares of an LLC (or similar entity) that owns the underlying asset.
This structure allows you to take advantage of what are known as pass-through taxation and the depreciation deduction.
Because an LLC (limited liability company) is a disregarded tax entity, the tax benefits of real estate ownership – including depreciation and cost segregation – are passed through to you as a passive investor.
Pass-through taxation means that the income (and expenses) from the real estate investment “passes through” to the individual investors, and is only taxed at the individual level.
The depreciation deduction allows you to take a tax deduction each year for the wear and tear on the real estate asset. This is a non-cash deduction, which means you can deduct it even if you don’t actually receive any cash distributions from the investment.
Each year, you would receive a schedule K-1 showing your income and losses for the syndication. In many cases, due to cost segregation and accelerated depreciation, the paper losses can be quite substantial, particularly in year 1.
This means that you could show a paper loss, even while you continue to collect ongoing passive income. This is a great benefit, because it allows you to offset other income from your day job or other investments.
And if you qualify for Real Estate Professional Status (REPS), this could have an even more substantial benefit to your overall tax situation.
Real estate investment risks
When you invest in a rental property on your own, you get to call all the shots (for better or worse). When you invest in a real estate syndication, you are putting your trust into a sponsor team that manages the asset on your behalf.
This can be a great way to begin as a passive investor without having to do all the work yourself. But it also means that you need to vet your sponsors carefully before investing.
The sponsor team is responsible for managing the property, so it’s important that they have experience and a proven track record.
When choosing which offerings to invest in, it’s crucial that you find a sponsor team you can trust – one whose interests are aligned with your own, who takes a conservative approach, who communicates openly and honestly with you, and who will be a good steward of your hard-earned money.
You will also want to look at the financials carefully to make sure that the deal makes sense and that you are comfortable with the risks.
One of the biggest risks in real estate investing is not being diversified. This means that if one property or market goes bad, your entire portfolio could be wiped out.
When you invest in a real estate syndication, you are spreading your risk across multiple properties and markets. This can help mitigate some of the risk and make your passive income more stable.
Another risk to be aware of is the possibility of fraudulent misrepresentation. This is when a sponsor deliberately misleads investors about the property, the financials, or the expected returns.
While this is always a risk when investing in any type of real estate, it’s important to be extra vigilant when considering a real estate syndication.
To properly vet the sponsor team, be sure to ask lots of questions, check out their track record, and read reviews or ask for references.
Of course, there are many other potential risks, but having the right team in place will be your best protection against any surprises that come up during the life of the investment.
When done correctly, real estate syndications can provide you with a more stable income than many other types of real estate investing, as well as some significant tax advantages.
What happens after you invest in a real estate syndication
In short, investors provide the necessary capital so that the management team can do what they need to do to make the asset sing for all involved – tenants and investors.
So, once you wire in the necessary capital, your active role in the investment is complete. It’s time to pop some bubbly and celebrate!
Your money will go into an escrow account where it will be held until the deal closes.
Soon, you will become a co-owner of the real estate property alongside other real estate investors.
Once the deal closes, you should hear from the sponsor immediately, with guidance on next steps and what to expect during the life of the investment.
You will begin receiving regular distributions from the property’s income, which can be deposited directly into your bank account.
You will also be able to attend the annual investor meeting, where you can meet the other passive members and get an update on how the property is performing.
For the most part, you should expect to receive monthly updates reporting on occupancy, any value-add components, and progress on the business plan, as well as financial reports on a quarterly basis, and ongoing preferred return distributions (either monthly or quarterly, depending on the deal).
You also have voting rights on any major decisions regarding the property, such as whether to sell it or refinance it.