Real estate syndication
What is real estate syndication? How does it work? Is it right for you? Find out below.
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—usually between 2 and 10 people but sometimes as many as hundreds of investors—to pool their money and purchase a property.
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 and redevelop the property. Meanwhile, the sponsor is responsible for acquiring the property, overseeing its renovation or development, property management, and following through on the predetermined exit strategy.
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 high returns.
Investors in a real estate syndication deal typically see annual returns of 8-12%, and sometimes even higher. Of course, as with any investment, there are risks involved and you should never invest more than you can afford to lose.
Related: Real Estate Investment Trusts (REITs) Vs. Real Estate Syndications
How a real estate syndication investment works
A real estate syndication comes together when a sponsor team (like yours truly!) finds a great commercial real estate asset and puts together a private placement syndication offering to passive investors.
The sponsor team (consisting of the real estate developer, property manager, an experienced real estate attorney or two, and accredited investors) 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-$100,000.
The sponsors do all the heavy lifting – including acquisitions, underwriting, and property 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.
Related: Real Estate Syndication Structures And What They Mean For You As A Passive Investor
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 your sweat equity upfront – 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 quickly and easily 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.
Related: Investing For Cash Flow Or Gains: Which Strategy Is Best Right Now?
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.
If you do not meet either of those criteria, you may be considered a sophisticated investor. While you save up more capital, go ahead and begin getting to know sponsors and other people who are as into real estate as you want to be.
Non-accredited investors can still invest in a real estate syndicate but must wait for a 506(b) deal to become available. These opportunities cannot be publicly advertised, so it’s even more important that you network with investors pools so you can get the low down on the commercial properties coming on the market.
You can also potentially invest in larger assets through a commercial real estate syndication using your Self-Directed retirement account.
If you’re still raising capital and getting your financial situation in order with hopes to invest in real estate one day, we suggest you get started with one of the many real estate crowdfunding options out there.
Related: Non-Accredited Investing: You Don’t Have To Be An Accredited Investor To Invest In Real Estate
Real estate syndication projected returns and hold times
If you’ve read this far, you’re probably wondering how much you could stand to make if you were to invest in a real estate syndication. The answer, as you might expect, is that it depends.
There are a number of factors that will affect your potential return, including the type of real estate being syndicated, the location, the business plan, the property management fee, the management team’s experience and track record, and more.
Every syndication is structured differently, so the projected returns can vary quite a bit. However, what we can tell you about are the types of returns most investors can expect.
When you invest in a real estate syndication, you can expect to receive both ongoing cash flow returns (typically to the tune of about 7-8% per year), as well as profits from the sale of the asset.
For the majority of our investments, when you factor in the profits from the sale after the 3-5 year projected hold time, the average annual return typically comes to around 15-20%.
Of course, there are no guarantees when it comes to real estate investments, so your actual return could be higher or lower.
In terms of hold times, most real estate syndications are held for 5 to 7 years, but some may be shorter and some may be longer.
The important thing is that you understand the projected hold time before you invest, so you can be sure it aligns with your own money goals.
Again, returns will vary for each offering, but this should give you a high-level overview of what investors might see.
Real estate syndications are a great way to diversify your portfolio, get exposure to multiple asset classes and markets, and potentially earn higher returns than you would from traditional investments like stocks and bonds.
Related: Watch What Happens When You Invest $50,000 A Year In Real Estate Syndications
Tax benefits of real estate investing
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.
This is different from a C-Corp, where the income is taxed first at the corporate level and then again at the individual level when it is distributed to shareholders.
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.
Related: Top Ways To Lower Your Taxes As A Real Estate Investor
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 portfilio 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.
Related: What Happens To Real Estate During A Recession And When You Should Buy
How to invest in a real estate syndication
The process of investing in a real estate syndication can vary slightly from one sponsor to another, but overall, there are a few key steps.
First, you’ll need to sign up with the sponsor you’re interested in investing with. For example, if you were interested in investing with us, you would sign up for the Goodegg Investor Club.
Depending on the sponsor and the types of deals they offer, you may then get immediate access to their offerings, or you may need to hop on a call with a member of the sponsor team first.
This ensures that the sponsor team can get to know you and your investing goals and that you can get a chance to ask your questions before moving forward.
Once you’re signed up, you will be able to see all of the current and upcoming real estate offerings.
Next, you will choose which property syndication you would like to participate in.
Once you have chosen an investment, you will go through a due diligence process. This is when you will review the financials, the property, the sponsor team, and anything else that will help you make an informed decision.
If everything looks good and you decide to move forward with the investment, you will sign the necessary paperwork and wire your capital to escrow.
Once your funds are in escrow, they will be held until the deal closes.
At the time the deal closes, you will become a co-owner of the property alongside the general partner(s) and limited partners.
You will then begin receiving steady cash flow from the property’s income, which can be deposited directly into your bank account.
Related: The Best Way To Invest $200,000 In Real Estate (It’s Not What You Think)
How to evaluate real estate syndication offerings
Once you get access to a real estate syndication deal, you would do your own due diligence on the offering – by reviewing the real estate syndicate summary, investor webinar, and external sources – to decide whether to invest.
The syndication deal summary is a short document that outlines all of the key details of the real estate deal, including:
-The property type and location
-The purchase price
-The expected returns
-The projected timeline
-The sponsor team’s experience
The investor webinar is a video presentation given by the sponsor team that goes into more detail about the deal. This is your chance to ask a general partner your questions and get to know the sponsor team better.
After reviewing the investment summary and watching the investor webinar, you should have a good idea of whether the deal is a good fit for you.
Next, you would move on to due diligence. Due diligence is the process of gathering information about the real estate property and the sponsor team to help you make an informed decision about whether to invest.
You would review items such as the property financials, sponsor fees, the acquisition fee, the third-party market analysis, and through your own research on the asset type, the location, population and job trends in the area, and more.
If you choose to move forward, you would review and sign the PPM (private placement memorandum), verify your accreditation status, and wire in your funds.
Related: Understanding The Fees In A Real Estate Syndication Opportunity
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.
Related: How To Achieve Financial Freedom In 10 Years Or Less
Here's how it works
Apply for the Goodegg Investor Club (it's free!), a community of people just like you who are looking to invest passively in real estate.
We'll help you discover whether passive real estate investing is right for you and give you the resources you need to invest with confidence.
When we find great deals, we'll share them with you, and if you decide to invest, we'll guide you through it, step by step.
Once you invest, sit back and relax. Your work is done. We'll take over the heavy lifting and send you ongoing updates and cash flow.
Ready to invest alongside us?
There’s no better and more reliable way to build wealth for your family than to invest passively in real estate syndications.
To start your real estate syndication investing journey, apply to join the Goodegg Investor Club.