- What is a real estate syndication?
- How does a real estate syndication work?
- Why should I invest in a syndication deal?
- What would an example real estate syndication look like?
A REAL ESTATE SYNDICATION – WHAT’S THAT?Starting with the basics. The term “syndication” means pooling resources. A real estate syndication is when a group of people pool their funds and expertise to invest in a real estate asset together. Instead of buying a bunch of small properties individually, the group comes together and buys a larger asset. Let’s pretend you have $50,000 for investing beyond other savings and retirement funds. You could invest it in an individual rental property, but that would also require time to find a property, negotiate the contract, do the inspections, run the numbers, get the loan, plus find the tenant, and manage the property. But, likely, you don’t have the time or energy to deal with such an obligation. This is where most people assume real estate investing is too hard and too much work, so they stop there. Real estate syndications are the alternative that allows you to still put your money into real estate without having to do the work of finding or managing the property yourself. Instead, you can invest that $50,000 into a real estate syndication as a passive investor. So, you contribute $50,000; a friend has another $50,000 to invest, someone else puts in $100,000, and on and on. By pooling resources, the group would now have enough to buy not just a rental property but something more significant, like an apartment building. As a passive investor, you don’t have to do any work 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 small share of the profits. When done right, real estate syndications are a win-win for everyone involved.
HOW DOES A SYNDICATION DEAL WORK?Now you’re interested in the “behind the scenes” details of syndications to see how this all shakes out. First off, two main groups of people come together to form a real estate syndication: the general partners and the limited partner (i.e., passive investors). The prior section mentioned a team that would take care of all day-to-day management (so you don’t have to!) in exchange for a small share of the profits. That syndication team is made up of general partners (GPs). They do all the legwork of finding and vetting the property and creating the business plan. Essentially, they do the work you would do as the owner and landlord of a rental property, just on a massive scale. The limited partners (LPs) are the passive investors (like you) 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 and limited partners come together. The general partners find a great deal and put together an efficient team to execute the intended business plan. The limited partners invest their personal capital into the deal, making it possible to acquire the property and fund the renovations. Together, the general partners and limited partners join an entity (usually an LLC), holding the underlying asset. Because the LLC is a pass-through entity, you get the tax benefits of direct ownership. 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 quarter). Once all the planned renovations are complete, the general partners sell the property, return the limited partners’ capital and split the profits.
WHY SHOULD YOU INVEST IN A 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 several reasons passive investors decide to invest in real estate syndications. Here are a few of the top reasons:
- You want to invest in real estate but don’t have the time or interest in being a landlord.
- You want to invest in physical assets (instead of paper assets, like stocks).
- You want to invest in something more stable than the stock market.
- You want the tax benefits that come with investing in real estate.
- You want to receive regular cash flow distribution checks.
- You want to invest with your retirement funds.
- You want your money to make a difference in local communities.