What You Should Know About Real Estate Syndication

Investing in real estate is not something you do by yourself, it’s a team sport. You likely don’t have the money to invest in an apartment building by yourself, it’s a bit more than you can afford.

If you want to start investing in bigger and more complex properties but don’t have the required capital to do so, you should consider participating in real estate syndication.

Syndication should be an option for you if you don’t have enough capital to buy a property. Or if you have the money, but not necessarily the expertise. Let’s dive into what syndication is:

What is Real Estate Syndication?

Real estate syndication is a partnership among several investors to purchase a real estate property. These investors combine their capital, resources, and experience to buy a property that they wouldn’t otherwise be able to buy themselves.

Imagine a syndication real estate like a group project. Everyone puts their knowledge and skills together to accomplish a goal. Except in this project, everyone pulls their own weight.

Syndication opens the door to investing in real estate to people who don’t have the money or experience individually. However, this “group project” isn’t a disorganized mess. There are responsibilities that need to be fulfilled by different jobs in the syndication.

There are usually 2 roles in a real estate syndication:

• The Syndicator/Sponsor
• The Investor/Limited Partner

Your own level of capital and experience will determine which of the 2 you are.

What is a Syndicator?

One of the major players in the syndication process is the syndicator. The syndicator is tasked with acquiring the property and/or managing it. Without them, there wouldn't be a deal to invest in.

The syndicator or “sponsor” is the person that organizes the syndication and arranges for the involvement of all legal parties. It’s not uncommon for sponsors to offer their time, effort, and experience instead of capital investment.

The syndicator role might be a good fit for you if:

• You’re great at finding properties.
• You’re experienced at property management.
• You’re an effective communicator.

If you are great at finding deals but don’t have that much capital to invest, being an indicator might be the role for you.

CAUTION: it’s not all sunshine and dandelions being a sponsor. You have an enormous responsibility to the other members of the syndication. They rely on you for your diligence, financial stewardship of their money, and expertise.

Investor

The second type of person in real estate syndication is the investor. Investors provide the capital necessary to purchase the property, but they mostly serve a passive role.

Investors are generally interested in acquiring a property to gain a percentage of profits, but they typically will leave the day-to-day operations to the sponsor.

The investor role might be a better fit for you if you have enough capital to invest but lack the experience of finding and acquiring properties. Or if you’re looking to earn passive income without managing the whole deal yourself.

Before you start thinking investors have it easy, they actually have important responsibilities. At the beginning of every syndication, they must draft the syndication agreement. This agreement outlines:

• Communication Practices. This might mandate monthly or quarterly meetings and the point is to ensure transparency between the sponsors and the investors.
• Voting Rights. Determines the right for investors to decide what to do with the property once it’s acquired.
• Profit Distribution. This agreement outlines how much profit each member is entitled to.

As mostly passive members of the syndication, they will be the primary source of capital and own a percentage of the property based on the investment and number of investors.

How To Split the Profits in a Real Estate Syndication

Plain and simple: investors usually earn more in a real estate syndication than the sponsors do. Let’s get that out of the way. Investors have more capital in the deal than sponsors do so it’s not uncommon for investors to earn close to 70% while sponsors get 30%.

A sponsor only contributes 5-10% of the investment, but they can receive an “acquisition fee” for overseeing the property transaction. This is can be between 1 - 5% of the transaction value.

Whether the sponsor invested money or not, they still get a piece of the pie. However, the investors get a “preferred return” that’s a much larger slice. For example, if the investors get 12%, sponsors might get only 5%.

If the property is going to be sold, each investor will get a share of that deal’s profits. And if the property is going to be rented out to tenants, then the investors will get a share of the profits generated by the rent.

Summary

In case you’ve been skimming over everything until now, the reason you would partner with other investors in a syndication is to purchase a property you wouldn’t be able to afford on your own. In this group of investors, you’d serve one of two roles:

• The Syndicator
• The Investor

The syndicator is tasked with acquiring the property and maybe even renovating it to maximize profits for the investors. The other role, investors, provide the capital to purchase the property, but besides that, they play a mostly passive role.

Being an educated investor means being open to and understanding the investment options around you. By learning what you did today, anyone with enough experience and capital can dive deeper into the world of real estate and generate more passive income.