Real estate syndication provides a unique opportunity for a specific set of real estate investors, allowing those who meet the qualifications to receive cash flow, appreciation, and tax benefits, without ever dealing with the property themselves. After all, the goal of real estate investing isn’t to take care of clogged toilets, deal with tenant requests, and single-handedly lose all your hair just to make some cash flow. Real estate investing’s true goal is passive income. The key word in that statement? Passive! And the go-to passive real estate investing strategy of many investors is real estate syndications.
So why isn’t everyone investing in real estate syndications? We’ll break down the situation on syndications in this article—providing pros, cons, qualifications, and everything else you ever wanted to know about this purely passive real estate investment.
A real estate syndication is when a group of investors or investment organizations raise capital to purchase real estate investments or develop land. Real estate syndications raise capital from private investors who reap the benefits of cash flow, appreciation, and tax deductions.
Syndications and real estate crowdfunding are two different methods of raising capital. With a syndication, investors contribute money to a pool of funds that is used to purchase real estate investments. These investors receive cash flow from the properties and potential appreciation on their investment. Crowdfunding, on the other hand, is when an individual or company seeks small-dollar investments from multiple people through an online platform.
Real estate syndications provide numerous benefits to their pools of passive investors. Some of the top advantages include:
Passive Income: Real estate syndications can provide passive income for investors. When a property is purchased and a tenant is in place, the investor receives monthly rent checks from their share of the property.
Tax Benefits: Real estate syndications are tax-advantaged investments. The IRS allows investors to deduct their losses from the property’s income, which lowers their overall tax burden. Investors may also get a share of the property’s depreciation, which allows them to write off even more of their income.
Appreciation Potential: Investors can also benefit from the appreciation of their investment. If a property appreciates while they are holding it, they will receive that profit when the property is sold at the end of its term (typically 5 to 15 years).
Diversification: Syndications open up new investment avenues for many investors. You can invest in apartment complexes, self-storage facilities, warehouses, shopping centers, and other unique investments that individual investors may not have access to on their own.
Real estate syndications may be less risky than other types of investments, but it’s still not without its perils. The best way to mitigate these risks is with due diligence on each deal you invest in—and remember that even well-vetted opportunities can fail if they’re not monitored carefully enough.
Here’s what to look out for:
Lack of Control: Investing in a syndication means operating as a passive investor. So, you’ll get all the upside of passive investing as well as all the downside. As a silent partner, you have no say in the everyday operations of the property. So be sure you vet your operator/syndicator before moving forward, as you’ll want to be in agreement on their strategy.
Less Operator Incentive: The operator gets paid regardless of how the deal gets done. If they’re able to raise capital, find a property, and close/purchase, then they’re getting paid. Operators/syndicators often get paid an acquisition fee, asset management fee, and ownership percentage. It’s in their best interest to make the property perform due to reputational value, but even if the property doesn’t hit its cash flow or appreciation goals, the syndicator will still get paid. This means less skin in the game for the operator.
Illiquidity: Real estate syndications are long-term investments, often with a five, ten, or fifteen-year exit window. This means passive investors won’t have access to their invested capital until the property is sold. So, if you’re looking for a quick turnaround, avoid syndications!
A real estate syndication isn’t a one-man/woman show, it requires an entire team. As such, on most syndication deals, you’ll be working with the following roles:
The Operator/Syndicator/Sponsor
Syndication operators are responsible for working with a broker to find the deal, build the team that will manage the deal, execute the day-to-day operations for the deal, and communicate with passive investors as the property progresses. They are the captain of the ship!
The Investor
The investors (maybe it’s you!) provide the capital for the property purchase, renovation, and management.
Key Principles (KP)
The key principle, KP for short, is often another private investor, but with a very specific part to play in the deal. The KP is a very high net-worth individual who acts as a financial hedge for the lenders. This means that if something were to go criminally wrong with the deal, the KP may be liable to help pay for damages.
Asset Manager
The asset manager is responsible for the day-to-day management of the property. They will manage the tenants, rent collection, maintenance issues, and all other aspects that come with running a rental business. If you’ve ever used a property manager before, think of the asset manager as a mega-scaled version of this.
Real estate syndications are structured differently from deal to deal. Most syndications operate at some form of an 80/20 or 70/30 split. In the 80/20 example, passive investors get 80% of the returns while the syndicator and partners get 20% of the returns. This presents a pretty simple split that most passive investors would agree to.
Another common type of deal structure is the preferred return structure. This means that passive investors get first dibs on returns up to a certain percentage. For example, if a syndicator offered a 10% preferred return, it would mean that passive investors solely get the first 10% of the profits, then once that first 10% is fully paid out, the syndicator and partners get a piece of the profits as well.
Syndications, like almost any other type of real estate investment, make money in a few specific ways.
Cash Flow
The first way that real estate syndications make money is through cash flow. This is the amount of income produced by the property, minus any expenses to maintain it. The more cash flow a property generates and the lower its expenses, the higher return on investment (ROI) passive investors will see.
Appreciation
The second way that real estate syndications make money is through appreciation. Appreciation is when the value of a property rises over time. As the value increases, so do rents and cash flow from the property. This profit cannot be realized until the property is sold or refinanced.
Acquisition Fees
The third way that real estate syndications make money is through acquisition fees. Acquisition fees are paid to the syndicator for finding and underwriting the investment opportunity. This fee is often a percentage of the total purchase price.
Management Fees
The fourth way that real estate syndications make money is through management fees. Management fees are paid to the syndicator for managing the investment property. This fee is often a percentage of the total monthly rent collected from tenants. The management fee can also include other services such as advertising, tenant screening, and maintenance of the property.
Depreciation and Tax Benefits
Although tax write-offs aren’t necessarily a way to “make money,” they are a primary reason why so many people start syndications and why so many investors throw money into one. With loan interest write-offs, cost segregation studies (depreciation), tax-free cash-out refinances, and more, syndications help high net-worth individuals make even higher incomes without much of a tax burden.
There are specific subsets of investors who can invest in real estate syndication deals and each subset varies based on the type of real estate syndication.
This is a type of syndication that allows non-accredited investors—meaning you don’t have to meet a certain net worth or income threshold to get in. That being said, to invest in a 506(b) syndication, without being accredited, you may need to personally know the syndicator. These types of syndications cannot be advertised to the general public.
This type of syndication is very common, and most people think of it when they think “real estate syndication.” 506(c) syndications can be advertised to the general public and may only accept accredited investors into the deal. An accredited investor must have a net worth that exceeds $1,000,000 (not including home equity) and has to make an average yearly income of $200,000 or greater.
If you are planning to invest in real estate syndication, there are a few things that you need to be aware of before entering into any deal.
1. Determine Your Real Estate Goals
Before you start investing in real estate, it is important to determine what your goals are. Which types of real estate interest you? What type of property do you want to buy? Is it commercial or residential or something else? How much money do you have to invest in this type of investment? Once you know what type of property will fit your needs and how much money can be invested into the deal, then it is time to look for a deal that meets those criteria.
2. Have the Funds and Get Accredited
If you’re interested in investing in 506(c) syndications, you’ll need to get accredited. Banks, brokerage firms, accountants, and investment advisors may be able to confirm your accreditation status. Once confirmed, you’ll need to save up the cash to invest. Some syndications have a $25,000 minimum while others have a $50,000 minimum. It’s not a cheap investment, but the passivity may be well worth it.
3. Find a Syndicator
Many online platforms offer syndication-type deals, but this may not be the optimal way to go. Some of the best real estate syndicators in the nation have long waiting listings to get into their deals. Your best bet? Talk to an investor who has already invested in syndications and ask them to recommend any syndicators they know and trust. You won’t want to invest a large amount of money without knowing other investors have walked away from the deal happy.
4. Find a Deal
Once you’ve found the deal/syndicator, it’s time to look into the deal. Make sure the deal fits with the syndicator’s investing experience. You won’t want to invest money with a well-known self-storage syndicator on their first multifamily deal.
5. Review the PMM and Reserve Your Spot
The PPM (private placement memorandum) gives you an in-depth look at the deal. Before you commit to investing, make sure you run through the numbers listed on the PPM conservatively. Make sure the deal’s exit strategy and cash flow projections work with your investment goals.
6. Deposit Your Money
Once you’ve cleared the hurdles of due diligence and decided to invest, it’s time to send in your money. The most common ways of doing this are wire transfers or electronic payments through a syndication portal. Always confirm (with a receipt!) that your payment has arrived where it needs to be.
7. Sit Back, Collect Cash
You did it! The money has been sent, the deal has been analyzed, and the operators are ready to do their thang’. Now it’s time to let your profits flow in and appreciation realize, all while getting some sweet tax benefits!
So there you have it. We’ve covered the basics of how real estate syndications work, and hopefully, that has helped you make sense of this complex, but cash-flowing topic. If you aren’t quite ready to invest in your first real estate syndication, don’t fret. You can still build wealth by buying your private real estate!
Still don’t know if the real estate syndication route is right for you? These FAQs should help.
For the most part, passive syndication investors need to be accredited to invest. Being an accredited investor means having a net worth of $1,000,000+ while making $200,000 per year.
The answer depends on several factors, but generally, syndicators make between 20% and 50% returns on their investment. This includes both the return from the property itself as well as any cash flow they earn while holding onto it. Syndicators are also paid in management fees and acquisition fees.
The answer depends on your goals. If you’re looking for a quick way to make money, then don’t bother with real estate syndications. These investments take time and experience to be successful. However, if you have the patience and commitment to learning the ropes, then they can provide a lucrative income stream with minimal effort on your part once set up correctly.
There are numerous online resources that can help you learn more about real estate syndications. Read this article, check out more posts on The Real Returns, or join a local real estate group/meetup, there’s a good chance someone there will have invested in syndications before!
There are many syndication companies, such as Cadre, Yieldstreet, and RealtyMogul to name a few.
