What is a Real Estate Syndication? Part 1
Most people have never heard of real estate syndication.
We had been investing in real estate for over a decade before we learned what syndication is. But it’s actually pretty common, and there is a reason for that.
Until fairly recently, SEC regulations did not allow for real estate syndication opportunities to be publicly advertised. Thus, you had to be part of an “inner circle” where you literally had to know someone who was doing a deal, in order to invest in one.
Luckily, the SEC has since seen the huge benefits of real estate syndications and now allows certain opportunities to be publicly advertised, thus allowing more people to learn about how to invest in these opportunities.
We’ll go over all the information you need to start investing in real estate syndications from what they are, to the returns you can expect, to the risks involved, and more. Here’s an overview of what we’ll cover:
Real Estate Syndications Part 1
What is a real estate syndication?
How does a real estate syndication work?
Can you give me an example of a real estate syndication?
What are the different types of real estate syndications?
Why invest in a real estate syndication?
What are the returns like in a real estate syndication?
What’s the minimum amount I can invest?
How long is a real estate syndication?
What is a real estate syndication?
Let’s start with the basics. The term syndication simply means a pooling of resources. A real estate syndication, then, is when a group of people come together to invest in a real estate asset together. Instead of buying a bunch of small properties individually, the group of people come together and buy a larger asset together.
Let’s say I have $50,000 to invest. I could take it and invest it in a rental property myself, but I would have to set aside enormous time to find a property, hire an attorney and put it under contract, do the inspections, analyze the numbers, get the loan, then find the tenant and manage the property.
But, maybe I don’t have that kind of time or interest. This is where most people stop. They figure, real estate investing is too hard and too much work, so they stop there.
But, what few people know is that real estate syndications are the alternative that allow you to still put your money into real estate, without having to do the work of finding or managing the property yourself.
With a real estate syndication, I can invest that $50,000 into a real estate syndication as a passive investor. So I put in my $50,000, maybe you have $50,000 to invest, someone else puts in $100,000, and on and on.
By pooling our resources, we now have enough to buy not just a rental property, but something bigger, like an apartment building.
As passive investors, we don’t have to do any of the day-to-day work of 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 share of the profits. (More on this in a bit.)
When done right, real estate syndications are a win-win for everyone involved.
How does a real estate syndication work?
There are two main groups of people who come together to form a real estate syndication: the general partners and the limited partner passive investors.
The General Partners (GPs) or Sponsors are the people who put the real estate syndication together. They do all the hard work of finding and vetting the property and creating the business plan. Essentially, they do the work that you would be doing as the owner and landlord of a rental property, just on a massive scale.
The Limited Partners (LPs) are the passive investors, who invest their money into the deal. The limited partners have no liability or active responsibilities in managing the asset.
A real estate syndication can only work when general partners and limited partners come together. The general partners find a great deal and put together a great team to execute on the intended business plan. The limited partners invest their personal capital into the deal, which makes it possible to acquire the property and fund the renovations.
Together, the general partners and limited partners join an entity (usually an LLC), and that entity holds the underlying asset. Because the LLC is a pass-through entity, you get the tax benefits of direct ownership (more on this in a bit).
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 (monthly, quarterly or annually depending on the deal).
Once all the planned renovations are complete, the general partners sell the property, return the limited partners’ capital, and split the profits.
Can you give me an example of a real estate syndication?
Let’s say that we are working together with a partner, Joe’s company to find an apartment community in Sacramento, California. Joe’s company is based in Sacramento, so he works with real estate brokers in the area to find a great property that meets our criteria. After looking at a bunch of properties, they find one, listed at $10 million.
Joe and his team take the lead on the underwriting (i.e., analyzing all the numbers to make sure that the deal will be profitable), and they determine that this property has a ton of potential.
Next step is Joe and we will put together a real estate syndication offering. We create the business plan and investment summary for prospective investors and work with a syndication attorney to structure the deal.
Then, we start looking for limited partner passive investors who want to invest money into the deal. Each passive investor invests at least $50,000 into the deal. We continue raising money until we have enough to cover the down payment, as well as the cost of the renovations and all of the other associated initial operational costs.
Once we close on the deal, we work closely with the property management team to improve the property and get the renovations done on budget and on schedule.
During this time, we send out monthly updates, as well as quarterly cash flow distribution checks, to our passive investors.
When the renovations are complete, we determine that it’s a good time to sell. We sell the property for $15 million after 5 years. We return all of the passive investors’ original capital, and we split the profits from the sale with the passive investors at the 70/30 split that was agreed upon at the outset of the syndication (70% to investors, 30% to the operators/sponsors).
In the last six months, we had two syndication deals; 112-unit in Savannah Georgia and a 54-unit in Denver Colorado. Both are performing better than projected at the time of this blog.
What are the different types of real estate syndications?
There are lots of different types of real estate syndications. There are real estate syndications that focus on multifamily, self storage, and manufactured mobile home parks, land development, hotels, student housing, warehouses, and more. Some real estate syndications are for ground-up construction. Some are for buy-and-hold (i.e., buy an asset that’s already stabilized, and hold it for a number of years).
The real estate syndications that we do most often are value-add multifamily deals. Value-add deals involve assets that need a little love.
For example, we might invest in an apartment community whose units haven’t been updated in ten years. The kitchens are all dated, the carpets are worn, and the landscaping needs some work.
By making those improvements, we can increase the rents, which increases the income of the property and thus, the overall value.
Why invest in a real estate 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 a number of reasons that 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 (as opposed to paper assets like stocks).
You want to invest in something that’s more stable than the stock market.
You want the huge 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.
What are the returns like in a real estate syndication?
Let’s talk about one of the things people are most curious about – the returns you can expect by investing passively in real estate syndications.
There are two types of returns that you can expect from investing in a real estate syndication.
The first type of return is a cash flow return, which you would receive in the form of a check or direct deposit either monthly or quarterly from the time the deal closes through the time the asset is sold.
The second type of return is a split of the profits upon the sale of the asset. The exact split depends on each deal’s specific deal structure.
Typically, for the real estate syndication deals that we do, the cash flow returns total 5-10% per year. So, if you were to invest $100,000, you could expect about $5,000 -$10,000 per year in cash flow returns.
Then, at the sale of the property, you could expect an additional 40-60% ($40-$60,000), in addition to receiving your original capital back.
Altogether, when counting the $7,500 (avg) per year for 5-7 years, plus the, say, $50,000 at the sale, you would have received a total of $100,000 in returns over the course of 5-7 years, thus doubling your money in that time. When counting the profits from the sale, your average annual return would have been well above 10%. We are seeing an average of about 15% but in some cases exceeding well over 20%. And that’s all before factoring tax benefit.
What’s the minimum amount I can invest?
Typically, we see a minimum of $50,000 - $100,000 for the deals that we do.
Your money will be illiquid during the length of the hold time (i.e., you can’t withdraw it until the asset is sold). Thus, you should only invest with funds that you don’t need access to for a while and can afford to lose.
How long is a real estate syndication?
While each real estate syndication is different, we typically see projected hold times of 5-7 years, sometimes longer.
This means that, for a real estate syndication with a 5-year projected hold time, you should prepare to have your money in the project for 5 years. You will not be able to take your money out until the asset is sold.
More about RE Syndication in Part 2!