You may have enough resources to afford real estate on your own. Some investors, however, want to buy larger investment properties but do not have sufficient funds for the down payment and monthly expenses. These investors team up with other investors to buy properties they could not afford on their own. Real estate syndication enables this relationship between investors. Several investors combine their resources to purchase an expensive property as a single entity. We will discuss the real estate syndication process, the benefits, and how to get started.
What Is Real Estate Syndication and How Does It Work?
Many investors pool their funds together to purchase an expensive property. None of these investors could afford the property on their own, but their combined capital puts more opportunities within reach. Some real estate syndications only accept accredited investors, but real estate crowdfunding has made the model more accessible. Investors receive a percentage of cash flow and profits from a sale based on their investment.
Real Estate Syndication: Sponsors and Investors
Every real estate syndication features a sponsor. The sponsor leads property acquisition and typically makes 5-20% of the investment. The remaining funds come from investors. Sponsors do their due diligence to find the best deals, raise funds, make offers, and take care of the property. Everyone else in the syndicate becomes a passive investor. These investors do not have to worry about any work from the property. They handle all the construction, management, and every other responsibility for the property.
Why Investors Participate in Real Estate Syndication
Real estate syndication investors become passive, and all of the work gets done for them. Investors like a laid-back approach that lets them access promising properties. Most investors in real estate syndicates cannot afford a 100-unit property in a desirable location on their own. These properties can offer incredible cash flow and appreciation, and syndications make them more accessible.
Syndicate investors can confidently allocate funds, knowing that professionals are looking for deals and managing the property. Unfortunately, searching for the right deal can take years, especially if you don’t know much about real estate and local trends.
The Real Estate Syndication Process
Real estate syndicates have more money and resources than individual investors. Syndicates operate under the following process.
Raising of Capital
Every real estate syndication needs capital to finance properties. A sponsor will connect with investors and raise funds. Sponsors establish their objectives and network with investors who align with those objectives. Sponsors often set net worth and contribution requirements to participate in a deal.
Asset Acquisition
Sponsors use raised capital to acquire assets. They find many great assets and narrow their list for prospective investors. Potential investors will want to see what type of assets the sponsor intends to acquire. Doing research and compiling a list of assets helps you get money and acquire an asset.
Asset Improvement
Not every real estate syndicate buys quality properties. Some syndicates focus on fixer-upper complexes in desirable locations. The sponsor will improve the property so each unit can command a higher rent price.
Increase Net Operating Income (NOI)
An asset’s net operating income determines cash flow. Raising this number results in higher distributions and happier investors. Sponsors can minimize expenses and increase income streams to improve net operating income. Sponsors can raise prices and fees to increase rental income. They can also install laundry machines, vending machines, and other resources that can produce income. A sponsor may have to spend more money if property managers charge more for their services and taxes increase. However, sponsors often use fixed mortgage payments which eventually go away. This dynamic helps sponsors increase income at a faster pace than expenses.
Preferred Distribution
After covering expenses and taking their cut, sponsors distribute funds to investors. Investors receive a distribution based on how much they invested into the asset’s acquisition.
Exit Strategy
Some sponsors want to hold onto an asset for decades, while others want to exit the position in a few years at the right price. An exit strategy establishes a firm objective and timeline for the asset.
Final Distribution
Investors receive distributions at set intervals for multifamily complexes. These investors receive a final distribution after the sponsor sells the assets. After this final distribution, investors hope to get their initial investment back with additional proceeds. Sponsors can use the extra capital to find the next deal land to repeat the cycle. In addition, sponsors can tap into their network of investors to raise funds quicker than before.
Benefits Of Real Estate Syndication
Real estate syndication takes the benefits of real estate investments and makes them even better. Any investor involved with syndication gets the following advantages.
Earn Passive and Hassle-Free Income
You’ll receive consistent cash flow distributions for investing in real estate syndication. The sponsor will also handle all of the work, such as property management and recruiting tenants. This passive and hassle-free structure lets you earn additional income without doing extra work.
Professional Management
Real estate is a people-oriented business. It can take a long time to acquire the right skills and meet the right people. Sponsors have vast networks and top-tier management. Professionals find the best properties and discover the best property managers through trial and error. New investors often learn real estate lessons by losing thousands of dollars. A syndication’s management team has learned these mistakes and knows how to maximize a property’s value.
Asset Appreciation
Many assets gain value over time, especially real estate. Real estate is an inflation hedge that will appreciate as the population grows and demand increases. Asset appreciation helps during an exit, and you can collect cash flow in the meantime.
Stability
Real estate syndications buy multifamily properties and other large real estate acquisitions. These assets typically offer stability since people always need a place to live. Real estate is less risky than other assets like tech stocks and cryptocurrencies.
Investment Control
You can partner up with a real estate syndication with goals that align with yours.
Diversification
Real estate syndication makes it easier to diversify your portfolio. For example, some investors can afford an apartment complex, but they would have to invest every last penny into the asset. This risky portfolio concentration can bankrupt you if the property doesn’t generate enough cash flow. Real estate syndication lets you pool cash with other investors, requiring less capital to buy large complexes. These complexes also reduce risk since they have many units. Some apartments have over 100 units, helping you withstand the rental impact of a vacancy.
Tax Benefits
Real estate syndications offer several tax advantages. Investors can write off depreciation to save on taxes. You’ll also have a lower tax rate since you are a passive investor. Real estate is one of the best assets for saving on taxes and generating high returns.
