Disclaimer:This content is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice. Nothing contained on our site constitutes a solicitation, recommendation, endorsem*nt, or offer by ButterflyMX or any third-party service provider. ButterflyMX is not a financial adviser. You should always seek independent legal, financial, taxation, or other advice from a licensed professional.
Are you looking to take advantage of real estate investment opportunities without experiencing the trouble of developing real estate and managing it yourself? A real estate syndication investment may relieve many of the burdens of real estate investing. And they do this while also providing opportunities for a healthy return on your investment.
In this post, we explore the real estate syndication structure and provide a real estate syndication example. Next, we go over whether real estate syndications are good investments. Finally, we compare and contrast real estate syndications with REITs.
This post covers:
- What are real estate syndications?
- How do you get into real estate syndication?
- Is a real estate syndicate a good real estate investment?
- Real estate syndications vs REITs
What are real estate syndications?
Real estate syndications are groups of real estate investors who put their money together to develop a property. The number of people involved varies, with the average number of real estate investors hovering around 10. However, some syndicates number in the hundreds.
Real estate syndications typically feature two groups of people:
- The sponsor. This is the developer who chooses a real estate property and puts together a development proposal. They then find limited partners (investors) and manage investor relations. These are the people who typically run real estate syndication companies.
- The investors. These are the individuals who put capital, or financial assets, forward for the project. So, these are the people who fund real estate syndication companies. Because all they have to do is put money down, they are known as passive investors.
The best real estate syndications merge investors with a healthy amount of capital and capable real estate developers with lots of industry knowledge and experience. Syndications save developers from the woes of raising capital.
When investing, you’re by no means married to any one real estate syndication. You’re always free to pursue multiple real estate syndication investment opportunities, from multifamily investment to senior housing investment.
What are the 3 phases of real estate syndication deals?
Real estate syndications go through three phases before they’re considered complete.
The three phases of property syndication are:
- Origination. Origination happens when a sponsor begins forming a business plan and acting upon their development strategy. During this phase is when they bring real estate investors on board. They’ll prepare a presentation on their real estate syndication offering. From there, they will negotiate with these passive investors for a real estate syndication agreement.
- Operation. The middle phase involves managing the property and syndicate. Typically, syndicate members are informed of the property’s development status.
- Liquidation. This final phase culminates in the sale of the property and an ROI (return on investment) for all members of the syndicate.
How do you get into real estate syndication?
As long as you meet the necessary financial requirements, it’s pretty easy to invest with a real estate syndicate.
The main requirement is that you must be legally considered a sophisticated or accredited investor. In other words, you must have an annual income of at least $200,000.
As an alternative, if your net worth totals more than $1,000,000, you may also qualify.
Once you meet the financial requirements, you have a few options to find the right real estate syndication investment for you.
Here are a few ways to find your perfect real estate syndication:
- Network, such as communicating with other potential investors or developers on which syndications they recommend. This option can be difficult, especially if you’re just starting out in real estate development or investing.
- The tried and true method of searching online is always reliable. Look for real estate syndications with a history of developing successful properties.
A real estate syndicate’s minimum investment amount varies depending on both the type of property being developed and how many people are involved. Typically, we find that investment capital ranges between $25,000 and $50,000.
Is a real estate syndicate a good real estate investment?
Real estate syndicates may be a good investment if you prefer to be a hands-off investor. All you really need to provide is the required capital. From there, the sponsor will handle the messy work of developing or renovating a property.
The benefits of investing in real estate syndicates include:
- A passive monthly steady cash flow.
- Tax benefits through K-1 tax filings.
- Control over which development projects you choose to invest in for your real estate portfolio.
- Hands-off property management.
Are real estate syndications risky?
All real estate investments are subject to the risks of the current real estate cycle. However, many real estate syndications are far less risky than other real estate investments.
Additionally, the syndication you choose to invest in likely has an expected time frame for liquidation. So, if you stay informed of current real estate market projections and trends, you won’t have to worry about this type of risk.
However, one risk you will have to be aware of is your own finances.
The money you invest in a real estate syndicate can’t be easily withdrawn early (before the liquidation phase). Your finances must survive on their own without your investment funds. This is good practice for any investment strategy. In fact, it’s never a good idea to tie all of your money up at once.
How much does a real estate syndication make?
Investors in real estate syndications make money by receiving equity after the liquidation phase of a property. Generally, the sponsor makes between 30% and 40% of profits. Meanwhile, the investors split the remaining 70% to 60%. Both the sponsor and the hands-off investors stand to make a fair share of the profit.
Investors do need to consider real estate syndication fees that usually pop up during the process. Sponsor fees support the sponsor (otherwise known as the real estate syndicator) financially, given that they’re the most active participant in this investment.
These fees include:
- Disposition/acquisition fee. This is usually around 1% of the acquisition cost.
- Asset management fees. The real estate asset management fee varies between 1% and 2%. These can include fees that the syndicator will have to cover, such as a construction management fee.
- Finance fee. This fee hovers around 1.5%.
The above fees are all outlined and transparent in any real estate project deal before investors commit.
Discover the top 5 multifamily design trends:
Real estate syndications vs. REITs
Real estate investing with real estate syndications has many pros and cons when compared to multifamily REITs. REITs, also known as real estate investment trusts, that purchase or lease rental properties and rent them out. Passive investors put funds into REITs and receive a return on profits from rental income.
Let’s take a look at the similarities and differences between syndications and REITs:
| Real estate syndicates | REITs (Real estate investment trusts) |
|---|---|
| Income doesn’t accrue cash flow right away. | Income usually provides more cash flow instantly. |
| Investment is tied to the equity in one property. | Investments are tied to the REIT company itself, which can own and manage multiple properties such as a rental property. |
| Requirements to join a syndicate are very high and can be unattainable for middle-income investors. | Requirements for investing with REITs are generally attainable for most investors, especially beginners. |
| Can lower your tax bill. | Raises your tax bill because it’s classified as dividend income. |
| Investors can anticipate and avoid negative real estate cycles by deciding not to go forward with a syndicate. | The current real estate cycle can harm the annual profits of a REIT. |
Takeaways
- Real estate syndications happen when a developer becomes a sponsor and proposes an investment strategy.
- Investing with a real estate syndicate could be a hands-off investment that will generate passive income and provide tax benefits.
- Real estate investing with syndications differs from REITs in that syndications are for passive investors with more spending capital. Syndications also have vast tax benefits, and syndications have more diversity when it comes to property type.
