When I first heard of syndication, I related it to TV networks and how certain shows were syndicated to be broadcasted on other channels. As I dug more into ‘Real Estate Syndications’ I learned that it was not a very common term even for long time real estate investors.
The reason for that is until somewhat recently, SEC regulations did not allow for real estate syndication opportunities to be publicly advertised. You had to know someone who was doing a deal (be in the inner circle) in order to invest in one.
Luckily, the SEC now allows certain opportunities to be publicly advertised, which opens the gates for more people to learn about and invest this way.
But maybe you’re new to this term too and are wondering things like:
- What is a real estate syndication?
- How does a real estate syndication work?
- Why should I invest in a syndication deal?
- What would an example real estate syndication look like?
A Real Estate Syndication – What’s That?
The term syndication means pooling resources. A real estate syndication is when a group of people pool their funds and expertise 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 you have $50,000 for investing, beyond other savings and retirement funds. You could invest it in an individual rental property, but that would also require time to find a property, negotiate the contract, do the inspections, run the numbers, get the loan, plus find the tenant and manage the property.
But it’s likely you don’t have the time or energy to deal with such an obligation. This is where most people assume real estate investing is too hard and too much work, so they stop there.
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. Instead, you can invest that $50,000 into a real estate syndication as a passive investor. So you contribute $50,000, maybe a friend has another $50,000 to invest, someone else puts in $100,000, and on and on.
By pooling resources, the group would now have enough to buy not just a rental property, but something bigger, like an apartment building. As a passive investor, you don’t have to do any of the work 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 small share of the profits.
When done right, real estate syndications are a win-win for everyone involved.
How Does A Syndication Deal Work?
First off, 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 prior section mentioned a team that would take care of all day-to-day management (so you don’t have to!) in exchange for a small share of the profits. That syndication team is made up of general partners (GPs). They do all the legwork 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 (others like you), who invest their money into the deal. The limited partners have no 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 an efficient 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.
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 (usually every month).
Once all the planned renovations are complete, the general partners sell the property, return the limited partners’ capital, and split the profits.
Why Should You Invest In A 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 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.
A real estate syndication is a nearly perfect way that a busy professional can invest in large-scale, physical real estate assets, without the commitment of time or excessive mental energy, while also positively impacting the community and earning interest and tax benefits. This opportunity for passive income is sounding better and better.
An Example Real Estate Syndication:
Okay, so you’re interested, but you’re still like, “Is this real?” Here’s an example of what a real estate syndication deal would look like.
Let’s say that Stephanie and Mark are working together to find an apartment community in Orlando, Florida. Stephanie lives in Orlando, so she works with real estate brokers in the area to find a great property that meets their criteria. After looking at a bunch of properties, they find one, listed at $10 million.
Mark takes 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.
Since Stephanie and Mark don’t have enough money to purchase the $10-million property themselves, they decide to put together a real estate syndication offering. They create the business plan and investment summary for prospective investors and work with a syndication attorney to structure the deal.
Then, they start looking for limited partner passive investors who want to invest money into the deal. Each passive investor invests a minimum of $50,000 until they have enough to cover the down payment, as well as the cost of the renovations.
Once the deal closes, Stephanie works closely with the property management team to improve the property and get the renovations done on budget and on schedule.
During this time, Stephanie and Mark send out monthly updates, as well as monthly cash flow distribution checks, to their passive investors.
When the renovations are complete, Stephanie and Mark determine that it’s a good time to sell and the property goes for $15 million after just 3 years. Each passive investor receives their original capital plus their split of the profits according to the original deal. In this case, a 70/30 split was agreed upon at the outset of the syndication (70% to investors, 30% to Stephanie and Mark).
At this point, each passive investor has received monthly cash flow checks during the renovation and hold period, plus their initial capital investment back once the property sold, plus their portion of the profit split after the sale – a great return for pretty much no work. Sweet.
Now that you have got a peek behind the curtain of a real estate syndication, including what it is, how it works, how little effort on your part it requires, and how simple it could be to begin receiving your first passive income check, definitely don’t wait 10 years to make a move.
We always shared that you should get smart before you invest. Passive investing is not blind investing. You need to get into a deal with your eyes open. At Smart Capital, we guide you with the process all along the way, including providing you with educational resources to invest in yourself first before investing in a real estate syndication.