If you’ve been thinking about getting into real estate investing, chances are you’ve seen some opportunities for syndicating real estate.
The thing is, unlike more traditional forms of real estate investment, syndicating real estate investment isn’t very straightforward, and, chances are, you haven’t heard enough about it to know how it really works or if it’s a good investment.
The truth is, like any investment, it has its good and bad parts. Sometimes a syndicating deal is a fantastic investment, and other times sponsors might put forward riskier deals, usually with better rewards if everything pans out in the end.
That probably sounds familiar if you’ve done any investing before. Real estate syndication might be new, but it’s still a form of investing and works basically the same way.
Here’s what you need to know about real estate syndication, the benefits, and potential complications, and how it works.
How Does Real Estate Syndication Work?
Real estate syndication is a transaction offered by a sponsor, who will also manage the investment and a group of investors. The sponsor provides the opportunity along with details about the investment, what kind of returns to expect, and market information, and the investors invest, agreeing to keep their money in the investment at least as long as the pre-determined term on the deal.
Generally, this kind of investment is managed by an LLC or LP business, and there may be more than one person in the acting role of sponsor depending on the business and how many investments they run simultaneously.
Often the companies offering this kind of investment have multiple syndicated properties at one time. If you choose to invest you might invest in a single property, or you might be part of a syndication of multiple properties. Functionally, both kinds of investment work the same way, it’s just a difference of scale, and larger syndication deals tend to be less volatile.
There are two key kinds of payment from syndicating real estate:
- Preferred Return
- Rental payments
Additionally, you may also receive a third kind of income from the investment when the property increases in value. However, since not all properties increase in value all the time this kind of income is usually less consistent than the preferred return and rental distributions.
The preferred return is typically a 5-10% of the original investment amount that is paid annually before the sponsor takes any of the profits from the investment.
For rental properties, the sponsor will also distribute rental income to the investors on a monthly or quarterly basis, depending on the deal. Having a combination of both kinds of syndicated real estate can be a good way to ensure at least a modest passive income each month.
However, the cost of managing the property, including repairs, finding new tenants when someone moves out, and other costs are generally paid for before any profits are distributed. That means that you can have months or even whole years where the property isn’t really profitable depending on the condition it’s in, the kind of leases renters are given, ad the quality of building management.
Like jobs, a lot of people will leave a building that isn’t managed well, which can increase your costs and decrease the potential profit.
Ideally, you want to sponsor who has successfully managed this kind of investment before so that you know they know how to take care of the investment and make a reasonable profit from it.
What Is A Syndicating Real Estate Sponsor?
A real estate syndication sponsor is the person who puts the whole thing together and who also does the on-the-ground work of paying for property maintenance, collecting any rent from the property, and managing and distributing the money from the investment as required.
They also take an acquisition fee out of the initial investments for finding and purchasing the syndicated property(s). A typical acquisition fee is about 1% of the total, but it can range from .5%-2% on average.
From there, the sponsor either oversees the properties in question, or hires out to someone else to do so, either a property management and maintenance company or contractors. They manage payments to the investors as well as keeping them up to date on costs associated with the investment, market trends, and anything else that might be relevant to the value of the investment and whether payments are expected to go up and down.
What Are The Responsibilities Of An Investor?
The main responsibility of the investor is to make sure you’re choosing a good investment. You should look for syndicated real estate deals that have high-profit potential, and where the sponsor is as heavily invested as possible themselves.
It’s typical or a sponsor to invest between 5-25% of the cost themselves, partially so they make money on the deal, but also to prove that they’re committed to managing the investment well and keeping the investment safe for everyone involved.
You should also understand the terms of the contract, including how long you are required to stay an investor with your original investment if there is an opportunity to reinvest at the end of that investment term, and when to expect payments.
Every deal is a little different, so it’s important to be as informed as possible. Avoid excess fees, low sponsor investment, and other red flags that this deal might not be as profitable as it seems.
What Are The Benefits Of Investing In This Type Of Real Estate?
There are quite a few potential benefits to investing in syndicating real estate.
For one thing, for most investors, this kind of investment provides regular passive income. Most properties that get syndicated also offer relatively consistent rental income, so it’s easy to predict how much you’re going to get both short-term and long-term once the deal begins.
Working with an experienced sponsor can also make this one of the easiest kinds of investments to get going, especially since they are also investors and want to make it easy and profitable for themselves as well.
There can also be a much lower barrier to entry than becoming a landlord directly, or, if you have the means to invest more but don’t want the hassle of being a landlord yourself, bigger syndication investments let you reap the rewards of being a landlord without the personal responsibilities.
Real estate also tends to be a relatively stable and upward-trending market the majority of the time. It’s not impervious to crashes, but most real estate deals are relatively solid and unlikely to lose money.
Lastly, the regular income associated with being in a syndicated real estate investment can be a good way to add some variety to your investment portfolio, and to get a little bit of financial padding in case other investments perform poorly or the market more generally takes a hit.
Its all about building a little more security into your investments. And, like any investment, too much of one investment type can cause problems. But that’s no reason not to add at least a little syndicated real estate into your portfolio.
Challenges With Investing In This Real Estate
Despite the benefits of this kind of investing there are some challenges you need to deal with before it’s a good option.
First, like all investments, you should only invest money you don’t actually need into syndicated real estate. Until the term of your investment is up that money is effectively gone, and there’s no guarantee that you’ll make the money you’re expecting to from the investment over the course of that term.
Researching and choosing the right syndicated real estate deals can also be a challenge, especially since you need to research the sponsor as well as the deal itself. Jumping into a syndicated real estate investment too quickly can lead to lost profits from poor management, excessive fees, or higher than anticipated costs. The more research you do the better protected you will be.
Meeting minimum investment amounts can also be challenging depending on the property you want to invest in and your financial situation.
This isn’t quite the same as some other group real estate investments, and most syndicated properties won’t take micro-investments. You’ll need to invest a certain amount to qualify, and the amount required can be relatively high in some cases.
Is Real Estate Syndication Investment Right For You?
Most experts agree that syndicating real estate can be a good investment as long as you do your research before investing and make sure you fully understand the risks and potential rewards of the investment.
However, since investors don’t have direct control over the investment, or the option to pull out if it looks like you’re going to lose money before the end of the required term, it’s a good idea to limit the amount of syndicating real estate you invest in.
This kind of investment is good for diversifying your investment portfolio but syndicating real estate shouldn’t be the only kind of investment you make. Ideally, syndicating real estate shouldn’t even be the majority of the investments you make, even if you mostly invest in real estate.
If you’re interested in starting to invest in Syndicating Real Estate, contact Teifke Real Estate. Our team will be happy to help you find the best opportunities for someone in your position to invest!
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- Moussa, F. (2022, November 9). Council Post: A guide to investing in real estate syndications. Forbes. Retrieved November 17, 2022, from https://www.forbes.com/sites/forbesbizcouncil/2021/10/26/a-guide-to-investing-in-real-estate-syndications/?sh=61194c33538c
- Real estate syndication: How it works and how to participate. Financial Samurai. (2022, January 17). Retrieved November 17, 2022, from https://www.financialsamurai.com/real-estate-syndication-how-it-works-and-how-to-participate/