What Is Real Estate Syndication?
At its core, real estate syndication is a partnership between multiple investors, allowing them to pool all available and relevant resources to find and purchase properties. This often enables them to purchase a much larger property than they otherwise could individually.
How Real Estate Syndication Works
Real estate syndication is generally of two types: Commercial and Residential.
Commercial real estate syndication involves several private investors who pool their money to acquire property for business and/or commercial use. It can include retail stores, hotels, offices, multi-purpose buildings, etc.
Residential real estate syndication works like commercial real estate syndication’s counterpart. The sole difference is that the resource pooling gets done for residential buildings like quadruplexes, duplexes, and condos.
Structure of a Real Estate Syndication
There are two main categories of people who participate in real estate syndication: the syndicator and the investor.
Also called a partner or sponsor, the syndicator is an individual who acts as the manager in a particular syndication deal. They typically scout, handle, and secure the contracts for various property investments, and deal with any associated matters. In addition, they may also manage the acquired assets. The syndicators usually do not contribute capital to the investment. Instead, they contribute their skills and time. Some syndicators may also take a relevant acquisition or management fee for the work.
Investors are the people who provide a certain amount of money for investment purposes. They fund property acquisition and any costs related to management, such as renovations or repairs. Investors in syndication deals benefit from passive income from the syndicate in the form of monthly or quarterly returns.
Setting Up a Real Estate Syndication
Typically, a real estate syndication structure adheres to the following points:
- The syndicators and investors form a limited partnership (LP) or limited liability company (LLC) in syndication deals. The former is the managing member, and the latter is the limited partner.
- Each party involved in the investment receives and holds a specific percentage of ownership over the property.
- In some instances, the proprietorship can get split equally among the partners. However, the syndicators take a higher equity percentage in most scenarios.
- The cash flow acquired from selling buildings and earning rent gets shared among the involved individuals. The division depends on the proprietorship percentage over the owned property.
- Particular deal structures remain associated with the preferred returns to the investors. Hence, the agreement must come to a minimum return level before the syndicator can make any money. It, in turn, provides a guarantee for the investors. Additionally, it offers stakes to motivate the syndicator to continue striving.
Benefits of Real Estate Syndicate Investing
People benefit from investing with real estate syndication companies in various ways, including:
In real estate syndication, the parties generally share the profits they acquire from and after a real estate project. It allows investors to collect their intellectual and financial resources. In turn, they can invest in suitable and profitable projects and properties they generally cannot afford. In other words, they can get larger assets related to real estate like mobile home parks, apartments, self-storage units, plots, etc.
Take the example of apartment syndication. In it, a group can buy a well-furnished and high-end apartment building or complex that they could not afford before the syndication deal. It is solely possible because they pooled all available resources and collected the money to make it happen.
The cost-effectiveness factor proves beneficial for the syndicators. It enables them to earn significant profit from an investment property without putting down any money.
A real estate syndication ensures passive returns for the investors. In other words, they can get regular income from the asset they invested in without directly managing the property. They can leave that role to the syndicators and get the passive earnings in return.
Real Estate Syndication vs. Real Estate Investment Trusts (REITs)
Though they may sound similar, investing via real estate syndication differs significantly from investing in a real estate investment trust (REIT). REITs are companies that primarily invest in various properties. Generally, investors purchase specific shares in REITs and own that percentage of the company instead of the actual properties. As such, REITs must adhere to several requirements as stated by the U.S. Securities and Exchange Commission.
A few differences between real estate syndication and REIT are mentioned below:
Minimum investment funds required
Real estate syndication requires more funds for investment compared to REITs. It is possible to own a fraction of a REIT share for as little as $1. Real estate syndication, on the other hand, involves ownership over a section of the LLC that, in turn, owns the asset. Generally, most real estate syndications require an investment amount of a minimum of $50,000.
A real estate syndication entails a company created by the sponsor for purchasing a particular property. Real estate syndications usually are less complicated than REITs, meaning it’s usually easier for investors to understand the business plan and the relevant details of the project.
For instance, the investors can know everything about their partnered sponsors in multifamily syndication. It, in turn, allows the investors to determine the worth of the investment.
On the other hand, a REIT involves an organization that invests in various real estate projects. Thus, it handles multiple undertakings simultaneously. However, it does not provide much visibility into the progress of the investment.
Real estate syndications have more tax benefits than REITs. The income that comes from REITs gets considered as a regular dividend, which leads to a higher tax bill.
Real estate syndication has depreciation and income that pass through the tax return associated with the investors. In other words, the relevant earnings can give cash and decrease the tax bill by offsetting the other related incomes.