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Are you looking to invest in real estate without experiencing the trouble of developing property and managing it yourself? Real estate syndications may relieve many of the burdens of real estate development. 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. 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 investment?
- Real estate syndications vs REITs
What are real estate syndications?
Real estate syndications are groups of investors who put their money together to develop a property. The number of people involved varies, with the average being about 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 property and puts together a development proposal. These are the people who typically run real estate syndication companies.
- The investor. 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.
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.
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.
What are the 3 phases of real estate syndications?
Real estate syndications go through three phases before they’re considered complete.
The 3 phases of property syndication are:
- Origination. Origination happens when a sponsor begins planning and acting upon their development strategy. During this phase is when you should bring investors on board.
- 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 an accredited or sophisticated 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 for you.
Here are a few ways to find your perfect real estate syndication:
- Network, such as communicating with other 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 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 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:
- Passive monthly income.
- Tax benefits through K-1 tax filings.
- Control over which development projects you choose to invest in.
- Hands-off management.
Are real estate syndications risky?
All real estate investments are subject to the risks of the current real estate cycle. However, 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 trends and projections, 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 the sum you’ve invested. This is good practice for all sorts of investing. 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%. For a hands-off investment, this could be a pretty good deal!
Investors do need to consider real estate syndication fees that usually pop up during the process. These fees support the sponsor (otherwise known as the syndicator) financially, given that they’re the most active participant in this investment.
These fees include:
- Acquisition/disposition fees. This is usually around 1% of the acquisition cost.
- Asset management fees. These vary between 1% and 2%.
- Finance fees. This fee hovers around 1.5%.
The above fees are all outlined and transparent in any deal before investors commit.
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Real estate syndications vs. REITs
Real estate investment opportunities with real estate syndications have a number of pros and cons when compared to REITs. REITs, also known as real estate investment trusts, are companies that purchase or lease rental properties and rent them out. 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 right away. | Income usually flows in 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. |
| 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 puts together a group of investors to fund a large-scale investment property.
- Investing with a real estate syndicate could be a hands-off investment with the possibility of minimal risk.
- Real estate syndications differ from REITs in that syndications are for investors with more spending capital, syndications have vast tax benefits, and syndications have more diversity when it comes to property type.
