Real estate syndication is a way for investors to pool their resources to buy more significant properties that would have been difficult to purchase on their own. Participating in a syndication project provides a powerful way for you to leverage your own money. Syndication also gives you other benefits, such as reducing the time spent on managing properties.
90% of larger apartment purchases flow from transactions involving syndications.
The process of syndication, which can have many moving parts and involve a plethora of team members, might feel a bit daunting and overly complicated at first glance. However, it’s similar to other, more familiar, business transactions.
Who are the players in a syndication deal?
The syndicator, or sponsor, is the party initiating the deal. A syndicator locates a potential acquisition and performs due diligence that includes thorough underwriting.
He or she is also in charge of hiring the right property manager, getting financing, and running the day-to-day operations of the syndication.
The best syndicators put together teams composed of individuals with strengths in a variety of fields, including law, finance, and commercial brokerage. Typically, syndicators contribute between 5-20% of the required equity capital, with investors providing the remainder.
Syndications are similar to other kinds of business transactions. For example, someone wants to purchase a small medical supply business.
This person might be someone with money to put into the store (the investor) while his or her partner has more experience and a successful track record running a similar business. (the Sponsor or Syndicator) In this example, the experienced partner is tasked with running the supply business. Typically, they will receive compensation in the form of a paycheck. Both the experienced partner and the investor partner will get a slice of the profits based on the amount of time and money invested.
Syndication works similarly. A syndication sponsor supplies the “sweat equity,” of fund-raising, acquisition, and management, while passive investors provide the equity.
Syndications, which have existed for many decades, are surprisingly simple to set up and are often structured as Limited Liability Companies or Limited Partnerships. These structures offer measures of protection for all parties. Distribution and voting rights, along with sponsor’s fees, are outlined in the LP or LLC Operating Agreement.
How does a passive investor make money from a syndication?
Syndication investors make money from their investments through appreciation and rental income. Since a property’s value generally appreciates over time, investors earn more substantial profits when the property eventually sells.
If you are thinking of participating in a syndication you should be aware that it may take a long time for your investment to mature. Syndication is not a “flipping” operation, but rather a buy and hold approach to real estate investment.
While some types of syndications can mature in as little as six months, the majority take from 5-10 years.
Every investor receives some share of profits when the deal matures, and the property sells.
Depending on the nature of the deal, the syndicator (aka “sponsor”) might earn an acquisition fee that averages around 1% but could go as high as 2%. Proper syndications are so structured as to ensure that the deal works for everyone.
In addition to allowing investors access to much larger real estate deals than might have otherwise been possible, syndication also provides numerous tax benefits, some of which have the potential to take your annual tax liability to ZERO or near-zero.
Operating within an LLC or LP opens the door to tax-deferred status and may allow you to compound 100% of the investment fund’s proceeds for years so long as you don’t distribute gains outside the funds.
A CPA specializing in real estate transactions will be able to explain which syndication tax advantages apply to your unique financial situation.
Wall Street investors diversify their portfolios to lessen their exposure to risk. It’s a proven strategy that is also possible in the world of real estate investing, thanks to syndication.
By spreading your money across multiple deals with different syndicators, reaching into different regions, and locating niches, you can build diversification into your real estate portfolio simply and effectively.
When you can remove yourself from an asset, you will forego many of the headaches associated with real investing. These include dealing with evictions, nasty tenants who destroy your property, maintenance that is costly and time-consuming, hiring and firing managers, and other issues that will chew up chunks of your life.
Investing in syndications allows you to push off the more unpleasant tasks associated with real estate. Paying the syndicator his or her fee enables you to become completely passive and earn your “mailbox money,” with fewer hassles
In contrast to single-family homes, multifamily syndications are businesses that are valued mainly by Net Operating Income (NOI). This means that by making strategic improvements to a property, you will increase NOI and thus increase the value of your property.
There are even more reasons that smart investors choose to put money into syndications. In future posts, we will examine some of these and show you step-by-step how to build a recession-resistant, tax-favored portfolio designed to grow and protect your wealth.
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