Follow Us on Social Media

email icon rss icon linked.in icon google plus icon twitter icon facebook icon

Real Estate Syndication: 3 Ways You Can Profit

by Khary Reynolds on August 30, 2010 · 38 comments

  <
real estate syndication

As a real estate investor it is critical that you have access to readily available capital in order to capitalize on the numerous opportunities that are present in today’s market. One way to do this is by acquiring properties through syndication.

Real Estate Syndication is simply the pooling of funds from numerous investors and channeling those funds into real estate projects. These funds can be used to acquire a property in its entirety, or these funds can be used as an equity contribution to the project in addition to a commercial mortgage, which would fund the majority of the project’s costs.

As a real estate investor, especially as a commercial real estate investor, you should constantly be looking for ways to syndicate real estate opportunities. By successfully syndicating real estate deals, you will be able to acquire more property and profit in numerous ways.

Here are the 3 Ways You Can Profit from Real Estate Syndication

1.) Acquisition FeesAs a syndicator of real estate you will typically receive compensation for finding the property, conducting due diligence, and structuring the deal. Acquisition fees can range anywhere from 1% – 5% of the acquisition costs, or it can be a flat fee (i.e. $25,000). These fees are generally negotiable with the other investors that you bring into the deal. If your fees are too high, other investors might be leery to invest with you, however, finding and structuring deals can be a tedious task, so make sure your are compensated for your time and effort.

2.) Asset Management Fees – Another way to profit from real estate syndication is to receive an asset management fee. This fee, generally 1% of gross revenue, is typically paid to you as the syndicator of the project because it will be your responsibility to manage not only the property but the syndicate partnership as well.

You will have to constantly ensure that the property is being managed and operated efficiently by communicating regularly with the property manager. If the property is under going renovations, it will be your job to ensure that the renovations are completed on-time and hopefully under budget.

In addition to managing the investment, you will also be responsible for managing the syndicate. This duty will require that your investors are communicated with on the regular basis in regards to their investment and ensuring that they receive their compensation on a regular basis i.e. monthly, quarterly, or whatever time period that was agreed upon.

3.) Equity Participation (Cash Flow & Appreciation)Finally, you will be compensated through your equity participation in the project. Your equity stake in the project could range anywhere from 5% – 50% depending upon your experience and the details of the deal. Normally, your investors will receive a preferred rate of return ranging from 8% – 12% or higher, on their invested capital first, then the remaining cash flow and/or equity will be split between you and your investors at whatever percentage that was agreed upon.

For example:

Let’s say that you and a group of investors acquire a building for $1,000, 000 – all cash, no mortgage. Your investors put up the entire amount, which included your acquisition fee. After all of the expenses have been paid including your asset management fee, the property generated $120,000 a year in profit. Your investors would generally be entitled to a preferred interest payment first. Let’s assume that it is a preferred interest rate of 8%. That means that your investors would get $80,000 in interest first out of that $120,000 profit (8% of $1M). The remaining $40,000 would be split between you and your investors at whatever percentage you previously agreed upon. That could be a 50% – 50% split or it could be a 75% – 25% split with your investors getting the larger portion.

So, with an 8% preferred rate of return and a 50% –50% split, your investors would have made $80k in interest and another $20k from its equity participation in the cash flow from the property. This would equate to a 10% cash-on-cash return for them, PLUS, they would still have an equity percentage in the appreciation of the property, so there is still an opportunity for them to make more money on the back end, once the property is refinanced or sold.

As the syndicator, you were able to participate in a deal with little money out of your own pocket and you will have been paid through an acquisition fee, asset management fee, and an additional $20k in cash flow. PLUS, you will still have a 50% stake in any future equity appreciation in the property.

Overall, this would be a win-win situation for all of the parties involved and would lay the foundation for syndicating additional deals in the future.

Hopefully, this article was helpful and provided you with more insight on how you can profit from syndicating real estate. If you have any questions, we can carry the conversation over into the comments below so please let me know your thoughts and comment below.

Comments are always welcomed and encouraged! Let me know your thoughts below in the comment section and feel free to retweet this post on Twitter or share on Facebook.

Photo: Osvaldo Zoom

Email *
  



{ 38 comments… read them below or add one }

Eric Amzalag August 30, 2010 at 3:40 pm

Khary – Sounds like you’ve got some xperience doing syndication. I hope this question is not too personal, but how did you build your investor group that backs you on any syndication deals you may do? Also, how long did it take you to find a quality group of investors that would back you through the thick and thin of purchasing investment properties?

I ask because I’m currently 21 yrs old, and am really trying to network in my area with the goal of one day syndicating deals myself. I’m currently working at a Commercial Real estate firm in my college town, and I always wonder what kind of events I should go to to meet people who – in the future – will feel comfortable investing with me… I’ve tackled part of my goal – get into CRE. Now I need to take the next step…

Reply

Joe Stampone August 31, 2010 at 1:57 pm

Hey Eric,

I’m not too familiar with Santa Barbera, but from what you described, it seems like an interesting City. The growth boundary and dense development make it very sustainable.

From an outsiders perspective, it seems like the best opportunities will be in rehabbing older properties to make them more “green.” Just because you’re buying a building at a 5 cap doesn’t mean there isn’t upside.

If you can rehab the building, increase rents, thereby increasing value, then there is money to be made. Feel free to email me with details for further discussion.

Reply

Khary Reynolds August 31, 2010 at 2:13 am

Eric thank you for taking the time to comment. I really appreciate it. In terms of your question, finding a group of investors to invest with you in a never ending process. With today’s economy everyone is leery about investing their money, so you will always be in the process of meeting investors, building credibility, gaining trust, presenting deals, etc. It would seem like right now you are in the “Meeting Investors” & “Building Credibility” phase. It is great that you got involved with a CRE firm because that will help you to build credibility.

If I were you I would begin attending as many REIA meetings in your area as you can and find the people who are already doing deals. Ask them if you could work for them for free doing whatever mundane tasks they don’t want to do. This could be visiting properties, going to the court house and searching public records, running comps/analyzing deals. If you approach the relationship with the heart of a servant, the law of reciprocity will come back to you and you will find that many of these investors will want to return the favor to you in some way. This could mean investing in one of your deals, or allowing you to be a partner in one of their deals, or introducing you to other investors.

Hopefully this helps. If you have more questions, please feel free to leave another comment or connect with me on the forums.

Reply

Eric Amzalag August 31, 2010 at 10:26 am

Extremely helpful. thank you Khary.

If you don’t mind I think I’ll contact you through the forums. Have a bunch of questions and I don’t want to cramp this great post :)

Talk to you soon Khary,
Eric

Reply

Khary Reynolds August 31, 2010 at 11:02 am

@Eric – Glad I could help. I received your colleague request and accepted, feel free to contact me anytime.

Reply

Jeff Brown August 31, 2010 at 10:05 am

I think if you’re able to find superbly high quality buildings, with golden tenants, in equal quality locations at cap rates of 12%, you’ll have no problem whatsoever of finding investors.

Reply

Khary Reynolds August 31, 2010 at 11:07 am

This is true Jeff, unfortunately in my area and experience those buildings rarely are “found”, normally we have “create” them through renovation and/or repositioning. And as I am sure you know with renovations, anything that CAN go wrong, normally DOES go wrong!! LOL! So getting investors to see the potential of the final product can be work sometimes, but overall it is worth the effort.

What are your thoughts, can you “find” deals like this, that need limited work?

Reply

Eric Amzalag August 31, 2010 at 11:11 am

I know that in Santa Barbara – where I work – you cannot..
Lead me to my questions in the huge comment above – Is this a deal breaker for Santa Barbara as the location for my RE career if my goal is to syndicate deals?

Reply

Khary Reynolds August 31, 2010 at 11:20 am

Eric,

Money can be made anywhere and you better believe somebody is making money in Santa Barbara. You just have to figure out “Where”, “What”, and “Why”. See this post I did on BP a couple of weeks ago: http://www.biggerpockets.com/renewsblog/2010/08/16/now-right-time-real-estate-find-deals/

Khary Reynolds August 31, 2010 at 11:08 am

This is true Jeff, unfortunately in my area and experience those buildings rarely are “found”, normally we have “create” them through renovation and/or repositioning. And as I am sure you know with renovations, anything that CAN go wrong, normally DOES go wrong!! LOL! So getting investors to see the potential of the final product can be work sometimes, but overall it is worth the effort.

What are your thoughts, can you “find” deals like this, that need limited work?

Reply

Eric Amzalag August 31, 2010 at 10:38 am

Your definitely right on that Jeff. I do find myself w/ another dilemma…

Mind you, I am only 21 so things can change, but I do have a great job + opportunity to work at the highest volume Commercial RE brokerage in my ~120k population college town + surrounding city. My boss wants me to commit to 3 years after graduation (2011-2014). Here’s my dilemma – the cap rates in my city average 5% because of zoning restrictions that do not allow ANY new buildout whatsoever. There is no geographic (space) city expansion. As such, property values don’t fluctuate as widely as other areas (supply is limited, demand grows) but because there is less risk, the cap on buildings does not get as high as in other areas. My goal has always been to learn through brokerage and PM while building an investor group and then to syndicate RE deals starting as soon as is possible.

Knowing that the cap in my town will VERY rarely go above a 5-8% range, do you think it will be difficult/nigh on impossible to find investors?

Do you think that this city will be a “bubble” (That whatever progress I make building an investor group and learning brokerage and PM will not translate to a bigger city because of this cities unique RE characteristics)?

Do you think staying in this smallish city to gain experience at this high volume CRE brokerage is inconsistent w/ my goal of syndicating deals?

Khary, Jeff, I know this is a ton of stuff. This definitely DOES NOT belong here in the comment section of this article. I will take this and move it to the forums – any idea where a good place to put this post would be where it will get some exposure?
Khary – I will absolutely understand if you feel the need to delete this comment here.

Thanks for the responses guys!
Eric

Reply

Khary Reynolds August 31, 2010 at 11:17 am

Eric,

Personally, my philosophy is that “You don’t know, until you try!”. I would say learn as much as you can at your brokerage firm and see who is buying the commercial buildings in your area. Are they local investors, investment groups, institutional investors. Also, you might want to “drill down” and see which segments of the commercial market are you going to focus on AND the going cap rates for each type of commercial property type i.e. Multi-family, Industrial, Office, Retail, etc.

I would say that you are in a great place because you are at a high volume CRE Brokerage firm, if you pay attention to the transactions you will find out who the “players” are and what areas they are “playing” in. The next question would be to find out “Why” they are playing in these areas and if you can play in these areas with them.

I know these are specific answers to your questions, but I think that they are fundamental questions that you will have to answer in order to know which direction to proceed.

Hope that helps

Reply

Jeff Brown August 31, 2010 at 10:43 am

Eric — Go here http://bit.ly/4ewycc — get my cell number at the bottom of any post I’ve written, and call me ASAP. You remind me of…me. :)

Reply

Eric Amzalag August 31, 2010 at 10:56 am

I’m gonna need to hold off on calling till tonight – not @ work due to some food poisoning but have some responsibilities for a Student Club here at School (UCSB Student Entrepreneurs Association). I’ll shoot you an email and maybe we can schedule a good time to chat?

Reply

Jeff Brown August 31, 2010 at 11:42 am

Khary — In my experience, and I’ve syndicated a bunch over the years, the answer flows naturally from what Grandma told us. If it sounds too good to be true, etc. If a building can be fixed up with not much effort/cash, and will then yield 12% cap rate, AND it’s location is boffo, there’s something definitely wrong in Denmark.

Either the location quality is significantly overrated, or the NOI is, or the effort/cost of fix-up is. Sometimes all three — in my experience, almost always all three. :)

A building bringing all three into play would be rare as hen’s teeth to say the least.

Bottom line? If you can indeed find A+ locations with buildings for which you can create 12% cap rates, you’ll be the most popular guy in town. I haven’t been able to do that.

Reply

Khary Reynolds August 31, 2010 at 11:56 am

Jeff,

Grandma was definitely right on that one and just about everything else for that matter! :-) Yeah, you definitely can’t find that in the A+ areas, that’s why I tread in the B-/C+ areas. I have been having much better luck in those areas, but the A+ properties look so pretty, I wish I could get them for rock bottom prices and super high Cap Rates! :-)

Reply

Jeff Brown August 31, 2010 at 12:06 pm

Astute investors will shy away from locations significantly worse than A. They realize, probably through experience, that there’s a reason the the cap rate can be so high. It’s cuz there’s relatively very little demand for the area, regardless of the return offered.

Reply

Eric Amzalag August 31, 2010 at 12:33 pm

I think thats the benefit my location offers me. lower cap rates (8% isnt BAD) but more security because investors know the supply is limited. Demand remains high because this is an affluent city and investors need vessels for their cash….

tough decisions tough decisions. You both have been fantastic helping me out w/ this so far :D

Reply

Duke Long August 31, 2010 at 2:30 pm

Eric,
1. Just start.
2.Define your niche.
3. Numbers are just that…numbers.
4. Value for the client.
5.Quote from a big hitter friend of mine ” 25 years 17 hours a day that’s my secret.”
6. Simple answers maybe but, the other commenter’s hit the finer points.

Reply

Joel Owens September 6, 2010 at 9:19 am

Good article on syndication.

Investors thinking they will pick up Class A buildings for peanuts are dreaming.There is so much hedge fund,war chests etc. looking for this stuff that they are getting desperate to invest the fund in SOMETHING,ANYTHING!

In my neck of the woods Georgia we get investors all across the nation investing here.In their home towns like New York,California,etc. they are seeing 5 CAP rates where investors are speculating on these markets appreciation and care less about the CAP.

Here unless you buy a rundown building in a A location and repurpose into something else or tear it down and build new you will not drive those numbers on a class A product.

Most of the investors I know want class A location with B or C building.Class A buildings are still being gobbled up by REIT’s,Insurance companies,and other institutional players looking for a marginal CAP of 6 to 7.

Investor groups don’t go after those Class A assets as they get beat out time and again by institutions who will accept much lower returns.You will have investors that buy in B and C locations for THE RIGHT PRICE.

In Atlanta in the war zone you can pick up gut jobs for about 5,000 a door.The new BELTLINE is coming and these areas are only about a 1/2 mile from the Aquarium and Coca Cola store. I can assign these properties for a fee or Atlanta government will buy these from you with the Neighborhood Stabalization Program funds.

Reply

Khary Reynolds September 7, 2010 at 3:17 pm

You’re dead on Joel. The class A with low cap rates is definitely the realm of the institutional players. I personally don’t think B or C locations are all that bad. For me the key is whether or not there is “violent” crime. If there is not a lot of “violent” crime I will consider the area.

Reply

Jere September 7, 2010 at 6:14 am

Wow, I would love to be able to do that. What would the paperwork look like to do syndication?

Reply

Khary Reynolds September 7, 2010 at 3:26 pm

Jere,

The paperwork can vary depending on how much money you need and/or how many investors you have. You might doing something comprehensive in a Private Placement Memorandum, but that will be expensive and cost prohibitive, but will probably give you the most protection from a disclosure standpoint. Or, you might simply use a joint venture agreement via a LLC or LP operating agreement.

Reply

Audrey Lee Jacobs February 9, 2012 at 11:46 am

I find your discussion interesting – even if almost two years late! I am an investor, who is starting to do syndications for my own account. I agree with the comments about B and C properties (not in war zones, which is where the D properties are located) with decent cap rates (8 is great in NYC, my hometown) being a good way to go for investments and for syndication. I am an attorney and I am available to talk abou thte documents required for syndication deals……good luck to all…….and to our success……

Reply

Randy Holland July 21, 2014 at 1:54 pm

Audrey,
Appreciate your interest in all of us. I’ve recently sold a business in the Nashville area. I spent several years as a broker with Marcus and Millichap in LA. I’m very interested in returning as a syndicator here in the Nashville market. Vanderbilt MBA, lots of high-net worth contacts, etc., but am wondering how to structure deals that would allow individual investor shares (or ownership percentages) to remain portable over the long run. Obviously, a fundamental incentive to any real estate acquisition strategy is the 1031 exchange. It seems to me that one of the mitigating factors to syndicate participation as an investor is the fear that I, as an investor, will be forced to remain tethered to a particular ownership entity forever. Taking title as Tenants in Common would seem to enable the necessary rights, but I don’t know if that’s completely true.

I’d like to purchase properties in the $2-3M range with 80% financing by accumulating $25K investments from local doctors and business owners. But as that $25K investment grows, it’s likely that these individuals will seek to separate and/or regroup. Do you have any advice?
Many thanks,
Randy

MA3 March 27, 2011 at 1:58 pm

Hi there Khary

This is s very useful article and i do have some questions which i would love your thoughts on. Essentially im an architect in London and have made my commercial clients very rich by turning certain real estate around. Typically doing the plans to convert buildings, add more appartments, increase sq ft sales areas etc. Im really interested in doing this for myself now but have little if no equity to put into the bussiness- hence syndication.

I wonder what your thoughts are in how i can approach Syndication in my context. I was thinking that i could be responsible for the sourceing of projects- i could then turn the projects around using my architectural knowledge with a view to sell?

Also- what formal agreements are required to put such a proposal in place- and what are the approc timeframes?

Your thtoughts would be very welcome

Thanks

Reply

Aaron July 26, 2011 at 6:36 am

does it dilute anyone’s equity interest when you distribute funds form a refi?

Reply

Ian Landy March 27, 2012 at 7:43 pm

Khary,

I appreciate the article it hits on some really good points: how do I get paid for my efforts of establishing a syndication as well as what is a fair split as the syndicator and as the investor?

Currently my partner and I are working on getting the ball rolling with a syndication out here in CA. We are both Realtors and work for an established and trusted brokerage. Where we are struggling is on the legal end. We have found, as you have also mentioned in an above post, a PPM is the best way to protect you legally in addition to giving you more options in selling securities of your syndication. We are having a heck of a time finding a lawyer that wants to take on that liability, and the ones that will are charging substantial fees. We don’t have a problem forking over the money to do it but we do want to be sure we are getting what we pay for. Do you or anyone you have worked with have a good attorney in CA that you would recommend to do this?

Thanks!

Reply

Dan Genzel December 10, 2012 at 7:19 pm

Ian,

There are multiple ways to get paid for your efforts.

As a broker you are poised best to get into the syndication business…drives fee’s and wealth to the bottom line. You can create brokerage fee’s, acquisition fee’s, management fee’s, asset mgt fee’s and back end disposition fee’s. There is no shortage of fee’s. Right now I am seeing a split between sponsor and investor of 75%/25% to investor. As you will see on my website I was doing deals in the 50/50 range for a while.

Before you go out and hire a securities atty to put together a PPM ($10,000 ish) which the deal pays for (but you have to front) you should put together investment summary and a term sheet which are both pretty minimal documents.

I do have a couple good atty’s in CA

Dan Genzel, CCIM

Reply

Beau Bruderlin June 16, 2012 at 9:40 pm

Hi there,

Thanks for the article and shared advise.

I have a question… If a Property Syndicate is created for a property that DOES NOT produce an income ( land banking in this instance) , how do the investors redeem there share in the syndicate? How can investors buy and sell their share in the property?

Thanks,
Beau

Reply

Tom Higgins June 26, 2012 at 2:00 pm

I really like this no nonsense introduction to Real Estate Syndication. This is just what I want to accomplish.

Reply

Rob July 25, 2012 at 7:12 pm

Khary,
Like Ian, I am interested if you filed a PPM or had to follow similar paths as a REIT in order to approach investors, or how you managed to avoid this. Thanks.

Reply

Dan Genzel December 10, 2012 at 7:22 pm

Rob

You have to get quite a few PPM’s done in order to even think about a REIT. A Fund or 2 would be before that…

You can create brokerage fee’s, acquisition fee’s, management fee’s, asset mgt fee’s and back end disposition fee’s. There is no shortage of fee’s. Right now I am seeing a split between sponsor and investor of 75%/25% to investor. As you will see on my website I was doing deals in the 50/50 range for a while.

Before you go out and hire a securities atty to put together a PPM ($10,000 ish) which the deal pays for (but you have to front) you should put together investment summary and a term sheet which are both pretty minimal documents.

I do have a couple good atty’s to help you down the road.

Dan Genzel, CCIM

Reply

Tim September 23, 2012 at 10:50 am

This seems to be a great thread, however, there are no comments since July 2012 so I am assuming everyone is out getting wealthy. Good Luck on your future endeavours.

Reply

Dan Genzel December 10, 2012 at 7:22 pm

Tim, what do you need help with?

Dan Genzel, CCIM

Reply

raj December 27, 2012 at 10:36 am

Thank you so much this was a very helpful for new investors

Reply

Michael D January 2, 2013 at 8:22 am

Khary,

Great that you did the write up on this, really enjoyed reading it as well as all
Of the dialog.

I’m interested in syndication.  My question is what happens when a private party owns a portion of a real estate Limited partnership and they want out?  Is there an easy way to find those kinds shares and possibly buy their share?   Would it be sold at a discount?  Is there an exchange of sorts for something like this, and also is there way to shop around and look for opportunities to invest in a new joint venture?

Reply

Steve April 22, 2013 at 11:00 pm

Is there a threshold size (# of investors) that drives you to a PPM? For the smaller deals can a syndication be accomplished without the legal expenses of a PPM? Thanks. Steve

Reply

Leave a Comment

Comment Policy:

• Use your real name and only your name in the field designated for your name.
• No keywords allowed as anchor text in the name or comment fields.
• No signature links allowed under your comments
• You may use links in the body of your comment, but it must be relevant to the discussion at hand, and not merely be some promotional link.
• We will have NO reservations about deleting your content if we feel you are posting merely to get a link without adding value to our discussion.
If you add value, but still post keywords, we'll use your comment, but remove your link and keywords.
• For more information about acceptable practice, see our site rules.

Want your photo to appear next to your comments? Set up your Gravatar today.

Previous post:

Next post: