Real Estate Syndication: 3 Ways You Can Profit
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.
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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 Fees – As 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.
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.
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Photo: Osvaldo Zoom