You’ve heard the term “real estate syndication” and are intrigued yet a little confused.
What exactly is a syndication, and more importantly, how do real estate syndicators make money?
Put simply, a real estate syndication is a group of like-minded investors who pool their resources (including money and skills) in order to make larger investments than they would have been able to alone.
Like other real estate investment models, there are a variety of ways you can make money when setting up your own real estate syndications. Every syndication arrangement can be slightly different.
Not all will leverage every revenue option below. Some will even come up with their own to add. The degree to which each is leveraged can vary widely, too. It’s up to you and whomever you’re working with to craft your own model.
From experience, investor partners prefer less complexities, so the simpler the structure, the better. Just keep in mind that being a generous syndicating sponsor and leaving plenty of profit for your passive capital investors is going to be key to your ongoing success, referrals, and repeat raises for new projects.
Here are six common ways multifamily syndicators make money.
How to Make Money as a Syndicator of Apartment Deals
One of the most common fees is an acquisition on the successful closing of a new asset. This is typically a small percentage of the value, like a real estate commission. This covers sourcing deals, screening them, and managing the transaction from start to finish.
Asset Management Fee
Multifamily syndicators typically also make an ongoing asset management fee as a percentage of revenues collected. This is completely different to profit splits, and generally the role oversees operations relating to property, such as property management.
There is a lot of work involved in securing a refinance for a commercial property. For long term holds, this is a regular occurrence due to loans that often mature or face major adjustments every five to 10 years.
Few syndications buy and hold forever, as most investor partners want to see an exit in the foreseeable future. Assets are regularly recycled to maximize true returns. Some syndications are created specifically for redeveloping and flipping commercial properties after they’ve been renovated and performance has been established.
Loan Guarantor Fee
Even though commercial mortgage loans are mostly asset-based loans, there is often a guarantor to sign off on the loan required. The more experienced and better their credit, the better the terms of the loan. That helps every partner in the syndication. It’s only fair the syndicator gets an extra risk-based fee for that service.
There are many ways you can arrange to split profits with your partners. You can offer preferred returns to them first if you like. You will often put some cash into the deal yourself. Then, net profits will often be split 70/30 or 90/10. What you want to offer to your partners will usually determine the profit split (i.e., 12 percent cash on cash).
There are many ways to profit as a multifamily syndicator. My advice? Don’t sell yourself short, aim for desirable yet achievable gains, and be competitive but not greedy.
Hoping to profit through syndicating in some other way? Questions about any of the above structures?
Let me know in a comment.