The Ultimate Guide to Real Estate Syndication

Real estate syndication allows people to team up to invest.

Real estate syndication can be a lucrative way to enter the real estate investing business. Syndication in real estate gives you a share in investment properties with all the perks—passive income, tax breaks, and property appreciation. You also avoid the hassle and stress of being a landlord.

So, suppose you want to invest in property without spending much capital. In that case, syndicated real estate could be for you. However, as with any investment strategy, there’s much to learn before setting up a real estate syndicate.

This ultimate guide to real estate syndication will help you unlock the potential of this potentially profitable investment opportunity.

What is Real Estate Syndication?

Real estate syndication is when investors and property developers pool capital and resources to purchase and manage real estate assets. The size of the individual investment determines the percentage of profits, property appreciation, and ownership they can expect in return. Real estate syndication typically involves property developers, investors, and real estate professionals.

Real estate syndication is a type of “real estate crowdfunding.” The syndicate involves two groups—the syndicators and the investors.

• Real estate syndicators (also called sponsors) lead the acquisition and management of real estate assets, including purchasing, renovating, and dealing with tenants. They deal with the physical aspect of property management. But, of course, they may also invest their finances in the syndication. 
• Real estate investors invest capital in property syndication, typically as passive investors, and receive a share of profits and ownership in return. They are called “passive investors” because they don’t have an active property management role like the syndicators. However, syndicate investors must meet specific eligibility requirements. The JOBS Act of 2012 states that “accredited investors” must have an annual income of at least $200,000 for two consecutive years.

The Pros and Cons of Real Estate Syndication

Real estate syndication is an investment strategy that can offer benefits and drawbacks for both sponsors and investors.

For example, sponsors get access to more capital and can invest in larger properties than would otherwise be possible. However, they have less control over investments. On the other hand, investors can diversify their real estate portfolios without getting involved in day-to-day management or property transactions.

Here are the pros and cons of investing money in a real estate syndicate.

Pros

• A passive investment strategy without additional risks of being in a partnership
• Better cash flow because you can participate in more lucrative investment opportunities like multifamily properties or commercial buildings
• Excellent tax benefits thanks to incentives like bonus depreciation
• Enjoy the benefits of real estate investing—cash flow, equity, tax benefits, and passive income
• Avoid responsibilities of landlording and property management
• Real estate syndication allows you to be a passive investor anywhere
• Join a group of investors and property developers with shared investment goals

Cons

• Less control over your investment assets
• Lack of liquidity because capital is usually tied up in the investment for three to ten years
• You must meet the minimum requirements to be an accredited or sophisticated investor
• Fewer returns because profits are shared between investors and sponsors

Real Estate Syndication vs. Real Estate Investment Trust (REIT)

Real estate syndication and real estate investment trusts (REITs) are two popular ways to invest in real estate. Both investment methods allow investors to expand their portfolios without involving property management. Additionally, both methods involve pooling capital from multiple investors. However, there are key differences between the two.

Here is a list of the main difference between REITs and real estate syndications:

• Capital: Investing in a real estate syndicate involves more capital—sometimes, the minimum investment is $50,000. However, you can invest in a REIT for as little as $1,000 as a non-accredited investor.
• Ownership: Real estate syndication allows you to own part of the property. On the other hand, REITs typically manage multiple investments. Therefore, you invest in the REIT investment company, not a specific property. This fact also makes it more difficult to see where your cash is invested.
• Tax breaks: Investing in REITs means you miss the tax benefits of a real estate syndicate because the IRS considers income from the investment as a dividend, which is taxable. However, passive losses like depreciation on syndicated real estate investments can reduce your tax liability.
• Returns: The investment structure of syndicated real estate means returns are greater. For example, you get monthly payouts and a share of the asset’s sale.
• Accreditation: A sticking point for some people wanting to get started in real estate investing through syndication is the criteria. Accredited investors must have a minimum income of $200,000 for an individual, a $300,000 joint income if they have a spouse, or a $1 million net worth, excluding the value of their primary residence.

How To Start A Real Estate Syndication

Suppose you are a real estate property developer (sponsor) who wants to syndicate real estate investment. In that case, you must conduct due diligence on a property to ensure the investment can attract accredited investors. 

Here are the steps to set up a property syndicate to attract prospective investors.  

Find a property

The first step in setting up a real estate syndicate is to determine the investment strategy and identify the target market for the syndicate, which involves conducting market research and analyzing the local real estate market to identify opportunities and trends. Once you have identified a target market and investment strategy, you can search for a suitable investment property that aligns with these goals. Due diligence should be conducted on any potential properties to ensure they meet the criteria for the investment strategy and are attractive to potential investors.

Here are some tips on finding the right investment property:

• Search for distressed properties or properties in foreclosure
• Network with local real estate agents, brokers, or wholesalers
• Find off-market properties for sale
• Focus on property types with the highest demand

Research your housing market

The second step to ensure success with your syndicate is to research the local market. After all, you can only attract investors if you can attract tenants. 

Here are some crucial factors to help determine if a property is in a good location:

• The health of the local real estate market
• Trends in population and job growth
• Average property value estimates
• Check out local newspapers and community websites to get a feel for the area

Calculate your estimated income and ROI

After locating potential investment properties, it’s time to crunch the numbers. This step is the only way to have a chance of attracting investors to your syndicate. Remember—passive investors are only interested in making returns on investments. 

Cash-on-cash return is a common metric that passive investors use to calculate ROI. Here is a simple way to calculate potential ROI on an investment property:

[annual cash flow] ÷ [cash invested] x 100 = cash-on-cash return

Cash flow returns factor in the running costs to calculate the income distribution to investors. Most investors expect to see a 6–8% annual return. 

Set up a real estate syndicate

After finding an excellent real estate investment opportunity, it’s time to put your syndicate together. Here are a few ways you can find potential investors:

• Search real estate investment websites
• Connect with potential investors through social media like Facebook groups
• Find local real estate investment clubs
• Look for websites that offer crowdfunding real estate
• Ask family and friends

When approaching potential investors, it’s important to ensure that your pitch is clear and concise and that you have a well-thought-out business plan and investment strategy.

Negotiate with your partners

A solid real estate investment opportunity greatly depends on your negotiation skills. Your ability to get the best deal starts with negotiating the best price when purchasing the property. However, you will also need excellent negotiation skills when dealing with your investors. 

As the sponsor, you are responsible for the real estate purchase, syndication agreements, business plan, due diligence, and property management. In addition, you are responsible for arranging the partnership agreement and structuring the deal for your investors. Therefore, you must negotiate with them their share of the profits. 

Structure the deal

The next step in setting up real estate syndication is to put everything down in writing. The two standard options for structuring a real estate syndicate are a limited partnership or a Limited Liability Company (LLC). Typically, the payout in a real estate syndication structure is 70/30—70% to share among the investors and 30% for the sponsors.

Distribution waterfall is another way to structure a real estate syndicate. However, this structure means that potential returns depend on certain criteria. Here are a few popular ways to customize returns:

• Return of Capital (ROC): The limited partners receive their initial investment before the sponsor receives any payouts.
• Preferred Return: Investors receive their preferred return percentage after initial capital contributions have been paid.
• General Partner (GP) Catch-Up: The sponsor (general partner) receives a significant portion of the returns until they have received a pre-determined percentage of profits.

What is the best way to structure a real estate syndicate investment? Typically, an LLC is best for a fix-and-flip project, and a partnership is ideal for a buy-and-hold investment.

Close on the deal

The last steps in syndicating a real estate investment are signing contracts, funding the investment, and transferring property ownership. Closing the deal can seem like a marathon. You have all the regular steps to close a standard real estate deal. In addition, you must create a partnership or LLC, get cash from investors, and ensure that all legal documents are in order. 

In most cases, hiring a real estate attorney or agent to assist in the process makes sense.

Real Estate Syndication FAQs

To help you understand more how this works, here are some common questions investors and property developers ask about becoming part of a real estate syndicate.

Is real estate syndication a good investment?

Real estate syndication can be a profitable way to diversify an investment portfolio or fund larger investments.

Investors can earn passive income through rental income without worrying about purchasing property, dealing with tenants, or the day-to-day operations of property management. Additionally, developers can pool funds from multiple sources and find larger investment opportunities in multifamily apartment buildings or commercial properties with fewer risks.

How does real estate syndication turn a profit?

Returns on investment in a real estate syndication are achieved through rental income, property appreciation, and potential equity gains. Generally, investors receive returns through regular cash flow distributions and at the time of sale or refinancing of the property. The exact return structure varies depending on the syndication agreement. Typically sponsors receive 30% of the profits, and the investors divide the remaining 70%.

What are the phases of real estate syndication?

The three phases of syndicating real estate are origination, operation, and liquidation. The origination phase starts from searching for a property to purchase to closing the deal. Operation is the phase where the sponsor manages the property as a landlord. Finally, the liquidation phase is when the exit strategy is accomplished—the property is sold or refinanced to cash out.