{"id":158675,"date":"2023-09-22T15:51:09","date_gmt":"2023-09-22T21:51:09","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=158675"},"modified":"2024-02-29T17:59:25","modified_gmt":"2024-03-01T00:59:25","slug":"vetting-syndications-and-avoiding-traps","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/vetting-syndications-and-avoiding-traps","title":{"rendered":"Here’s How You Can Avoid Walking Into Syndication Traps"},"content":{"rendered":"\n

Syndications are a hot topic lately, especially since <\/span>celebrity investor Grant Cardone has gotten into trouble <\/span><\/a>for allegedly inflating potential returns and failing to disclose risks.<\/span><\/p>\n\n\n\n

You have no doubt heard about syndications while listening to investing podcasts and seen posts promoting syndication deals in your social feeds. But what exactly are they?<\/span><\/p>\n\n\n\n

Syndication is a method of purchasing or building property as part of a group of investors who pool capital to fund the deal, as well as any construction\/value-add costs. It can be a great way to get a piece of larger projects that you likely would not be able to fund on your own, like a large condominium complex, hotel, or mobile home park.  <\/span><\/p>\n\n\n\n

Know the Players: Who Does What?<\/span><\/h2>\n\n\n\n

Any real estate syndication will include a version of these two roles:<\/span><\/p>\n\n\n\n

Sponsor<\/span><\/h3>\n\n\n\n

These are the people who find and manage the deal. They are active participants in the project and will direct and supervise the project as it progresses. They are also responsible for raising capital (from investors). Sponsors set up the terms of the investment and profit structure and receive a cut of the profit themselves.<\/span><\/p>\n\n\n\n

Investors<\/span><\/h3>\n\n\n\n

This is you. You have a passive role in the investment, contributing money alongside other investors for an ownership stake in the deal with a potential profit schedule that sponsors have predetermined.<\/span><\/p>\n\n\n\n

The Rules On Who Can Invest<\/span><\/h2>\n\n\n\n

The JOBS Act of 2012 opened the doors for accredited investors to invest in real estate syndication. Being an <\/span>accredited investor<\/span><\/a> is a key prerequisite here. Federal securities law defines an accredited investor as a person making over $200,000 per year over the last two years or joint income with a spouse over $300,000, with a net worth exceeding $1 million (excluding their primary home). Read the <\/span>full, official SEC definition<\/span><\/a>.<\/span><\/p>\n\n\n\n

How Do You Make Money from a Syndication Deal?<\/span><\/h2>\n\n\n\n

Every deal is different. As you review the syndication proposal for each deal, make sure you have a crystal-clear understanding of the wealth distribution plan, especially since there may be multiple ways you can invest in a single deal. <\/span><\/p>\n\n\n\n

For instance, tier 1 investors may be offered a preferred return of 10% and no equity, while tier 2 investors may be offered a preferred return of 7% but a share of the equity at sale. (And you decide whether you want to be tier 1 or tier 2.)<\/span><\/p>\n\n\n\n

Related: <\/span><\/em><\/strong>The Ultimate Guide to Real Estate Syndication<\/span><\/em><\/strong><\/a><\/p>\n\n\n\n

Pros and Cons of Real Estate Syndication<\/span><\/h2>\n\n\n\n

Pros<\/span><\/h3>\n\n\n\n