Real Estate Syndication: Who, What, Why, and How

If you are exploring your options when it comes to investing in real estate, sophisticated commercial real estate structures like syndication may seem complex. Syndication offers investors advantageous investment opportunities not advertised to the general public, in addition to many ancillary benefits.

As an investor, understanding what a syndication is, why the syndication structure is used, and who can participate in a syndication can help you take your real estate investing to the next level.

What is a Syndication?

The dictionary definition of a syndication is “a group of individuals making a joint effort to undertake specific transactions.” In a real estate sense, it is a group of individuals who pool their capital (money) and put it to work with a trusted real estate expert.

A potential real estate investor may be a business owner, doctor, lawyer, accountant, programmer, or other high-income individual. They understand real estate is the best asset to grow their wealth but they often:

- don’t have the time to start a real estate business on the side because they’re already working long hours;

- don’t have the experience and track record to generate sufficient deal flow, win contracts, or effectively manage a deal;

- don’t have the capital to acquire a large enough deal on their own.

By pooling their capital with other investors and having the investment controlled by someone with the experience, track record, and team of experts, investors are able to participate in deals much larger than those they would ever be able to on their own. The benefits are many: improved cashflow, better stability, economies of scale, better debt terms, tax credits, etc., to name but a few.

A syndication has two sides: a General Partner (GP) and a Limited Partner (LP).

The Limited Partners are the true passive investors, bringing their capital into the deal; they do not take an active role in managing the deal, nor do they make decisions in terms of the investment’s direction.

The General Partner(s) (oftentimes called syndicators) put the LP’s investment to work and effectively manage every aspect of the deal from sourcing the deal, underwriting, acquisition, management, operations, renovations, all the way to the eventual sale of the property. They are responsible at all times to ensure the LPs investment is performing as expected.

Why Invest in a Syndication Structure?

Wall Street does one thing really, really well: raise large amounts of money. Wall Street is a money raising machine and has a long history of using the syndication structure to raise capital.

Syndication is purpose-built to raise capital, and when acquiring large multifamily properties, it is the most efficient investment structure to use. It also has the benefit of offering true passive investing to those investors bringing their capital into the deal.

With a more basic partnership structure often used in single family home investing, with one person managing the deal and the other signing on the debt and bringing the equity needed, both parties are considered to be active participants. This means that both are on the hook if the deal goes sideways, even if one party is not involved in the hands-on management of the deal.

The syndication structure, designed to efficiently raise capital from passive investors, limits the risk of the Limited Partners. LPs are afforded protections under the law. The General Partners in a syndication shoulder the risk and are on the hook in the event issues arise in the deal.

Syndication also allows for the customization of the structure to suit the specific investment through different classes of shares. Over the past few years, many syndicators have adopted multi-level investor class shares to give investors more flexibility in how and when they receive their returns.

If you are a busy, high income earner, syndication is a more efficient, purpose-built way to invest in multifamily properties that produce stronger cashflow, offer more stability, and reduce your tax liability.

Who Can Participate in a Syndication?

Generally speaking, most syndicators work with Accredited Investors. There are several ways to qualify as an accredited investor:

- Individual annual income over $200,000;

- If a couple, combined annual income over $300,000;

- Net worth exceeding $1 million (not including primary residence).

For more, visit: https://www.investopedia.com/terms/a/accreditedinvestor.asp

If you are an accredited investor who is looking to take advantage of the benefits of multifamily real estate, the next logical question is, How can I invest in a syndication?

The first step is to start building relationships with syndicators. Get to know who they are, their investment philosophies and styles, and if it is a good fit with your investment goals. There are many different personalities, philosophies, and styles out there, and it is important to work with people who share your outlook, tolerances, and goals. The most successful syndicators offer excellent educational materials and won’t hesitate to answer your questions about syndication and multifamily real estate.