Real Estate Syndication: What is it and How it Works
WHAT IS IT?
The term syndication may sound complicated and intimidating, but it’s really just a classic real estate investing term. It is defined as a group of people or entities that pool money together to fund the purchase of investment property. In other words, it is crowdfunding before crowdfunding existed.
Most of us have heard of or maybe even have participated in a GoFundMe or Kickstarter campaign, which are a similar concept. On one side we have a project sponsor who has that great idea or special cause that needs funding. On the other side are people who back or pledge the campaign through contributions.
The main difference between these platforms and real estate crowdfunding, I.e. syndication, is what one gets in return. For example, participating in a GoFundMe or Kickstarter campaign may be motivated by rallying around a friend or family member’s creative idea, charity or other cause. Often with no more incentive for a return than goodwill. Mind you that I am using crowdfunding as the example, not comparing a cause to an investment…but I digress.
The objective of participating in a real estate syndication is the opportunity to share in the regular cash flow and profits that are tied to the performance of an investment property. The size and cost of the investment property is typically much more than one could afford or access on their own, but with far less expertise, capital or time commitment required to participate. Pretty straightforward so far?
HOW DOES IT WORK?
- The syndicate sponsor, who is usually a company that specializes in these types of deals, identifies a property or development opportunity.
- The syndicate sponsor analyzes it to gauge the return potential (technically called Underwriting the deal). The typical overall return objective is at least 10%.
- They determine the amount of capital needed to be raised, along with the minimum share or investment amount required to participate,
- The sponsor then raises the funds required by marketing the project through the sharing of an Offering Memorandum with potential investors.
- Potential investors evaluate the Offering and the opportunity. This includes the minimum investment, potential return, hold period and ways to exist the investment, which is typically after 3-7 years or a profit objective is met.
- If interested, the investor commits the amount of money they want to invest and wait for the project to be fully funded. He or she then signs off on some legal documents. The investment is not just a share in the partnership, but an actual ownership interest in the underlying property.
- Once the property is acquired and stabilized, all investors receive their share of profits at least once per quarter through direct deposit.
- After the hold period is met, the property is sold or exchanged and all investors and the sponsor share in the profits
Now while the overall approach from an investor standpoint is fairly easy and straightforward, it’s not as simple for the sponsor. Without getting deep into the weeds, there is an awful lot of work that goes into a project to make it worthwhile. For all the work in putting together the project, operating and managing and eventually facilitating the sale or trade of the property, the sponsor is rewarded by sharing in the profits based on escalators. This means that the better the property performs the more profit for everyone.
IS IT FOR ME?
So why would someone want to participate in a syndication instead of just buying an investment property on their own? The answer is two-fold; first, participating in a syndication only requires funding your share and signing some legal documents. From there is a matter of sitting back and collecting quarterly distributions and a share of the profits. There are some regulation stipulations on qualifying to participate, but they include exceptions to allow participation from individuals that the sponsor already knows or has a relationship with. Check our website for more information on this.
Buying a property on your own not only requires the time and effort to identify a property, but will also require getting a loan, and managing or finding a manager to handle all of the ongoing leasing and maintenance tasks that come along with it. Add in the accounting work and tax filing requirements and you end up with a part time job. Not only is the time and expertise required much greater, but the economies of scale multiply at a much greater rate the larger the investment.
THE BOTTOM LINE…
The bottom line is that there are many ways to invest money, and just as many ways to invest in real estate, but the reality is that real estate returns are far more accessible than investing in the stock market or retirement funds that you can’t touch until you’re 65 or older. And a real estate syndication is one of, if not the easiest methods to access investment property without having to get another education to learn how or spending your nights and weekends being a landlord.