What is a Real Estate Syndication: The Basics

In today’s society, the possibility of becoming wealthy exists but remains a lofty aspiration for most. While many have come to understand that real estate is one of the most effective mechanisms by which one can attain wealth, many would-be real estate investors are held back for one reason or another. If only there was a way such an investor could more easily cross the bridge into the wonderful world of real estate… One viable option is to participate in a real estate syndication.

What is a Real Estate Syndication?

A real estate syndication is simply a group of like minded investors that pool their resources together in order to participate in investments larger than they otherwise would have been able to alone. These resources may include liquid capital, expertise, project management, and a variety of other valuable things. Similarly, syndications come in a variety of flavors. Let’s look at reasons one might want to participate in a syndication before discussing the various types of syndications and common pitfalls to avoid.

There are many would-be real estate investors—doctors, lawyers, engineers—that would love to jump in the real estate game but lack the time or inclination to do so. Inversely, there are many experienced investors that know a good investment when they see one, but they may lack the capital necessary to pursue it alone (such as a larger 75-unit property). Both types of investors are ideal syndication candidates.

The passive investor—with money, but no time or expertise—can join a real estate syndication and reap the various benefits of real estate investing without any of the hassle. The experienced, but capital deficient, investor can purchase the investment of a lifetime while helping out others. It sounds like one of those fabled “win-win” situations I keep hearing about.

Sounds intriguing, but what kind of syndications are out there?

Syndications are basically formed as follows: some managing member, or expert, pools all the necessary resources, including capital, and basically does all of the dirty work. Naturally, the managing member is compensated in some way. This is where problems can arise.

Some managing members will perform all of the steps necessary for completing a successful real estate transaction, and all they will charge is a “reasonable” 10% interest in the property. Offhand, this doesn’t sound terribly unreasonable. But on a $10 million property, the managing member would have just netted a fractional ownership interest worth one million dollars. Not bad for a day’s work, huh?

Stay away from these forms of syndications!

Another form of syndication—a fair one—is where the managing member charges a fee that is some inverse percentage of the investors initial investment. In other words, the larger an investor’s share of ownership (not to exceed 50%, of course), the less his syndication fee. After all, that investor is less dependent on the syndication—the other investors—than they are on him.

Add this information to your arsenal of investing knowledge, and continue making informed decisions along the path to achievable wealth.

Happy investing!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.