The Concept of Real Estate Syndication

by Sudarsan Chakraborty

If you are new to the world of real estate investing, this will probably be the first time you’ll be hearing of the term real estate syndication. Nevertheless, that should not deter you, as some experts may be oblivious to the term. Whether you’re an old or new investor, this article aims to give you insight into the said concept.

As more people seek to delve into real estate, there’s the ever-present need for reeducation and sensitization on standard terms. While some may frown upon this, there is enough proof to show that lack of knowledge is one of the many reasons amateur investors lose money in the real estate market. The list is endless, from accepting bogus offers to purchasing at the wrong time.

This article examines the concept of real estate syndications by highlighting its pros and cons, alongside its relevance in real estate.

What Is Real Estate Syndication?

Long before the advent of crowdfunding in real estate investing, real estate syndication was a common approach employed across the board. Alternatively, property syndication is a partnership agreement between several investors to combine their skills, resources, and seed capital to acquire and manage a property that seemed unaffordable without a collaboration. 

How Does It Work?

There are usually two roles in property syndication – the syndicator and the investors – who work to foster growth. A real estate syndicator is the sponsor, and it often represents the company comprising expert-level real estate agents with great experience and knowledge of the industry. Their function is to scout for good properties after conducting extensive research.

On the other hand, the investors are the capital generators; they provide the capital used for securing the property. This capital also covers the monthly expenses associated with owning the investment property. Real estate syndication entails pooling your money with other interested investors to purchase a property through a real estate syndicator.

You can deduce that the syndicator hardly provides any capital input. Instead, they are involved in scouting properties, securing them, overseeing management responsibilities, and providing investors with updates on the property. You can apply real estate syndication across different property types such as rentals, fix-and-flips, commercial properties, and others.

Types of Syndication and the Role of Investors

In real estate syndication, the investors provide the bulk of funds required for the partnership. Thus, they function as passive partners without acquiring and managing properties. There exist some regulations on how real estate investors raise capital, and these regulations determine the type of syndication undertaken and the structure of the business.

There are two rules of regulation: rules 506(B) and 506(C).

A 506(B) syndication involves allowing property investors and developers to raise an unlimited sum of money from an unregulated number of accredited investors, alongside a maximum of 35 non-accredited investors. This syndication doesn’t require any prior filing with the Securities and Exchange Commission.

Nevertheless, be mindful that general solicitation is not allowed as issuers must be in an existing business relationship with their investors before making the offer. On the other hand, the recent 506(C) syndications established in 2012 allow general solicitations; however, non-accredited investors can’t partake in the offering.

Overall, there are no restrictions on the money generated or raised. Neither are their restrictions on the number of accredited investors who can come on board. The process offers great real estate syndication investment opportunities.

Profit Generation in Real Estate Syndication

An investor who puts money into a real estate syndication receives a percentage of the profits at the agreed payout period. This statement means that you’ll begin to make actual profits after receiving returns that total to your initial investment. 

It’s noteworthy that profit generation from fix-and-flip investments occurs after the property’s sale. The investor receives a percentage of the profit based on the percentage invested. There are also some fees attached to the business.

Real Estate Syndication Checklist

Before joining a real estate syndicate, you need to understand what you’ll be getting from the investment. The following are things to do before joining a syndicate:

  • Carefully Choose Your Role

Do you wish to invest in and manage properties but have little capital? Are you confident in your property scouting skills but fear that property prices may be too hard on your pocket? Then, it’d be best if you considered joining a real estate syndicate as a syndicator. 

As a real estate syndicator, you’re tasked with scouting, securing, and managing the property with little expected from you in the capital. You’ll receive an acquisition fee, that is, a commission for closing the deal. This commission usually averages around one percent.

  • Pick a Great Structure

Most real estate syndications are structured as limited liability companies or partnerships, allowing the syndicator or sponsor to be a managing member or general partner. The investors themselves are regarded as limited partners or simply as members of the partnership.

As said earlier, the terms of a real estate syndication agreement may vary, and it is best to seek advice from a real estate attorney when putting together a contract. Do well to state all rights and requirements to ensure that all stakeholders are on the same page.

  • Be Cautious

Being a sponsor comes with numerous responsibilities. From active asset management to income reporting and accounting, the list goes on. Hence, you must exercise caution, diligence, and expertise at all times to ensure that you’re on top of your game. Ensure that you only accept projects within your capabilities as the general activities of the business come with significant risks.

Benefits of Real Estate Syndication

Real estate syndication provides numerous benefits to investors and real estate syndicators alike. They include but are not limited to the following:

  • Passive income
  • Access to a diversified portfolio
  • Benefit from experienced syndicators
  • Comfortable investing

Cons of Real Estate Syndication

Every business has its drawbacks; hence, it’s not surprising that real estate syndication has some disadvantages. They include:

  • Non-liquidity 
  • Property failure
  • Hidden fees
  • Risk of property depreciation

Get Onto The Moving Train

If you are fascinated by real estate investment and believe that joining syndication will be the best way to get into the industry, then the time to begin is now. Contact any of the top real estate syndication companies today to get started.

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