If you’ve spent much time around the real estate investment world, you probably have come across the term “real estate syndication.” It’s a stylish term that makes you sound like a sophisticated investor. But what does it really mean? How does it fit into the world of crowdfunding, REITs, and real estate private equity?
A real estate syndication is a real estate investment strategy involved in crowdfunding, REITs, and Real estate private equity (REPE). While crowdfunding, REITs, and REPE are often used interchangeably with real estate syndication, they are not synonymous terms. Real estate syndication is a funding relationship, or agreement, between real estate investors and a sponsor. Crowdfunding, REITs, and REPE are different ways of assembling investors for real estate syndication.
Real estate syndication is a powerful strategy. It allows multiple investors to pool their capital for investment in real estate that would be too expensive or too complex for an individual investor to take on alone. Such real estate projects can include multifamily properties (apartments, condos, etc.), mobile home parks, land, self-storage units, or other commercial real estate. People have been using real estate syndication for decades. However, real estate syndication has become even more prevalent in recent years due to the growth of crowdfunding platforms and the changing regulatory landscape.
So, how exactly does real estate syndication work? What are its applications? Upsides, downsides, and how can you leverage real estate syndication?
Workings of Real Estate Syndication
In this real estate investment strategy, investors pool funds to purchase, operate, and manage real estate properties. Investors contributing to this pool are brought together by a third party, called the sponsor (also called the general partner). The sponsor can be an individual, a group, or a larger firm.
The sponsor takes the pooled funds and is responsible for the acquisition, operation, and management of properties. Sponsors typically hold an equity stake in the deal to ensure alignment of sponsor and investor interests, but also collect fees for their work. Investors share in the profits and losses of the real estate investment based on their percentage of ownership.
Here is a basic rundown of the syndication process:
- The sponsor finds a real estate investment opportunity: The sponsor looks for a property that meets their investment criteria and negotiates a purchase price with the seller.
- The sponsor creates an investment package: The sponsor puts together a detailed investment package that outlines the investment opportunity, the potential returns, the risks associated with the investment, and the terms of the deal.
- The sponsor raises capital from investors: The sponsor promotes the investment package to potential investors and raises the necessary capital to purchase the property.
- The sponsor forms a partnership or LLC: The sponsor forms a partnership or LLC to hold the property and manages the property on behalf of the investors.
- The property is managed and operated: The sponsor manages the property and is responsible for ensuring that it generates net operating income (rental income, etc) and is properly maintained.
- The property is sold: The sponsor sells the property when the time is right, and the investors share in the profits or losses based on their percentage of ownership.
Pros of Real Estate Syndication
Real estate syndication offers many benefits to both investors and sponsors. Here are some of the main benefits:
- Access to larger real estate deals and the larger associated benefits: This pro is especially relevant for investors who don’t have the millions required to individually invest in major real estate assets.
- Diversification: Real estate syndication allows investors to build an overall more diverse and resilient portfolio. It also builds diversity in a real estate portfolio through investing in different types of properties and in different geographic locations.
- Professional management: The sponsor is responsible for managing the property, which means that investors do not need to have any experience or expertise in real estate investing, maintaining property, or managing tenants.
- Potential for high returns: Real estate syndication deals have the potential to generate higher returns than traditional real estate investments because of their large scale and the professional management of the property. Real estate investing, especially on a large scale, is known for its ability to appreciate in value and resist economic downturn.
- Passive Income, Tax Benefit: Investors see their incomes increase through real estate ownership profits and the tax breaks real estate owners get through a K-1 filing. Investing in real estate syndications gives you the potential to earn more and pay less.
Real estate syndication is magic for the investor. Investors contribute funds to the pool, the sponsor handles the rest. When net income from properties is accrued or profits are made from selling appreciated real estate assets, the investors get a slice of the gain.
The magic happens here--investors contribute money in, and receive cash flows back, with high potential for these flows to exceed the contributed amount. All this happens without investors having to do anything but put money in the sponsor’s pool.
The toilets and tenants that make directly owning and operating real estate a hassle are nowhere to be found. All the investor has to do is fill out a few forms online, make sure their money is received by the general partner, and then sit back, relax and wait for the checks to come in.
Cons of Real Estate Syndication
As with all investments, real estate syndication also comes with risks, and investors should carefully consider these risks before investing. Here are some of the main risks:
- Illiquidity: Real estate investments are typically illiquid, which means that investors may not be able to sell their ownership stake in the property easily. (With the exception of REITs, which are traded like stocks.)
- Sharing of control: Depending on the type of syndication, investors in a real estate syndication deal have limited control over the selection and management of property which is typically in the hands of the sponsor.
- Importance of choosing good partners: Investors must choose an experienced and trusted real estate sponsor and maintain a healthy relationship with them. Otherwise, investors risk a huge headache, conflict, and losses. Investors must put in time for due diligence to ensure a successful syndication.
How Can You Leverage Real Estate Syndication?
Fortunately we know some guys who are pretty good with this whole real estate syndication thing….
Real estate syndication comes in many shapes and sizes. Nowadays, just about any type of investor can enjoy the benefits of real estate syndication. For the accredited investor real estate private equity firms or other types of real estate syndication companies dealing with pools of big time investors may be the best fit for you. Birgo Capital is a premier impact driven REPE firm in Pittsburgh, Pennsylvania, investing in stable multifamily property in America’s heartland.
If you aren’t an accredited investor, or just aren’t ready to throw around the big bucks in REPE, investing in REITs is a fantastic way to enjoy the benefits of real estate syndication. Birgo Capital recently rolled out its own REIT: REITURN. REITURN ties into the same network of multifamily investments as the private equity side of Birgo, offering the asset appreciation and dividends of real estate syndication for as little as $500.
Real estate syndication is one of the best ways to enjoy the benefits of real estate investing without the hassles of direct ownership. With more options for investors of all stripes than ever, there is opportunity for you to enjoy these benefits.