Real estate syndication is when a group of investors pools their money to purchase one investment property, such as a commercial space or a large multi-family apartment complex. Large commercial developments are usually too expensive and risky for one investor to manage independently. So, it often makes sense to team up with a group of investors to pool your capital and share some of the risks and responsibilities.
You may consider a few different strategies if you’re interested in real estate syndication. Typically, one investor or a group of investors will be in charge of spearheading the project (known as the sponsor). They will lead the other partners, who assume various roles and levels of risk. Here are the common members in a real estate syndication deal.
- Sponsors / General Partners
- Limited Partners
- Passive Investors
- Joint Venture Partners
- Managing Entities
1. Sponsors / General Partners
The sponsor, also known as the general partner, is responsible for finding the deal, marketing it to other investors, and organizing the capital. They will take on the bulk of the responsibility but also receive management fees and a greater portion of the profit (depending on whether they invest their own money).
2. Limited Partners
Limited partners are the next tier of investors. Unlike a general partner, their responsibility is limited only to their investment, and they have no management authority over the project. As a result, they assume less risk but also receive a smaller share of the profit.
3. Passive Investors
Passive investors are members who have no direct interaction with the investment but are willing to invest their own capital in the hopes of getting a nice return. They work with the GPs and LPs to understand how the investment is performing.
4. Joint Venture Partners
Joint venture partners are investors who maintain a separate business identity but offer their capital and resources to help complete the project. They typically have a looser structure than GPs and LPs and carry liability for only their involvement in the project.
5. Managing Entities
Managing entities act as a point of contact for all the various members. They facilitate communication and provide updates and guidance on the status of the investment.
The exact steps will vary greatly depending on the timeline and details of the investment. But generally, these are the steps you must take to complete a real estate syndication deal.
- The sponsor finds a suitable deal
- The sponsor builds a team of partners and creates the capital stack
- Partners determine how much additional capital is needed
- Managing entities create a legal structure for passive investment
- Passive investors provide additional capital in exchange for an ownership stake
Once the necessary capital is raised and contracts are signed, the sponsors will move forward and acquire the property. If the project succeeds, profits will be distributed according to each party’s role in the deal and how much they invested.
- Low Barrier to Entry
- Limited Liability
- Support From Experienced Professionals
Low Barrier to Entry
Syndication allows investors to get involved in large commercial real estate deals without having millions to invest. The minimum requirements will vary depending on the project; however, some crowdfunding websites allow you to get started with as little as a few hundred dollars.
Depending on your role in the deal, your liability is limited to only what you invest. So, if the investment isn’t successful, you don’t have to worry about getting sued or destroying your credit, which isn’t always the case for other real estate investing strategies.
Support from Experienced Professionals
If you are new to real estate investing, syndication allows you to work alongside experienced professionals with skills and connections. Of course, you must do your due diligence to ensure you’re working with a reputable team, but syndication allows you to make a profit without being an expert yourself.
- Limited Control
- Deal Structures Can Be Complex
- Lack of Liquidity
Unless you are the sponsor of the investment, you will relinquish your control over the management of the deal. You are relying on the sponsor to make responsible decisions with your money, which may be difficult for some investors. So, the limited liability comes with a downside, in that your risk is decreased because someone else is in charge.
Deal Structures Can Be Complex
The nature of real estate syndication means the deal’s structure can be very complex. However, knowing how the capital stack works is crucial, so you can feel confident that you’ll be fairly compensated. Sponsors can earn money from a deal, even when partners do not, by collecting management fees or selling the property if things go south. So, work closely with managing entities to understand how the deal is structured, and maybe hire a lawyer or financial advisor to help you analyze and negotiate if you’re uncertain.
Lack of Liquidity
Real estate investments are generally illiquid, which means once you invest, you’ll have to wait until the project is completed to get your money back. If you decide a few months in that you need the funds for something else, you can’t simply sell your shares and walk away. Depending on the timeline and strategy of the investment, it could take years for you to get your money back, so be sure you’re in it for the long term.
Like any investment strategy, real estate syndication has its benefits and limitations. It’s a straightforward way to earn passive income without taking on the risks and responsibilities of owning a property if you can find a competent sponsor with the knowledge and resources to deliver results. However, there is always the risk that things may not go as planned, and you could lose your entire investment. Syndication is a useful strategy that many experienced investors use to make consistent returns. However, you must do your due diligence to ensure a deal makes sense.
Real estate syndication is a great way to participate in lucrative real estate deals that are typically only available to the most experienced investors. However, it still carries risk, and if something sounds too good to be true, it likely is. So, do thorough research and carefully vet all partners involved in a deal before getting involved in any syndication deals.