There are many ways in which you can invest in real estate. Whether you’re new to the world of real estate investing or have been at it for many years, it is essential to understand and consider all of your investment options. One of the newest and most exciting options is real estate syndication.
In this guide, I’ll help you to understand how real estate syndication works, so you can decide if it is right for your portfolio.
Kent Ritter is an experienced multifamily investor and entrepreneur empowering you to build real wealth through real estate syndication. Learn More
What Is Real Estate Syndication?
We all know that investing in real estate takes capital. However, it is also essential to have the knowledge, negotiation power, experience, and connections to be successful. For one individual to have all of these assets can be pretty rare. Real estate syndication helps to solve these problems for many individual investors.
In a real estate syndication, a group of individual investors pool their capital through an overarching project sponsor to fund a large-scale real estate project. Individual investors make a monetary contribution to the project and are paid out based on the terms of the deal. The individual investors will not have to worry about day-to-day project planning, cash flow management, employees, staffing, or any of the more complicated parts of the project. Instead, the sponsor handles all of the actual work involved in the project, while individual investors enjoy a passive return on their investment.
As the project is funded by a number of investors, lower capital is required to participate in a large-scale project for individual investors. And, because the project sponsor is responsible for managing the project, individual investors don’t need to have industry knowledge, experience, or a network. Instead, it is important to find a sponsor who they can rely on to manage the project successfully.
How Does Real Estate Syndication Work?
Each real estate syndication company will have its own strategy and standards of business practices. However, the basic process is the same:
- Property Identified. The project sponsor researches and finds a property. The goal is typically to find an undervalued property that can be improved with amenities and renovations in order to increase rental rates and property value.
- Investors Join. Individual investors join the syndication to collectively fund the project.
- Property Purchased. The project sponsor purchases the property, handling all of the negotiations on behalf of the syndication.
- Property Management. Once investors are in place, property managers and the real estate syndication company will handle the ongoing management and improvement of the property.
- Passive Income. Individual investors receive a regular passive income through rent collection, and they may receive a percentage of profit at the time of property sale, depending on the terms of the deal.
Pros & Cons of Real Estate Syndication
As with all investments, there are both advantages and disadvantages to consider. Let’s take a look at some of the pros and cons of real estate syndication so you can determine if it is right for you:
Pro: Hands-Off Real Estate Investment
Investing in real estate by purchasing your own properties, managing improvements, managing the tenants, and then selling them for a profit can be a very rewarding process. However, being a landlord is very time intensive and there are quite a few stressors and headaches that come along with this strategy.
With real estate syndication, you won’t have to deal with contractors that don’t show up, late night emergency calls, evictions, or any of the other headaches involved with property management. The project sponsor handles all of the work for you. This makes syndication a great way to earn a passive income.
Pro: Ability To Analyze History and Prior Success
Before investing in a real estate syndication agreement, you can look at your investing group’s past history and success. Luckily, real estate performance is easy to track and follow. Analyzing these previous deals and ensuring that the project managers did the best they could to bring investors the largest return is part of the initial process of getting involved in a real estate syndication. Choosing a sponsor that has been through the process and understands what it takes will help minimize the risk of your investment.
Pro: Tax Benefits
Real estate investing offers several tax benefits. When you invest in a real estate syndication, you will be able to deduct some things on your tax return, including depreciation, mortgage interest, repairs, and more. Be sure to speak with a tax professional to understand the full scope of real estate syndication tax benefits.
Pro: Access to Larger Scale Projects
As an individual investor, it can be difficult or even impossible to get involved in large-scale projects on your own. Aside from the investment amount, the scope of work is much too large for one person to take on.
If you want to be involved in multifamily buildings, large commercial projects, and residential housing developments, the real estate syndication method is one of the best options to take.
Pro: Diversification
Diversification is an important part of any investment strategy. Having your funds involved in a number of different projects helps to minimize the overall exposure and risk that you have. Additionally, those with diversified investments tend to have larger long-term gains than those who are concentrated in one area or concept.
Even if you currently are involved in some type of real estate investment, chances are the opportunities you will have with a real estate syndication will be much different, allowing you to diversify your portfolio within this sector.
Con: Low Liquidity
Real estate syndication is typically a long-term investment strategy. Your funds may be involved in the project for several years, making syndication less liquid than other investment options like stocks or mutual funds. Even so, this is offset in many instances by the fact that real estate syndications can provide returns that are 2-3x what you could expect in the stock market and investors can gain a regular passive income through rent collection. Even though your money may be tied up in the project, you can earn a monthly passive return on that investment—then a larger payout at the time of property sale, depending on the terms of the deal.
Con: Less Control Over Project Success
As an individual investor, you will have little control over the project’s success. You can do all of your due diligence before investing, but the project sponsor and the overall real estate market will determine the level of success of the project. If a hands-off strategy is something that you will struggle with long-term, it may make sense to look into a different type of investment for your real estate needs.
How To Get Started with Real Estate Syndication
The most important part of the process is to complete your due diligence. You must be sure that you choose a sponsor with integrity, a good track record, a substantial financial backing, a specific and repeatable strategy, and who puts their own skin in the game. Real estate syndication is a unique business and ensuring that you invest with a reputable company will help to reduce your risk.
It is a good idea to independently research the individual projects that the real estate syndication company is involved in as well. Many sponsors will have more than one project going at any given time. Some will require varying investment minimums, and it is important to carefully consider your options so you can decide what works best for your budget and goals.
Once you have completed your research, you can make your investment and wait for the returns. With real estate syndication, professional property managers and project leaders will handle all of the investment details. You can simply watch the reports come in and track the progress while you wait for your return.
Is Real Estate Syndication Right For You?
Real estate syndication offers a unique opportunity for individual investors. Understanding the potential risk and reward will help you decide if it is for you.
If you want to have exposure to benefits of large-scale real estate projects but don’t have the time or the initial funds to manage such a project on your own, real estate syndication can be a great choice. It’s important to do your research to find a project sponsor who has an excellent track record and to educate yourself on the projects that they are currently working on.
Kent Ritter is an experienced multifamily investor and entrepreneur empowering you to build real wealth through real estate syndication. Learn More
