What Is Real Estate Syndication and How Do You Get Involved?
TL;DR - Real estate syndication is great because it allows syndicators and investors to pool money together to purchase deals in the millions. To get involved, you can form your own syndication or invest in one as a limited partner (LP).
What happens when someone finds a great real estate deal but doesn’t have all the money to invest in it?
Well, one of two things can happen.
They can let the deal walk away.
They find investors to join them and form a real estate syndication.
The first option is pretty lame. It means they won’t get to capitalize on the awesome deal they found.
The second option is smart - they get to invest in a huge property deal (in the millions) with other investors.
But what is real estate syndication? And how do you get in on the action?
Real Estate Syndication
Real Estate Syndication: Power in Numbers
You can think of real estate syndication as crowdfunding.
In crowdfunding, a group of people put money together in a pool. The money pool is typically used for a specific purpose, such as purchasing something or investing in a project.
With real estate syndication, the function is the same. A group of investors form and pool their money together. The money pool is used to purchase extremely valuable real estate property. We’re talking multi-million dollar deals.
But you may be wondering, “why don’t the investors purchase their own properties individually?”
Here are the main benefits of real estate syndication:
The “syndicator” doesn’t have to put a lot of their own money down
The “investors” get a completely passive investment
Investors save time by not having to look for real estate deals
Very little liability for investors
Opportunity for bigger deals because of larger capital
Both syndicators and investors get to purchase a $1 million+ investment
So to answer to question above — syndicators get to take part in huge deals with little money of their own and investors get a 100% passive investment.
It’s a win-win.
But what does being a syndicator or investor mean? And how is the syndication structured?
How a Real Estate Syndication Is Structured
There are two major parties involved in syndication: the syndicators (a.ka. sponsors or general partners (GPs)) and the investors (a.ka. limited partners (LPs)).
The Syndicators
This can be an individual person, partners, or a company.
Their role is to find, obtain, and manage the real estate. As well as deal with all of the paperwork hassle.
Generally, they have a lot of experience with real estate and know the ins and outs of the business. Their main contribution is expertise, connections, underwriting, and due diligence. However, they can (and should) also provide capital to the deal as well.
Responsibilities of Syndicators:
Due diligence
Underwriting
Locating investors
Gathering capital
Building the business plan
Managing investors
Navigating legal, tax, and SEC regulation paperwork
So basically, syndicators do everything an individual investor would do for their own real estate.
But they also manage other investors and focus on providing profitable returns to them.
In return, syndicators get fees for doing all of the legwork and managing the real estate. And they get to be a part of large deals.
It’s important that a syndicator invests at least a bit of their own money in syndication deals. If they don’t it can be a red flag.
Syndicators could get their upfront fees from a deal and then do nothing to make the deal truly valuable. In that case, limited partners would be in a bad situation.
The Investors
Investors simply provide the capital necessary to fund a deal.
Each individual investor receives a portion of the real estate equity according to the amount they invested.
Once they’ve provided their portion of the capital, their investment is truly passive. They’re hands-off from there on out.
Investors receive monthly or quarterly distributions. They also get benefits from appreciation, equity pay down, and real estate tax. Not to mention profit once the property is sold.
But to be an investor in a real estate syndication is not so simple. Most syndications require their investors to be accredited.
Accredited investors are allowed to trade securities that may or may not be registered with financial authorities. To become one, you must satisfy a certain requirement in regards to income, net worth, asset size, governance status, or professional experience.
How Profit’s Shared
While there’s no set way syndications split profits, there are two common methods:
The Straight Split and the Waterfall Split.
The Straight Split
This is a simple and easy way for the syndicators and investors to split profits (cash flow, property sale, etc.). The syndicators get a set percentage of the profits and so do the investors.
A typical straight split is 80/20.
The investors, together, share 80% of the profits. The syndicators get the other 20%.
The Waterfall Split
With this method, there’s a preferred return structure. This means the investors keep all of the profits until a certain rate of return. Until that rate of return is met, the syndicators don’t get anything.
However, once that rate of return is met, profits are split between syndicator and investor.
Here’s an example of a waterfall split:
| Rate of Return | Investor Share | Syndicator Share |
|---|---|---|
| 8% | 100% | 0% |
| 8.1-10% | 70% | 30% |
| 10.1% and higher | 50% | 50% |
This method is beneficial because it forces the syndicator to make the syndication profitable. If it isn’t, they won’t get a cut of the profits.
Therefore, when a syndicator offers this split, it’s because they’re truly confident in the deal.
Syndicator Fees
It’s important to note that even with a waterfall split, a syndicator can still make money.
Even if they don’t share in the profits of a deal, there are fees they collect based on their responsibilities.
Examples of this are:
Acquisition fees - finding the deal, doing due diligence, hiring management, etc.
and
Asset Management fees - Investor management, exit strategy, etc.
Ways to Get Involved with Syndication
By now, you’re wanting to start your own real estate syndication so that you can get involved with big deals. And why wouldn’t you?
But first you need to know how to get started.
Priority number one should be to build your real estate network. This can hardly be stated enough.
When you’re forming a syndication, it’s all about who you know. After all, if you don’t have access to investors, you can’t capitalize on a great deal.
So start networking early in your career — even if it’s your first day as a real estate professional.
Ways to do this are:
Go to real estate meetups
Attend live real estate trainings with other professionals
Speak with realtors, contractors, and investors on LinkedIn
Use social media to your advantage!
And, of course, don’t neglect your inner circle! The people closest to you are the people that trust you the most.
Your family, friends, and coworkers are all people you can ask to invest with you.
Step two is to build your real estate experience.
After all, who wants to invest with someone who doesn’t know left from right?
You should be cultivating knowledge within the real estate industry. You could do this will little to no money of your own through real estate wholesaling.
The bottom line: learn, learn, learn, and learn everything you can about real estate.
Once you’ve developed enough knowledge about the business of real estate, that’s when you can call on your network to form an awesome deal.
The third and final step is to understand what you’re taking on.
While real estate syndication can be a great way to pool money together and buy investments in the $1 million+ range, it isn’t easy.
There’s a ton of legal, tax, and SEC regulation paperwork that you’ll have to take on to start your own syndication. It can be a massive headache — especially for a beginner in the real estate space.
If you aren’t ready for that burden, there’s another option for you.
Option Two
Join a real estate syndication and a limited partner (LP).
As opposed to starting your own syndication, this will allow you to get your feet wet and understand this method more.
And like we mentioned before, as an investor in a syndication, your investment is truly passive.
Once you give the syndicator your money, your hands are off the deal. You’ll receive your pieces of the profit with no more effort involved.
Whichever option you pick, real estate syndications can be a great method to invest in huge deals.
Happy hunting!
How We Can Help You
Does investing in real estate sound intriguing to you? Would you like to learn more? We’d love to be of value!
At Undoor, we pride ourselves on teaching new and experienced investors how to maximize their gains with minimal stress. Our goal is to help you fall in love with real estate and real estate investing. What we’re most passionate about is maximizing investment gains for people like you.
Do you want to get key insights and advice that’ll help you get ahead of the game? Don’t hesitate to contact us for any and all real estate wants or needs.
