Many real estate investors have this image formed in their minds that real estate investing is a slow process and it can take years to move onto your second investment property. They begin to convince themselves that it can take time to advance in their career as real estate investors. But the truth is there is a way to gain financial momentum in real estate investing. One of the great ways to speed up your real estate career is through real estate syndication. If you want to learn more about real estate syndication and are curious to find out how it works, then continue reading. Please feel free to leave any comments or any personal experiences you feel will be beneficial below.
What is real estate syndication?
Real estate syndication is a great way for investors to pool and integrate their financial and knowledgeable resources to invest in properties that are bigger than they could afford to invest in on their own. It is very similar to real estate partnership, where you find a partner to help you finance a real estate project that is too big to handle alone. The difference is that real estate syndication is a large-scale partnership that can have up to hundreds of real estate investors involved.
There are two main parties that make up real estate syndication: the syndicator (sometimes called the sponsor) and the investor. Each one plays a vital role in generating a great amount of money from the investment. Despite the different roles that each party plays, in the end, their goal is one. They work together as a team to achieve complete success.
The syndicator: The syndicator is the one in charge of the real estate syndicate. He/she mainly invests time (also known as sweat equity). He/she is responsible for connecting with investors to collect the funds for their project and manage the property as a whole.
The investor: The investor is the one who is putting the cash on the table. He/she provides most of the financial equity. This is a form of passive real estate that is common among many investors who invest their money in real estate syndication companies to generate real estate passive income. Even though their involvement is very minimal, they still receive a percentage of the project’s profits based on an agreed rate between both parties.
How to start a property syndicate
Starting a real estate syndication is not complicated. However, there is a certain process to follow to ensure all goes well.
- Financing process: As with any type of investment, the most crucial part is financing. You need to make sure to find real estate investors who are willing to invest their money in your project and who have the same goal in mind as you do.
- Identify the scope of the syndicate: Ask yourself how many investors do you want to be involved?
- Draw out a business plan: Get organized and visualize strategically how you want to achieve your goal. Start by deciding on the right type of property you want to invest in and then choose the real estate market you want to enter. To make your property search easier, use Mashvisor to help you find the property that matches your needs.
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- Create a syndicate agreement which will act as the constitution for your investment plan. This is to ensure that both parties know their roles and what to expect from the project. You should also include each party’s profit range so no misunderstandings occur in the future.
The profits made from real estate syndication
Like any other investment, the main purpose of real estate syndication is to make a profit to get a high return on investment. Both the syndicator and the investor make a profit from the project. The investor earns a percentage of the profits made from the project based on the share of their contribution towards the project. However, the syndicator makes a profit in a number of different ways.
1. Asset management fees
It is your job as the syndicator to manage the property and maintain it. In addition, the syndicator is responsible for managing the syndicate. Meaning you have to connect with investors and keep them updated on the project’s performance. That is why a syndicator will generally receive an asset management fee which is generally 1% of the gross revenue.
2. Acquisition fees
As a syndicator, you receive compensation for your role in finding the property and structuring the deal. This is known as the acquisition fee and can usually be 1%-5% of the acquisition. This fee is negotiable between the syndicator and the real estate investors. Keep in mind that you need to find a balance when you set your acquisition fee. You don’t want to ask for too much and scare away the investors.
3. Equity participation
Finally, as a real estate syndicator, you will receive compensation for your equity participation in the project. This usually ranges from 5% to 50% depending on your skills and the specifics of the deal.
The pros and cons of real estate syndication
In real estate investing, there are never any guarantees that a certain investment strategy will be profitable. That is why it is highly recommended that real estate investors do a thorough background search of the advantages and disadvantages of the potential investment. Real estate syndication is no different and you should be aware of the pros and cons so you can decide if this type of investment is suitable for you or not.
The pros of real estate syndication for real estate investors:
- Provides a great source of funds
- It allows investors to tackle big deals
- Great way to generate passive income in real estate
- You don’t have to get involved in the management
- No prior knowledge or expertise is required
- Can offer higher returns than many other available investments
- Favorable depreciation deductions that will ultimately reduce the taxable income that is passed through to the investor
- No self-employment taxes
The cons of real estate syndication for real estate investors:
- Lack of control since the day to day tasks are solely dependent on the sponsor
- Market volatility. The value of the investment can go up and down and is subject to local market conditions.
The bottom line
Despite the disadvantages of real estate syndication for real estate investors, it remains a strong option for property investment. It has become very popular among many investors due to its high benefits and how easy it is to make money in real estate with this strategy. No matter if you are playing the role of the sponsor or the investor, both parties win in syndicating.