Real estate syndication is a concept applied in the real estate market which opens up opportunities for different types of real estate investors to make a profit through a win-win situation.
Whether you’re looking to become a passive investor, or to crowdfund and manage a real estate project, real estate syndication can be a very useful tool to utilize in the real estate market.
So, what is syndication? What are the different roles that you can take in it? And how do you profit from it? Let’s find out!
What is Real Estate Syndication
The simplest way to describe real estate syndication is the pooling of funds from an investor or a number of investors with the purpose of employing those funds into a common real estate project. These funds can either be used to fund the entirety of the project, or they can be used to contribute towards the project in addition to a commercial mortgage. Real estate syndication is very similar to real estate partnerships, and the passive role of the investor is similar to that of REITs (Real Estate Investment Trusts).
Real Estate Syndication: Roles
There are two roles in a real estate syndication: the investors and the syndicator.
The role of investors in real estate syndication is very simple: they invest their money in a real estate project that is run and managed by the syndicator, and they earn a percentage of the project’s profits based on a predetermined and agreed upon rate that is split between all investors and the syndicator.
The role of the investor in a real estate syndication is a passive one: he/she is not required to participate in the running or management of the investment property, and his/her involvement in the project is minimal.
The syndicator is the person who initiates the real estate syndication; he/she is the one responsible for finding a property, analyzing it, and managing it. Additionally, in most cases, the syndicator will be the one responsible for finding investors and pooling money towards the project. It should also be noted that the syndicator of a real estate syndication usually contributes the least amount of cash into the project (5%-20%), and is compensated for the time and effort that he/she puts towards managing the project.
Real Estate Syndication: Crowdfunding
Real estate syndication has become much more popular in the last few decades due to advancements in technology in general, and the invention of the internet in particular.
Back in the pre-internet age, in order to crowdfund a real estate syndication, the syndicator and the investors needed to find a common ground to do networking in order to find one another and agree on the terms of the syndication. This meant that they had to find a common place to meet, like a club, before getting to know each other and deciding whether they want to do the investment together or not. This process was time-consuming and geographically limited, which made real estate syndication a challenging process to get into.
With the invention of the internet, however, real estate syndication became much easier and faster. Nowadays, you can find online forums and crowdfunds where syndicators and investors can match up without even having to meet one another. This made it much easier for investors, in particular, to participate in real estate syndications using nothing more than a computer, giving them access to all the information they need to know about the project that they have invested in from the comfort of their own homes.
Real Estate Syndication: Profits
Just like any other real estate investment, the main purpose of syndication is to make a profit for both the syndicator and the investors, turning the real estate project into a win-win situation for all parties involved.
When it comes to the investors, the way they make money from the syndication is very simple: they earn a percentage of the profits made from the project that they have invested in based on the share of their contribution towards the project.
The syndicator, however, makes a profit in a number of ways:
A real estate syndicator typically receives a compensation for his/her role in finding the investment property, conducting due diligence, and structuring the deal. The acquisition fees associated with real estate syndication can usually be 1%-5% of the acquisition costs, and they are usually negotiable with the real estate investors participating in the deal. You, as a syndicator, need to find the balance while setting your acquisition fees; if you ask for too much, the investors will be lured away from investing in the project; and if you ask for too little, then you might not be compensated for the time and effort that you’ve invested in it.
Asset Management Fees
As a syndicator, you will also receive an asset management fee which generally amounts to 1% of the gross revenue. This fee is paid to the project’s syndicator in return for his/her services of managing the entire project – both the investment property and the syndicate partnership.
It is your responsibility as a syndicator to manage the investment property and maintain it. If you’re not personally managing the property, then you will need to constantly communicate with the professional property manager in order to ensure that it is being properly managed and that all works related to the property, such as maintenance and renovations, are being done properly and on time.
Additionally, as a syndicator, you will also be responsible for managing the syndicate. This means that you will have to constantly communicate with the real estate investors and keep them up to date on the project, and ensure that they receive their part of the compensation in accordance with the time period that you’ve agreed upon (monthly, quarterly, or annually).
Finally, a real estate syndicator will receive compensation through the property’s cash flow and appreciation based on his/her equity stake in the project, which usually ranges anywhere between 5% and 50%, depending on his/her skills and the specifics of the deal.
Real estate syndication is not a concept that is new to the real estate market, but it is becoming increasingly popular due to it becoming much easier since the invention of the internet. Whether you’re involved in it as a real estate syndicator or a real estate investor, depending on your set of skills and financial background, real estate syndication can be a win-win investment for all parties involved when done right.
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