Real estate careers generally start small: one or two single family homes used as rental properties or even a turnkey investment property. Once real estate investors have found success in these first stepping stones of real estate investing, they itch to move forward in their real estate careers.
Sometimes it takes years to get into something bigger in real estate investing like multifamily homes (apartments for sale), commercial real estate rental properties, or more than just a few single family homes. Do real estate investors have to wait so long to gain financial momentum to advance their real estate careers? The answer is no, not when real estate investors turn to real estate syndication.
If you want to learn all about investment property syndicates, the best way to fast-track real estate careers, you’ve come to the right place. This is the ultimate guide to real estate syndication.
What Is Real Estate Syndication?
A real estate syndication is when income property investors come together to finance a property investment. There can be a few real estate investors involved or even hundreds. Not only do they pool together their financial resources for the real estate investment, but property investors can share any other real estate investing resources at their disposal.
This allows income property investors to make a profit and further their real estate careers as well as allowing them to get involved in real estate investments of a much larger scale than they could on their own.
How Does a Real Estate Syndication Work?
There are two basic roles in a real estate syndication: the sponsor (sometimes called the syndicator) and the real estate investors. Let’s take a look at how each one is involved in the real estate investment:
The Sponsor
The sponsor plays the most crucial role in investment property syndicates. The rest of the real estate investors rely on the expertise of the sponsor to carry out the following tasks:
- Find the investment property (or properties)
- Get sufficient financing for the rental properties
- Acquire the investment property
- Be responsible for day-to-day rental property management
Besides investing time (or what is referred to as “sweat equity”), the sponsor also invests financial equity. This can be anywhere from 5-20% of the total equity capital for the real estate investment.
Click here to find an investment property with Mashvisor.
The Real Estate Investors
Generally, the real estate investors only invest money (financial equity). They put in 80-95% of the total equity capital for the real estate investment. Because they don’t invest any “sweat equity”, being income property investors in a real estate syndication is considered to be passive investing. Any money they make is passive income.
What Are the Types of Real Estate Syndication?
Investment property syndicates can be simply structured in a few different ways. Each type allows some level of protection for the income property investors involved.
Corporation
A corporation is a business structure that allows the business to become its own legal entity. It is given the rights and responsibilities of an individual in the eyes of the law. Because of this distinction, it is considered a separate “legal person” from its owners.
Limited Partnership
A limited partnership is formed by two or more business partners. One or more of the partners enjoy limited liability, meaning they are only liable up to the amount of the cash investment. In a limited partnership, partners don’t receive dividends. Instead, they profit from direct access to positive cash flow from rental income.
Limited Liability Company
The final structure for investment property syndicates is a limited liability company. A limited liability company is a combination of a corporation and a limited partnership. In a limited liability company, the owners can’t be held responsible for the debt of the company.
In any form of real estate syndication, there is some kind of agreement (limited liability company operating agreement or limited partnership agreement) that must outline the following:
- Right to distribution of positive cash flow
- Voting rights
- The compensation rights of the sponsor for rental property management and other responsibilities
How Do Real Estate Investors Make Money with Real Estate Syndication?
Both the sponsor and real estate investors make money in a few different ways in a real estate syndication.
The Sponsor
- Investment Property Acquisition Fees: 0.5-2% of the cash investment
- Rental Property Management Fees
- Traditional way of making money in real estate from rental income and property appreciation
The Real Estate Investors
- Preferred Returns: 5-10% of the cash investment received annually
- Traditional way of making money in real estate from rental income and property appreciation
Also each party gets paid depends on the agreements. It could occur monthly or quarterly for rental income. For property appreciation, it depends on when the real estate investment has matured (from a few months to years).
Related: What is a Real Estate Syndication and How Does it Make You Money?
How Has Real Estate Crowdfunding Changed Real Estate Syndication?
Real estate syndication has been a part of real estate investing for years. However, it came into the limelight with the internet and real estate crowdfunding. Real estate crowdfunding allows more income property investors to reach a syndication, meaning they can also put in less of a cash investment. No longer do investment property syndicates have to rely heavily on networking and knowing the right people, thanks to real estate crowdfunding.
Related: All You Need to Know About Real Estate Crowdfunding as a New Investor
What Are the Pros and Cons of Real Estate Syndication?
Naturally, there are advantages and disadvantages that sponsors and real estate investors have to consider.
Pros for the Sponsor
- Use the financial resources of others for rental properties you may not have otherwise had access to (commercial real estate, multiple residential real estate properties, etc.)
- Decrease the risk of real estate investing with limited liability
- Have control over rental property management
Cons for the Sponsor
- Expensive set up cost ($20,000-$30,000)
- Pooling together enough of a cash investment (which isn’t always easy)
Pros for the Real Estate Investors
- Passive investing/passive income
- Don’t need expertise in real estate investing or rental property management to start making money in real estate in this way
- Limited liability
- Invest in many different real estate investment opportunities
Cons for the Real Estate Investors
- No (or limited) control over the rental properties
Understand and consider all of the advantages and disadvantages of getting involved in investment property syndicates before taking upon it.
What Are the Steps of Starting a Real Estate Syndication?
Many income property investors assume that first you have to find rental properties and then you find the funding. However, it is recommended to do the opposite when trying to start a real estate syndication. In this way, there is no real time limitation to finding investors. Follow these steps:
- Pick a real estate investing niche: one type of investment property in a specific real estate market that you have experience with
- Decide on an investment strategy and design a fitting business plan for it outlining how you will be making money in real estate
- Come up with a list of potential income property investors (family, friends, business associates, investment property owners, doctors, lawyers, accountants, etc.)
- Arrange meetings with potential real estate investors and get them interested in your business plan
- Keep the interested potential income property investors informed, updating them as you look for an investment property deal
The last step involves finding the best rental properties to get income property investors on board. Use Mashvisor to find and analyze rental properties for your real estate syndication.
Click here to find rental properties now.
These are the basic steps for starting a traditional real estate syndication. A sponsor can always turn to real estate crowdfunding platforms, which take less time to find financing for rental properties. For real estate crowdfunding, a sponsor has to have an investment property ready to be approved by the platform. Because there already exists a pool of real estate investors, there should be no pressure of time.
How Can Real Estate Investors Join a Real Estate Syndication?
Joining a real estate syndication either requires a real estate network or scouting out real estate crowdfunding and syndication websites. There are a few things to consider when choosing a real estate syndication to join:
- Do you qualify to join? There is usually a list of attributes that an income property investor must possess to get involved.
- Thoroughly review the track record of the sponsor, as you are putting the investment property in their hands
- Comprehensively understand the terms and conditions and make sure they meet your investment strategy (liability, preferred returns, voting rights, exit strategy, and what the sponsor gains financially)
Review these elements, and you should be able to find a real estate syndication that is right for you.
Related: What is a Real Estate Syndication and How Can You Take Part in It?
A real estate syndication is a great option for getting involved in bigger and better investment opportunities. Whether you choose to be a sponsor or go the route of passive investing, enjoy positive cash flow from rental income and property appreciation. Making money in real estate can be greatly enhanced with investment property syndicates. Consider starting or joining one today!
