by Joe Firmin 3 ½ Minute Read
Many real estate investors “get their feet wet” through some form of residential real estate or even being an accidental landlord when they rented out their first house. We recently met a couple people who had been in the real estate investing game for over 10 years and had never heard of a “real estate syndication” before.
Actually, it’s pretty common. Until recently, SEC regulations did not allow for real estate syndication opportunities to be publicly advertised. You had to be part of the “inner circle” (i.e., you had to “know a guy” doing a deal) to invest in one.
Luckily, the SEC now allows certain opportunities to be publicly advertised, which opens the gates for more people to learn about and invest this way.
But maybe you’re new to this term too and are wondering things like:
- What is a real estate syndication?
- How does a real estate syndication work?
- Why should I invest in a syndication deal?
- What would an example real estate syndication look like?
A Real Estate Syndication - What’s That?
Let’s start with the basics. A real estate syndication is when a group of people pool their funds and expertise together to invest in a real estate asset together. Instead of buying a bunch of small properties individually, the group of people come together and buy a larger asset together (e.g., an apartment building).
Let’s pretend you have $50,000 for investing, beyond other savings and retirement funds. You could invest it in an individual rental property, but that would also require time to learn how to do it all, including - find a property, negotiate the contract, do the inspections, run the numbers, get the loan, plus find the tenant and manage the property.
But it’s likely you don’t have the time or energy to deal with such an obligation. This is where most people assume real estate investing is too hard and too much work, so they stop there.
Real estate syndications are the alternative that allow you to still put your money into real estate and all its benefits, without having to do the work of finding or managing the property yourself. Instead, you can invest that $50,000 into a real estate syndication as a passive investor. So, you contribute $50,000, maybe a friend has another $50,000 to invest, someone else puts in $100,000, and on and on.
If you’re passive, who does the work? A lead syndicator or sponsor team (aka – the general partnership) does the day-to-day management (i.e., all the active work), and in return, they get a small share of the profits.
When done right, real estate syndications are a win-win for everyone involved.
First off, there are two main groups of people who come together to form a real estate syndication: the general partners (GPs) and the limited partners (LPs - passive investors).
The GPs essentially do the work that you would be doing as the owner and landlord of a rental property, just on a massive scale. Included is also the communication with the LPs on the performance of the investment.
The limited partners (LPs) are the passive investors (others like you), who invest their money into the deal. The limited partners have no active responsibilities in managing the asset.
A real estate syndication can only work when GPs and LPs come together. The GPs find a great deal and put together an efficient team to execute on the intended business plan. The LPs invest their personal capital into the deal, which makes it possible to acquire the property and fund the business plan.
Together, both partner groups join an entity (usually an LLC), and that entity holds the underlying asset. Because the LLC is a pass-through entity, you (the LP) get the tax benefits of direct ownership.
Once the deal closes, the GPs work closely with the property management team to improve the property according to the business plan. During this time, the LP investors receive regular and ongoing cash flow distribution checks (quarterly or monthly).
Once all the planned renovations are complete, the GPs sell the property (or hold long-term), return the LP’s capital, and split the profits.
If you’d like to see the logistics of the money – see this post on how that would work – the step-by-step.
Why Should You Invest In A Syndication?
Okay, now that you’ve got a decent understanding of how real estate syndications work, let’s talk about what’s in it for you. There are a number of reasons that passive investors decide to invest in real estate syndications.
Here are a few of the top reasons:
- You want to invest in real estate but don’t have the time or interest in being a landlord.
- You want to invest in physical assets (as opposed to paper assets, like stocks).
- You want to invest in something that’s more stable than the stock market.
- You want the tax benefits that come with investing in real estate.
- You want to receive regular cash flow distribution checks.
- You want to invest with your retirement funds.
- You want your money to make a difference in local communities.
A real estate syndication is a nearly perfect way that a busy professional can invest in large-scale, physical real estate assets, without the commitment of time or excessive mental energy, while also positively impacting the community and earning interest and tax benefits.
Here’s an Example of Real Estate Syndication:
Let’s say that Jane and John are working together to find an apartment community in Dallas, Texas. Jane lives in Dallas, so she works with real estate brokers in the area to find a great property that meets their criteria. After looking at a bunch of properties, they find one, listed at $10 million.
John takes the lead on the underwriting (i.e., analyzing all the numbers to make sure that the deal will be profitable), and they determine that this property has a ton of potential.
Since Jane and John don’t have enough money to purchase the $10-million property themselves, they decide to put together a real estate syndication offering. They create the business plan and investment summary for prospective investors and work with a syndication attorney to structure the deal.
Then, they start looking for limited partner passive investors who want to invest money into the deal. Each passive investor invests a minimum of $50,000 until they have enough to cover the down payment, as well as the cost of the renovations.
Once the deal closes, Jane works closely with the property management team to improve the property and get the renovations done on budget and on schedule.
During this time, Jane and John send out monthly updates, as well as monthly or quarterly cash flow distribution checks (mailbox money), to their passive investors.
When the renovations are complete, Jane and John determine that it’s a good time to sell and the property goes for $15 million after just 3 years. Each passive investor receives their original capital plus their split of the profits according to the original deal. In this case, a 70/30 split was agreed upon at the outset of the syndication (70% to investors, 30% to the Jane and John).
At this point, each passive investor has received cashflow distribution checks during the renovation and hold period, plus their initial capital investment back once the property sold, plus their portion of the profit split after the sale...a pretty sweet deal for little-to-no work! Money working for you… $$$
Now that you know the ins-and-outs of a real estate syndication, including what it is, how it works, how little effort on your part it requires, and how simple it could be to begin receiving your first passive income check, definitely don’t wait 10 years to make a move.
If you decide you want to be a hands-off investor and invest in real estate syndications, join the Freedom Network. It’s absolutely free to join with no commitment necessary, seriously. If you don’t join, we won’t be able to send you opportunities (sorry, SEC rules). So join today! Not sure how it will work? Check out this post to understand the logistics.