What Is Real Estate Syndication?
Real estate syndication deals are just one way that you can pool your funds with other real estate investors in a physical real estate asset. In most cases, you’re probably locked into the deal under agreed-upon terms, but it’s a way for you to invest in real estate without managing it yourself.
The Basics of Real Estate Syndication
Real estate syndication deals are popular for entrepreneurs because it’s fast and effective. You also don’t really need to know very much about investing, real estate, or property management because you’ll have someone handle all those nitty-gritty details for you. As a commercial real estate investor, you might see the following returns:
Average annualized return: 15%
Internal rate of return: 10-15%
Cash on cash: 7-12%
Total return: 100% in 5-7 years
An Example of Real Estate Syndication
Let’s say you want to invest in real estate but you don’t want the time-consuming hassle and stress of managing it. You connect with a group of friends who are also investors. As a group, you decide to purchase an apartment building. You’ll likely choose the person with the most experience in real estate syndication and property management to become the syndicator. The group enters a limited partnership or syndicate.
The syndicate entity may use the funds to purchase the property or use the funds as equity. You may receive cash flow distributions on a quarterly or monthly basis depending on how the deal is set up, but the distributions may not start right away. You should know what to expect once the deal closes, and you'll receive monthly updates to clue you in on the status of the property, including renovation and occupancy.
The Benefits of Real Estate Syndications
Real estate syndication can be beneficial to you and your fellow investors, no matter who is the sponsor and who the investors are. You may not need to raise money or handle the details of property management. You just get all the benefits of the commercial real estate investments.
Access to a Diversified Portfolio
One of the most obvious benefits is that it allows you to more easily diversify your portfolio. You may not be able to invest in real estate on your own. As a part of the real estate syndication, you’re diversifying your portfolio without taking on as much of the risk.
Benefit from Experienced Help
Particularly if you’ve never invested in real estate before, you might make mistakes if you tried it on your own. As part of the investment group in a real estate syndication, other investors may have more experience than you. You’ll learn from them, tap into their larger investment network, and avoid common pitfalls.
Invest What You Are Comfortable with
You can dip your toe into the world of real estate investing without diving in. While there will probably still be a minimum amount to be a part of the real estate syndication, that minimum is usually much less than the amount you’d be required to invest if you were handling it all on your own.
Tap Into Passive Income
Passive income is the new favorite catchphrase, but that’s because it works. If you want to be involved in every aspect of your real estate investment, you can do that, but why? With a real estate syndication, you’re receiving regular passive income while the syndicator is doing most of the work. You’re reaping the benefits with lower risk and little to no hassle.
The Challenges of Real Estate Syndications
Of course, real estate syndications aren’t completely risk-free. It’s possible that something could go wrong. After all, any real estate investment involves risk, even if it’s minimal. Here are a few of the drawbacks for syndication.
Possible Property Failure or Depreciation
If the property fails, you’ll lose money. The amount of the loss will depend on the amount of risk you took on. Those members who invested the largest amount of money will lose the most. Depending on the agreement with the other passive investors, including the personal recourse guarantee, you may recover at least some of the money.
Real Estate Syndications Are Not Liquid
Even under the best real estate syndication scenarios, it’s likely that you’ll be locked in for some period with your investment. That means that if you have an emergency or want to use that money to invest in something else, you’re stuck.
You will agree to the lock-in period as part of formalizing the real estate syndication, so you have the option to push for a one-year duration as opposed to a 7–10-year duration. That’s an important consideration if you have any reason to believe that you might need the money sooner rather than later.
Hidden Fees
The syndicator will probably handle fee processing, including earnest money. There are other hidden fees that might pop up during the real estate syndication. They might involve property or asset management fees, organization fees, and more.
Future of Syndication
Real estate syndication is strengthening with technological innovation. Since real estate syndication can be such a gold mine, it will likely be one of those wealth-building opportunities that will continue to be lucrative in the future. According to Forbes, 40% of investors never pursue another real estate syndication deal after the first one.
How to Invest in Real Estate Syndication
The process of real estate syndication is fairly straight-forward. You typically start by determining which real estate niche you’d like to pursue. Then you develop an investment plan and create a business plan. You’ll use your investment plan and business plan to pitch investors on what you’re proposing. So, the goal is to get those investors to become your partners in this endeavor.
The next step sounds easy, but it might be a bit more complicated depending on what your requirements are, particularly with the current state of the real estate market. What you’ll need to do is find a real estate investment that you can all agree upon and that fits into your requirements. Based on the amount of investment that each investor has agreed upon, you’ll then fund the purchase.
The Passive Investor’s Role in Real Estate Syndication
As a passive investor, you’re usually only responsible for providing the agreed-upon capital for the real estate syndication. It’s passive income because you don’t have to do anything additional to receive the benefits. With that passive investment, you receive ownership shares in the real estate property.
Eligibility Criteria for Investing in Real Estate Syndications
Real estate syndication is not something that just any investor can take on. You need to be sophisticated and accredited to be eligible for real estate syndication. There are also a few other tangible requirements and criteria you must meet.
Meet the basic financial threshold. Here’s how.
Have an annual income of at least $200,000, or $300,000 (with a spouse)
Have a net worth of more than $1,000,000
For some of the real estate syndication, like a 506(c) offering, from the US Securities and Exchange Commission (SEC), you must be accredited to participate. There are still many situations when you only need to be a sophisticated investor. To be considered “sophisticated,” you must have in-depth experience and knowledge in investing.
How to Get Started in Real Estate Syndication
In real estate syndication, you don’t need to find the perfect deal. You don’t really need to do any of the work at all. If you’re looking to become part of a group of investors who are involved in real estate syndication, reach out to your network of investors.
Find out if you’re on the same page as far as risk, rewards, and market fluctuations are concerned. It’s helpful if you can find investors who are interested in the same types of asset classes.
Conclusion
Real estate syndication can be a great way to invest your money in small increments instead of a huge chunk that might be outside your price range. It may be just a way to pool your funds with other investors, but there's so much more potential with real estate syndication.
As an investor, your goals are building your portfolio, creating new sources of passive income, learning about the process, growing your income and your wealth. So, each time, you might make a larger investment than before. It’s all part of the process, as you learn and grow as an investor.
How Can EquityBrix Help?
EquityBrix can help you grow your wealth through our fractional real estate investment platform. Our team marries the needs of investors and real estate developers by providing opportunities for above-market returns. EquityBrix is committed to creating high-yield investment offerings, and we can help guide you through the new era of real estate investing.
If you want more information about tokenized real estate investing go to EquityBrix or EquityBrix.com/Learn.
If you are looking to grow your wealth and diversify your investment portfolio by learning about innovative ways of investing in real estate go to EquityBrix, or contact us for more information, or sign-up for the EquityBrix Newsletter.
*Disclaimer: EquityBrix is not an investment adviser. This information is for educational purposes only and does not constitute investment or tax advice. It’s important to be informed and to make your own investment decisions or do so in consultation with a professional financial advisor. Under no circumstances should this material be used or considered as an offer to sell or a solicitation of any offer to buy an interest in any investment. Any such offer or solicitation will be made only by means of a written online prospectus relating to the particular investment.
FAQs
What is real estate syndication?
Real estate syndication is just one way that you can pool your funds with other investors in a physical real estate asset. In most cases, you’re probably locked into the deal under agreed-upon terms, but it’s a way for you to invest in real estate without managing it yourself.
How much money do I need to invest in a real estate syndication?
The amount of your investment in real estate syndication really depends on your commitment level and the other investors. You could invest a little as $1,000 or hundreds of thousands of dollars. The level of risk and reward is completely up to you and the other investors.
How much do real estate syndicators make?
The amount that you can make from a real estate syndication will depend on how much you invest. In many cases, a sponsor might invest 5-20% of the capital in the real estate syndication project.
