There are some people who enjoy DIY projects. They love the idea of doing it themselves for almost any task, which includes commercial real estate investing. Real estate syndications can be thought of in that way.
For those who like to do their own research on a market, make their own calls, and take on a bit more risk, it may make sense to work with a brokerage and DIY. The best way to start from scratch is to invest in syndication that is tried and proven.
To help you decide if real estate syndication is right for you, read on to find out what it is, how it works, and what the types are.
Table of Contents
What is a Real Estate Syndication?
Before crowdfunding for real estate even existed, real estate syndication was considered the crowdfunding for real estate.
The basic principle of both syndication and crowdfunding is to pool the capital with others for this common goal or purpose. In real estate, that common purpose is acquiring a real estate property, a tangible building.
A real estate syndicate is formed when investors pool their money for a similar goal, in this case purchasing real estate. In order to buy or build a real estate property, investors pool their money together. It is also possible for them to borrow money using real estate leverage. There is greater purchasing power in real estate syndicates than in individuals.
Simply put, real estate syndication is a fancy way of saying real estate partnership. The Jumpstart Our Business Startups Act (JOBS Act) established real estate syndication as a response to criticism that only wealthy investors pursued real estate projects.
For anyone interested in real estate investment, real estate syndication opens up numerous possibilities.
How Does Real Estate Syndication Work?
This part will not focus on what are the three phases of real estate syndication, but rather on the roles you can fulfill when participating in a real estate syndication. There are different types of roles in a real estate syndicate—syndicators and investors. Real estate transactions are profitable for both parties.
Syndicators earn money by originating the transaction, generating rental management fees, capital appreciation, and generating monthly cash flow from rent. However, investors only profit from real estate appreciation and the monthly income from rent.
When they run short of investors in their own network, real estate syndicators can turn to crowdfund platforms for funding. Participating in real estate syndication requires you to decide whether you will be the syndicator or investor. A role’s suitability will be determined by your skillset, experience, and capital.
The syndicator is responsible for the most complex and demanding tasks. Your role as a syndicator is to complete all steps necessary to complete the property acquisition. In the case of a fix-and-flip or a rental, the syndicator is responsible for overseeing renovations and property management.
Real Estate Syndicator Responsibilities
There will be a great deal of responsibility on your shoulders as a syndicator. Investors are mostly passive—once the money is invested, they’ll take a backseat and let you run your business. Although, it is important to keep them updated about the progress of the investment on a regular basis.
It may be a good role for you to play the syndicator if:
- Finding suitable properties is one of your strengths
- Your property management experience is extensive
- House flipping is something you know a lot about
- Real estate accounting and reporting are part of your skillset
Real Estate Syndication Investor Responsibilities
You might have a better potential of landing an investor role if you have the following characteristics:
- You have enough capital to invest, but you don’t have any experience managing or buying property.
- Investments in real estate are just a source of passive income for you.
In a real estate syndicate, an exit strategy is always in place. A common exit strategy for some properties is to renovate and sell them for a profit.
When it comes to a rental property, an exit strategy usually involves stabilizing it or making it provide a steady income to the owners through their tenants. For commercial properties, you can read SaintInvestment’s article to learn everything you need to know about commercial real estate syndication.
Nevertheless, in any situation, the syndication is complete when the exit strategy is implemented.
How to Profit from Real Estate Syndication
When it comes to real estate syndication, your profit is heavily dependent on your role and the exit strategy. There are some real estate syndicates that split profits equally, but there are many others that do not. The passive investor typically receives about 70%, while the syndicator receives about 30%.
As a result of putting in more money, investors usually earn more. Most syndicators only contribute between 5% to 10% to the investment, if not none at all.
Even though the specific breakdown of capital varies for each real estate syndication, there are numerous ways for investors and syndicators to maximize their profits—these include:
In return for overseeing the transaction, the syndicator receives an acquisition fee that ranges from 1% to 5% of the investment. On the syndication agreement, the syndicator may be able to negotiate the inclusion of an acquisition fee.
Asking for too high a fee could discourage other investors from participating. However, don’t underestimate your abilities, particularly if you’re in charge of finding the property and setting up the deal.
Asset Management Fees
The members of a syndicate could decide to hire a property management company to locate tenants, collect rent, perform maintenance on the property, etc.
However, the syndicate can also delegate property management functions to the syndicator. There is a property management fee associated with that scenario that is generally around 10%. When a fix-and-flip is involved, the syndicator earns an even greater share.
Cash Flow and Appreciation
The syndicator still gets a slice of the pie, whether they invested money or not. A passive investor, however, earns a much higher preferred return.
For instance, if passive investors get 12% each, then the syndicator might only receive about 5%. However, all of this depends on the structure and how much responsibility is taken on by the syndicator.
Let’s suppose the property goes on sale. As a result, each investor will receive a percentage of the proceeds. It is ideal that the property will have appreciated by the time it is sold. House flipping is a common activity among real estate syndicates to maximize returns.
In contrast, if the property is rented out to tenants, then investors will each receive a percentage of the rental earnings.
Real Estate Syndication and Crowdfunding Platforms
A well-liked method for real estate syndicators to collect money from many different investors is through crowdfunding sites. These networks link syndicators with prospective investors using internet technology, enabling them to pool resources and buy real estate.
Crowdfunding platforms typically offer two types of real estate investments: debt and equity. In debt investments, investors lend money to the syndicator in exchange for interest payments and a return of their principal. In equity investments, investors buy ownership stakes in the property and share in the profits and losses.
Determine if Real Estate Syndication Will Work for You
The real estate syndication system is an excellent way to expand your portfolio, whether you are an investor or a sponsor. Syndicators do the work but reap the rewards by leveraging their investment with money from a pool of investors.
As an investor, you can also increase your portfolio, but with passive income. Taking on the role of an investor may be right for you if you prefer to take a back seat while still enjoying the potential profits that real estate can offer.
To learn more about syndicated real estate, you may discuss what will work well for you. Contact our team at 949-881-7128 at Saint Investment Group today!
Frequently Asked Questions:
An individual or organization that pools money from numerous investors to buy and handle real estate assets is known as a real estate syndicator.
A real estate syndicator’s job is to locate investment possibilities, collect money from numerous investors, handle the property, and make money for investors.
Becoming a real estate syndicator typically requires experience in real estate investing, knowledge of the industry and legal requirements, and the ability to network and build relationships with potential investors. You may also need to obtain relevant licenses and certifications.
Commercial assets like office buildings, shopping malls, and residential complexes are the usual targets of real estate syndicators. They might, however, also make investments in other kinds of real estate, like private rental homes or even undeveloped property.
You typically need to be an authorized investor, which implies that you satisfy specific financial requirements established by the SEC, in order to participate in a real estate syndication. Either directly with a real estate syndicator or through a website for crowdsourcing investments.
President of Saint Investment Group
Nic is a two decade seasoned expert in investing and capital raising, specializing in Real Estate and debt markets. With Saint Investment Group, he leads large-scale distressed asset purchases and innovative syndications for investors.