What is Real Estate Syndication?
Simply put, real estate syndication is an effective way for a syndicator/sponsor and a group of investors to pool their financial and intellectual resources together to invest in properties and projects much bigger than they could afford or manage on their own. Over 90% of large multifamily purchases are made through a syndication.
Role of a Syndicator
The sponsor/syndicator is the person who initiates the real estate syndication; they are responsible for identifying the market, underwriting the property, securing financing, overseeing the business plan/renovations and the daily activity of the property management company, ensuring strong investor relations, and managing the asset it general.
Role of an Investor
The limited partner, or investor, is the individual (or group of individuals) that provides the equity to fund the deal. 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 eight benefits of real estate syndication :
Cash flow
is the benefit you receive every month from renting real estate. It is money that comes in every month. Assuming that your monthly cash flow is greater than your monthly expenses and debt service, then the property will be cash flow positive. As a result, cash flow real estate investing is the safest way to ensure return on your investment.
Appreciation (Natural and Forced)
is the benefit you receive when you sell your investment property for greater than what you paid for it. There are two possible ways this increase can happen: through natural/market appreciation and through forced appreciation. Natural or market appreciation is an increase in the value of your real estate investment due to changes that occur in the real estate market. Such increases may happen when the demand for investment properties as yours outweighs the supply.
Moreover, natural appreciation may happen due to changes in interest rates or inflation. Forced appreciation refers to the increase in the value of the real estate investment property due to investors actions. This means it’s not influenced by the uncontrollable market forces, but rather investors who, through proactive engagement, have an impact on the investment properties value. Multi family property value is based off the Net Operating Income (your income minus your expenses) divided by the area’s going Cap Rate. Simply put, increasing the property value means increasing the Net Operating Income (NOI). So, to increase your NOI, you either need to increase your income by increasing rents or lower your expenses by finding areas to cut cost.
Moreover, natural appreciation may happen due to changes in interest rates or inflation. Forced appreciation refers to the increase in the value of the real estate investment property due to investors actions. This means it’s not influenced by the uncontrollable market forces, but rather investors who, through proactive engagement, have an impact on the investment properties value. Multi family property value is based off the Net Operating Income (your income minus your expenses) divided by the area’s going Cap Rate. Simply put, increasing the property value means increasing the Net Operating Income (NOI). So, to increase your NOI, you either need to increase your income by increasing rents or lower your expenses by finding areas to cut cost.
Principal Reduction
is the tried and true model of your tenant paying for your mortgage and principal payment every month. In essence, your tenant buys your property for you over time. Principal Reduction is more a function of loan term than anything else. The only drawback to principal pay down is that you only recognize the benefit at liquidity events (i.e., sale, refinance, etc.)
Tax
benefits of owning investment real estate are nothing less than outstanding. Imagine owning a dividend stock with very little volatility that pays a 15% tax free dividend. Real estate as an asset class gets all the normal deductions of any investment business with the added benefit of a paper loss called depreciation. The net benefit is that depreciation as a paper loss can in many cases completely offset the cash flow from your investment property. In certain situations it can offset even more than your current cash flow and you can create a “depreciation bank” or use the excess depreciation to offset any other income.
Diversification
One of the biggest reasons investors diversify their real estate investment portfolio is to mitigate risk exposure. The phrase “don’t put all your eggs in one basket” applies directly to this concept, as spreading your investment across a broad spectrum is how investors balance risk and reward in their investment portfolio. What we love best about investing in real estate syndications is that it’s relatively easy to build a framework around diversification.
Access To Large Investment Opportunities
Some of the best real estate investment opportunities in the world are in commercial properties. However, the purchase prices for this asset class can range from $2,000,000 – $500,000,000! Because real estate syndications give you the ability to pool your funds with other investors, you are able to get exposure to this asset class, without a seven-figure investment.
Ability To Invest Completely Passively
Possibly the most beneficial reason to consider investing in real estate syndications is that you have the ability to be a passive investor. In most investments like these, the investor is completely removed from the asset, the management, or the operational perspective of the investment.
When you invest in syndicated investments, the syndicator/sponsor will handle all aspects of the deal such as, doing due diligence, locating a profitable property (or properties), hiring and managing the property manager, sending out quarterly reports, handling investor relations, and so on. Investors will pay the syndicator via the performance of the deal with a split of the cash flow and appreciation. (Anywhere from 80/20 to 50/50 split for the investor is common but I typically see a 70/30 split.)
In exchange for the sponsor fee, you are able to be completely passive as an investor.
When you invest in syndicated investments, the syndicator/sponsor will handle all aspects of the deal such as, doing due diligence, locating a profitable property (or properties), hiring and managing the property manager, sending out quarterly reports, handling investor relations, and so on. Investors will pay the syndicator via the performance of the deal with a split of the cash flow and appreciation. (Anywhere from 80/20 to 50/50 split for the investor is common but I typically see a 70/30 split.)
In exchange for the sponsor fee, you are able to be completely passive as an investor.
Risk Reduction
By investing with other investors through a syndicator with a proven track record, investment risk is dispersed among all the investors. A syndication allows you to adjust your investment to a more comfortable risk level.
We all know that using an entity such as an LLC is advisable when investing in real estate. However, when you invest in a real estate syndication with a sponsor, you add another layer of protection between you and any liability resulting from the fund’s managers or debt obligations.
We all know that using an entity such as an LLC is advisable when investing in real estate. However, when you invest in a real estate syndication with a sponsor, you add another layer of protection between you and any liability resulting from the fund’s managers or debt obligations.
Each investment will receive some benefit from each of the four areas but you will find the blend differs on the types of investments you are making. For example you won’t normally find high cash flow on a percentage return basis in the same investment as high appreciation potential.