What Is A Real Estate Syndication And Why You Should Consider Investing In An Apartment Syndication?
- Thousand Doors Group
- Dec 15, 2022
- 7 min read
Updated: Dec 16, 2022
Recently, I had the opportunity to speak with a person who has been active in the field of real estate investing for more than ten years. He was completely unfamiliar with the concept of "real estate syndication." In fact, that occurs quite frequently. Due to limitations imposed by the SEC, real estate syndication opportunities could not be offered to the general public until quite recently. To be able to invest in one of these, you needed to be a part of the "inner circle," which meant that you needed to know someone who was already involved in the transaction.
The Securities and Exchange Commission (SEC) now enables certain possibilities to be publicly promoted, which opens the door for more people to learn about and invest in this manner.
But perhaps you are unfamiliar with this term as well, and you have questions such as the following:
● What is real estate syndication?
● How does real estate syndication work?
● Why should I invest in a syndication deal?
● What would an example of real estate syndication look like?
What Is A Real Estate Syndication?
Let's get the fundamentals out of the way first. Syndication is simply another word for pooling one's resources. Investing in real estate as part of a group known as a "syndication" occurs when multiple people combine their resources and knowledge in order to make a single investment. The group of people decides to pool their resources and purchase a single huge asset rather than spread their money out among a number of smaller assets.
Let's say that in addition to your previous savings and retirement assets, you have an additional $50,000 available for investment. You could put it in an individual rental property, but it would involve time to select a property, negotiate the contract, complete the inspections, run the numbers, and acquire the financing. On top of that, you would need to find a renter and manage the property.
However, it is most possible that you do not possess the time or energy necessary to fulfill such a responsibility. The majority of individuals give up at this point because they believe that investing in real estate is too difficult and requires too much labor.
Investing in real estate through real estate syndications is an alternative that enables you to keep your money in the real estate market while relieving you of the responsibility of personally locating and managing the property. Instead, you might become a passive investor in real estate by putting that $50,000 into a real estate syndicate. Your contribution of $50,000 will be followed by possibly another friend's investment of $50,000, then someone else's contribution of $100,000, and so on and so on.
The members of the organization would now have enough money thanks to the act of pooling their resources to be able to purchase not just a single rental property but something significantly larger, such as an apartment building. If you choose to invest in real estate using a passive strategy, you won't be responsible for any of the property management tasks. The lead sponsor team/Syndicator team will be responsible for the day-to-day management of the business (i.e., all of the actual work), and in exchange, they receive a portion of the business's revenues.
When executed properly, real estate syndications result in a win-win situation for all parties involved.
How Do Syndication Deals Work?
You are now curious about the "behind the scenes" particulars of a syndication in order to get a better idea of how everything ultimately plays out.
To begin, when a group of people get together to form a real estate syndication, there are two primary types of participants: active general partners, who run the business, and passive limited partners who invest the money.
The previous part of this article discussed a group that, in exchange for a modest portion of the income, would handle all of the day-to-day management responsibilities (so that you wouldn't have to!). General partners are the individuals who make up that syndication team (GPs). They are responsible for all of the groundwork, including the search for the property, the evaluation of the land, and the creation of the business plan. They, in essence, perform the tasks that you would be responsible for as the owner and landlord of a rental property; the only difference is that they do so on a much larger scale.
The limited partners, often known as LPs, are the passive investors (those who are in the same position as you) who invest their money in the transaction. The limited partners are exempt from any operational responsibility in relation to the management of the asset.
The participation of both general partners and limited partners is required for the successful operation of a real estate syndication. The general partners are responsible for locating a fantastic opportunity and assembling a capable group in order to carry out the strategic business strategy. Because the limited partners contribute their own money to the transaction, it is able to proceed with the purchase of the property as well as the financing of the modifications.
Jointly, the general partners and limited partners become members of an entity (often a limited liability company), and that entity is the one that owns the underlying asset. You are eligible for the tax benefits associated with direct ownership because the LLC is a pass-through entity.
As soon as the transaction is finalized, the general partners collaborate closely with the property management team to make enhancements to the property that are in line with the business plan. During this time, the limited partner investors will be given checks representing the continuous and monthly cash flow distributions (usually every month).
When all of the planned modifications have been finished, the general partners will sell the property, repay the initial investment money to the limited partners, and divide the profits.
Why Should You Consider Investing In A Syndication?
Now that you have a reasonably good knowledge of how real estate syndications operate, let's speak about the benefits that will accrue to you as a participant in one of these arrangements. The decision of passive investors to put their money into real estate syndications can be attributed to a variety of factors.
The following are some of the more important ones:
● You want to invest in something that’s more stable than the stock market.
● You want to be truly passive and let the pros do all the work.
● You want to take advantage of the return upside of a commercial property but don’t have the capital to take a deal down on your own.
● You want to invest in physical assets (as opposed to paper assets, like stocks).
● 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.
● You want the tax benefits that come with investing in real estate.
● You want to invest in real estate but don’t have the time or interest in being a landlord.
Real estate syndication is a nearly perfect way for busy professionals to invest in large-scale, physical real estate assets, without the commitment of time or excessive mental energy. Real estate syndication also has the added benefit of having a positive impact on the community, in addition to providing financial returns and tax advantages. This possibility to earn passive money is beginning to sound more appealing by the day.
An Example of An Apartment Syndication Deal:
This is an illustration of how a transaction including real estate syndication may look like.
Let's say Lisa and Thomas are experienced apartment syndication operators. They are actively trying to find a high-potential apartment community in Dallas, Texas, together as a team. Since Lisa lives in Dallas, she collaborates with real estate brokers located in the surrounding area to locate a fantastic property that satisfies their acquisition requirements. They look at dozens of properties before settling on the one that has a price tag of ten million dollars.
Thomas takes the lead on the underwriting, which entails examining all of the data to ensure that the transaction would result in a profit, and they find that the property in question possesses a significant amount of untapped potential.
In order for them to purchase the property using the syndication method, they have to first work with a syndication attorney to build the agreement, during which they develop the business plan and investment summary that will be presented to potential investors.
After that, they reach out to their existing database of people that showed interest in becoming a limited partner/passive investor in a high-potential syndication project. Each passive investor contributes a minimum of $50,000 to the venture until they have accumulated sufficient funds to pay for the down payment and the cost of the renovations.
After the transaction is finalized, Lisa collaborates closely with the team of local experienced property managers to enhance the building and ensure that the renovations are completed on time and within the allotted budget.
During this period, Lisa and Thomas will provide their passive investors with monthly updates as well as monthly cash flow distribution checks. These will continue until the end of the period.
After the renovations are finished, Lisa and Thomas think it would be a good time to sell the house. After only three years, the home sells for $15 million, which is a great return on their investment. Every passive investor gets back their initial investment, in addition to their agreed-upon share of the earnings, according to the terms of the original transaction. In this particular instance, the parties involved in the syndication decided to divide the profits in the proportion of 70 percent to the investors and 30 percent to Lisa and Thomas.
At this point, each passive investor has received monthly cash flow checks during the refurbishment and hold period, in addition to receiving their initial capital investment back after the property is sold, as well as their portion of the profit split following the sale...
That's one fantastic offer for very little to no effort on your part!
WE'RE HONORED TO BE IN BUSINESS WITH YOU
Building wealth doesn’t always require you to do all the work you normally would as an independent real estate owner/investor. You can also accomplish the same goal by taking advantage of a syndicated real estate project.
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