Introduction:
Are you tired of the daily grind and yearning for financial freedom? Real estate syndication might just be the answer you've been looking for. In this blog post, we'll delve into the exciting world of passive income and how real estate syndication can help you achieve your financial goals. Whether you're a beginner or an experienced investor, this article will provide valuable insights, actionable tips, and real-life examples to help you navigate the world of real estate investing.
Understanding Real Estate Syndication:
As per RealtyMogul, Real Estate Syndication functions as a crowdfunding method dedicated to investing in either residential or commercial real estate. This approach entails combining funds with like-minded individuals who share a common investment objective. A designated sponsor, either an individual or a group, orchestrates a deal that encompasses a singular property or multiple properties. This proposition is then presented to potential investors, who assess whether the opportunity aligns with their investment criteria before deciding to participate.1
Who’s Involved In Real Estate Syndications?
According to Forbes’ Guide To Investing In Real Estate Syndications, there are two key players in any real estate syndication investment: the syndicator(s) and the passive investors.Real estate syndicators, also known as general partners (GPs), are tasked with structuring and overseeing real estate syndication. The primary responsibilities of the general partner(s) include:
In essence, a real estate syndicator takes charge of every aspect, from property identification and transaction arrangement to operational management post-closure. The syndicator's role involves executing the business plan to deliver substantial returns to passive investors in the real estate syndication.
On the other hand, the role of passive investors in real estate syndication is to contribute a portion of the capital required for property acquisition. In return, passive investors receive ownership shares of the property. By owning a stake in the real estate property, passive investors benefit from regular (monthly or quarterly) passive income distributions, as well as a return on their investment upon property sale. This occurs alongside accruing equity, experiencing appreciation, and enjoying real estate tax advantages.
Pros and Cons of Investing in Syndicated Real Estate Investments3
There’s no such thing as a perfect type of investment for everyone, so here are some of the pros and cons of investing in syndicated real estate deals.
Pros of Real Estate Syndication
High return potential: Investing in syndicated real estate deals offers significant profit potential, making it a primary motivation for investors. Successful commercial real estate investments can yield substantial returns.CrowdStreet maintains a comprehensive record of all realised (sold) properties that raised capital through its platform. Among 115 completed investments, the average internal rate of return (IRR) stands at an impressive 17.7%, showcasing a remarkable annualised return history.
Access to unique real estate investments: Unlike conventional investment avenues, real estate syndication provides an opportunity for investors to engage in projects that would typically be beyond their financial reach or expertise. For instance, funding the construction of a hotel may be impractical for most individuals. Real estate syndication opens doors for investors without extensive backgrounds in real estate development or management to participate in novel investment opportunities
Portfolio diversification: Real estate syndication offers a significant advantage in uncertain markets and challenging economic conditions by facilitating portfolio diversification. Unlike single-asset real estate returns, which may not closely correlate with stock market trends, real estate syndication provides a level of stability. Real estate prices do not experience daily fluctuations like stocks, contributing to a diversified investment strategy that can be particularly valuable during turbulent times.
Cons of Real Estate Syndication
- Illiquidity: Syndicated real estate investments represent one of the least liquid approaches to investing in real estate. In contrast to real estate investment trusts (REITs), where shares can be sold at will, syndicated deals are typically illiquid for the entire duration of the holding period, making it challenging for investors to quickly access their funds
- Performance tied to a single asset: Unlike REITs that own diverse portfolios, syndicated real estate investments often tie your capital to a single asset. If the performance of this specific asset falls short of expectations, it can result in significant financial losses for investors, highlighting the concentration risk associated with such deals..
- Not all deals work out: While syndicated real estate investments can yield impressive returns, the outcomes vary widely. Despite the 17.7% annualised average return on a popular platform, there is a spectrum of results. Among 115 realised investments, some produced annualised returns exceeding 50%, while others resulted in a complete loss of investors' money (100%). While the risk/reward ratio may still be reasonable, it's crucial to acknowledge the potential for diverse outcomes when investing in a syndicated real estate deal
- Inconsistent income: Although many syndicated real estate investments offer passive income components, there are uncertainties. Income may not commence immediately, especially in development or renovation projects, and there is no assurance of receiving any income at all. Furthermore, the income may fluctuate significantly from year to year, making syndicated real estate investments less suitable for investors seeking stable and consistent income.
- Accredited investor requirement (usually): Participating in single-asset real estate syndication deals through crowdfunding portals typically requires accredited investor status. While there may be exceptions in private fundraising efforts, finding reputable private syndication opportunities can be challenging, as they lack vetting by reputable third parties.
How to Profit From Real Estate Syndication4
In real estate syndication, the extent of your earnings is closely tied to your role within the venture and the chosen exit strategy.While some groups opt for an equal profit split, this is not the norm in many real estate syndicates. Typically, passive investors receive approximately 70% of the profits, while the syndicator takes around 30%. This discrepancy is often attributed to the fact that investors contribute more capital, with syndicators typically investing only 5-10% or sometimes none at all.However, if a syndicator takes on roles such as managing a fix-and-flip project or acting as the property manager for tenants, they may negotiate a higher percentage. The specific allocation of capital varies across real estate syndications, offering numerous avenues for both syndicators and investors to enhance their profits in the syndication process.
Acquisition Fees:
As the overseer of the property transaction, the syndicator is entitled to an "acquisition fee," usually ranging between 1-5% of the transaction value. Negotiating this fee on the syndication agreement is possible for syndicators, but it's crucial to strike a balance that attracts investors without undervaluing the syndicator's contributions to finding and structuring the deal.
Asset Management Fees:
In cases where the syndicate purchases a rental property, members may choose to hire a property management company. Alternatively, property management duties can be delegated to the syndicator. In the latter scenario, the syndicator earns a property management fee, typically around 10%. This fee may increase further if the syndicator is involved in a fix-and-flip project.
Cash Flow & Appreciation:
Regardless of whether the syndicator has invested capital, they still receive a share of the profits. However, passive investors earn a higher "preferred return." For instance, if passive investors receive 12%, the syndicator might receive around 5%, contingent on the syndication structure and the responsibilities assumed by the syndicator.In the event of a property sale, each investor receives a portion of the profits, ideally influenced by property appreciation, especially in scenarios where real estate syndicates engage in house flipping to maximise returns. Alternatively, if the property is rented out, investors share in the profits generated through rental income.
Real Estate Syndication Scenario
Let's illustrate the dynamics of a real estate syndication in action.
Imagine you collaborate with a group of investors to acquire an apartment building. Recognizing your extensive property management expertise, the group designates you as the syndicator, leading to the formation of a limited partnership. The decision is made to allocate 15% to each of the six investors. Despite your smaller capital contribution, you secure a 5% ownership stake. Your role in managing the property earns you an additional 5%, and a 2% acquisition fee adds to your total, resulting in a 10% overall stake.
The property is purchased for $1 million, and you immediately earn $20,000 from the acquisition fee. With the property rented out, it generates an annual profit of $150,000. Your 10% stake translates to $15,000 per year, accumulating to $150,000 over the span of a decade.
At the end of the ten-year period, the syndicate decided to sell the property for $1.5 million. Each investor receives a 15% share, while your 10% entitles you to another $150,000. This concludes the syndication, and your total profits sum up as follows:
$20,000 (acquisition fee) + $150,000 (annual profit over 10 years) + $150,000 (profit from property sale) = $320,000
Considering your initial 5% investment of $50,000, your return stands at $320,000, reflecting an impressive increase of 640%. This scenario provides a compelling glimpse into the substantial profitability potential inherent in real estate syndication.
Conclusion:
Real estate syndication provides an excellent opportunity to earn passive income, achieve financial freedom, and build wealth. By pooling resources with other investors, you can access larger real estate projects that offer potential for significant returns. Remember to educate yourself, conduct thorough due diligence, and partner with trustworthy syndicators to mitigate risks and maximize your investment potential. With a diversified real estate portfolio and the power of passive income, you can take control of your financial future through real estate syndication.
