You’ve heard of investment clubs. You’ve heard of crowdfunding. Now meet their much more powerful cousin, real estate syndication.
Real estate syndication is a way for investors to join forces to invest in a large property, typically one too big for an individual to purchase alone.
How Does It Work?
Real estate syndication is essentially a relationship between a sponsor, also known as the general partner(s), and a group of investors. The sponsor acts as the orchestrator of the deal, putting in the most footwork. This means that the sponsor bears the responsibility of finding the property, raising capital, and managing the day-to-day operations. Individual investors in the syndicate, however, do not bear nearly as much responsibility—they can simply invest the money in the deal and reap the benefits.
How Do You Make Money?
So, how do you actually make money as an individual investor in a real estate syndicate? Let’s walk you through the process with an example. We’ll use Skyscraper Building as the name of the property purchased by our imaginary real estate syndication.
Let’s say a real estate syndication buys Skyscraper Building at 221 Making Money Way, an apartment building in Florida containing 400 units:
- Property Purchase – Skyscraper Building’s sales price goes for $50 million. The bank requires a 30% down payment to qualify for a loan on the remaining $35 million. The general partners contribute $1.5 million and turn to investors for the remaining $13.5 million of the required down payment.
- Improve Profitability – During the next five years, the syndication makes repairs and performs upgrades to Skyscraper Building, raises the rental prices, and finds ways to make the property more profitable.
- Collect Rent & Pay Out Profits – During the same five-year period, from the rental income, the syndication returns to its investors a portion of the profits Skyscraper Building generates every quarter.
- Property Sale & Pay Out – After those initial five years, Skyscraper Building sells for $65 million. The investors now get back their entire initial investment, part of the $15 million in profits from the sale, and receive quarterly payments during that period.
How To Get Started
After deciding that real estate syndication is a good fit for your investing goals, the space between that decision and actually committing your money may seem nebulous.
For first-time syndication investors, finding an open, appealing project is usually the most challenging piece of the process, but several options exist. Here are some for you to consider as you start your journey.
Many real estate investors rely on networking and personal connections to find deals. Meeting those in the industry who live in the same area as you is a good starting point.
Next, reaching out to syndicators is never amiss. Even if there are no open deals, syndications almost always have investor lists which potential investors can join to be notified of upcoming projects.
Research Syndication Options
After finding a possible syndication, thoroughly evaluating it is a critical step for a potential investor. Investors risk significant funds when committing to a syndication, and a project’s performance hinges on the skill and knowledge of the sponsor. As such, investors should do a two-pronged analysis of the offering by critically considering the sponsor and subject property.
When vetting a sponsor, it is important to remember that they are responsible for making big decisions on your behalf. You should thoroughly evaluate the totality of a sponsor’s experience, skill, and commitment before investing with them.
Syndication websites are a good place to start for preliminary information regarding a project. If it seems appealing, an offering package should be available from the sponsor.
What to Expect When Investing
For limited partners, the early stages of syndication investment are the most labor-intensive. After researching and funding the project, few tasks remain for the passive investors. However, the investors should remain attentive to communications from the syndication as some essential events may occur.
First, throughout the project, expect continued updates from the sponsor regarding the project’s progress. Among those updates may be requests for more capital, called capital calls. This right to compel investors to add additional funds will be clarified in the offering documents.
On the other hand, some of the communication from the syndication will be very positive. For example, in addition to information about distributions, investors will also receive a Schedule K-1 from the syndication. The Schedule K-1 is a tax document that provides the investor’s share of the project’s tax deductions and credits, thereby reducing your tax bill.
What are the Advantages?
Real estate syndication is the future of real estate investing, and it’s trending more all the time. Here are just a few benefits of investing in real estate syndication:
- Pooling resources
- Going from undervalued to highly-valued
- Investing in multifamily commercial projects
- Making bigger investment for bigger returns
- Portfolio diversification
- Professional expertise/advice
- Ability to take part in larger deals
- Passive income and cash flow
- Taxes
- Personal credit protection
- Minimizing risk
- Utilizing other’s connections
An attractive feature of a real estate syndication investment is its favorable tax treatment. Real estate sponsors can use depreciation to offset income, reduce current taxes on cash distributions, and defer taxes until the property gets sold. Ensure you understand these and all other factors when dealing with a real estate syndication.
Final Thoughts
Like with any investment, the investor should do their due diligence and understand their syndication investments. While syndications offer fantastic options for passive income, we know starting can be a challenge. We invite you to learn more about this and other previous projects Life Bridge Capital has successfully sponsored along with our investors, and decide for yourself whether this route to passive income is right for you. Life Bridge Capital can make the process easier. Let us help you reach your investment goals.
