What is Real Estate Syndication?
April 13, 2022
Invest confidently in real estate
Invest confidently in real estate
You may have heard of the idea of crowd funding a real estate deal. You may have even been surprised to hear someone with no real estate investing experience talk about investing in a deal with their friends or family. Real estate syndication makes both of these scenarios possible. Let’s demystify what a real estate syndicate is and look at the pros and cons of being in a real estate syndicate yourself.
A real estate syndicate is simply a partnership between a group of investors who want to invest in property together. This can mean that investors want to pool their funds, their knowledge, their skills and resources, or any combination in a way where they invest in a real estate deal together.
A syndicate is commonly structured as a separate business entity. This separate entity owns and operates the property – rather than any one individual. Within this business entity, partners will have units or shares of ownership. This joint ownership of the business entity is the syndicate.
While real estate syndicates, or the idea of crowdfunding a real estate deal is popular now, the construct for investing in real estate with partners isn’t new – although it hasn’t always been easy. The Securities Act of 1933 made solicitation of securities illegal. This included limiting the marketing of partnership opportunities for investing in commercial real estate deals. This led to real estate deals being secretive, or only handled by small numbers of private partners who had to put up large amounts of capital.
The Jumpstart Our Business Startups (JOBS) Act of 2012 allowed for the marketing of properties & investment opportunities to new investors. This change made it easier to seek partnership in real estate deals and opened the opportunity for investment to every-day investors. Real estate syndication suddenly became an opportunity for more people, and an attractive option for people who couldn’t fund an entire real estate deal on their own.
The primary reason for creating a syndicate is that it brings together investors who can partner together to access real estate deals that they may not have access to on their own. By joining their money and resources together, syndicate investors can take advantage of the benefits of co-investing. Within a syndicate partners can take on an active or passive role – as both are often required to get into great real estate deals. Members of the syndicate also share in the tax benefits and appreciation of the property owned by the entity. The organization together can find a property, establish an operating framework, pool initial capital, acquire the property, follow the operations, and share in any profits.
While a syndicate has no set number of members, there are a few key roles within a syndicate that define the responsibilities to operate the syndicate.
The most prominent role in a real estate syndicate is the syndicator, sometimes called the sponsor or general partner. This person is responsible for creating the syndicate, finding the deal, organizing the fundraising, and getting the deal to closing. The person in this role often has more experience in the real estate market and can offer this experience along with various skills and labor to get a real estate deal closed, perform any updates or repairs and begin managing the property.
Some syndicates may share this work across a small group of partners. This role is often compensated as they have more responsibility in the partnership.
Another key role in a real estate syndicate is the passive investor or limited partner. There are typically multiple passive investors who bring capital to the syndicate to fund an investment and will earn passive income distributions from the cash flows, plus any appreciation that may come from the sale of a property. Passive investors don’t usually have a role in the day-to-day operations of the property. These members will own a percentage of the real estate asset relative to their capital contribution.
A key partner is a syndicate member who is assigned work on the deal. They may be responsible for fundraising, or property management. They might also earn compensation from the syndicate for their role.
A syndicate, since it is a business entity, may have a harder time getting a conventional mortgage because conventional loans for real estate typically evaluate a person’s creditworthiness. However, a real estate syndicate can still get access to good financing options. There are also lenders that may specialize in providing financing for syndicates.
By their nature, real estate syndicates involve multiple investors. This lends itself to the opportunity to take on projects that can be larger than any one of the investors could do on their own. And with multiple investors taking on larger in real estate deals, you can minimize your individual risk and increase your potential for profits.
If there are any issues with the management or operation of the property, the risk is shared with the other partners in the syndicate. This will spread the risk and reduce each investor's individual exposure. Since you may be investing smaller amounts as a partner, this also frees up your own capital so you can consider investing in multiple deals across different properties to manage your risk through this diversity.
By organizing capital contributions from multiple investors, a real estate syndicate can invest in larger projects than an individual could do by themselves. Larger projects can offer the potential for higher profit margins since many operational expenses are shared by a single large investment.
Like other types of investing, participating in a real estate syndicate isn’t for everyone. There are upsides, and there are downsides to this type of investment. You’ll want to consider the pros and cons of real estate syndicates and compare then to your own investing strategy to see if it makes sense for you.
Padvest helps take the legwork out of creating a real estate syndicate on your own. You can form your entity, bring your co-investors, find a great deal, fund the purchase, and then operate your investment all on the Padvest platform. Sign up for the Syndicates waitlist to get early access to our launch.
