If you are new to real estate, you have most likely never heard of real estate syndication investing. It’s an area of real estate investing that is often overlooked by many, but it can be extremely valuable if you have the right connections. In this article, we take a look into what real estate syndication is, how it works, and how it can help you grow in real estate.
- Real estate syndication investing features two parties: the investor and the syndicator .
- The main role of the investor is to put up the majority of the required capital for the deal
- The role of the “syndicator” is more comprehensive and involves handling day-to-day operations, performing due diligence for the deal, dealing with tax filings, and more
- It’s normal for the syndicator to earn an “acquisition fee” for finding the right deal
- There are two different types of real estate syndication: 506(b) and 506(c)
What is Real Estate Syndication?
Real estate syndication investing (also referred to as “property syndication”) is a legal partnership between multiple investors. The investors combine their resources, skills, connections, and capital to purchase and manage real estate they couldn’t otherwise get on their own. Real estate syndication is quite common with larger real estate transactions such as buying apartment complexes, hotels, retirement homes, and hospitals.
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In a standard real estate syndication agreement, there are usually two roles between the parties involved: investor and syndicator.
Important Note: Real-estate syndication can also involve the purchase of multiple properties in the same transaction, and in some cases, a whole portfolio of properties.
Due to the complexities involved in larger deals, it’s important for both parties to be fully aware of all the legal requirements and stipulations within the syndication agreement.
The Role of the Investor
The investor is the individual who puts up the majority of the capital required to get the real estate syndication deal completed. The investor will typically provide additional funds if the property requires renovation, operating capital, and legal contacts.
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The role of the investor tends to be passive . Their main intention is earning a predetermined return from the syndication deal. It’s also the investor’s responsibility to look over the relevant details of the deal and ensure it fits their investment guidelines.
The Role of the Syndicator
The syndicator (commonly referred to as “the sponsor“) is the person responsible for finding and managing the properties. The sponsor goes out and finds the deals that fit the criteria of the syndication agreement. In most cases, the syndicator will have a little bit of their own money inside the deal (5% – 10%), but the majority of the money will come from the investor.
Some of the other duties of the syndicator include:
- Handling the day-to-day operations of the property
- Arranging renovations and dealing with general contractors
- Performing the necessary due diligence for the deal
- Handling the necessary tax filing and title work
- Performing the necessary market research
Important Note: It’s completely normal for the syndicator to earn an “acquisition fee” for finding the necessary deal. This tends to be a commission anywhere from 1% to 5% of the purchase price of the property.
Different Types of Real Estate Syndication
When it comes to real estate syndication, there are two main types: 506(b) and 506 (c). The difference between the two comes down to which types of investors are allowed to invest. The two are non-accredited investors and accredited investors.
A 506(b)-syndication is for non-accredited investors and tends to be reserved for “friends and family” syndication.
Under the 506(b)-syndication type, you can raise capital from an unlimited number of accredited investors and up to 35 non-accredited investors. In essence, you can take capital from anyone who wants to invest with you as long as you can prove that you had a pre-existing relationship with them.
Under a 506(b) you are prohibited from advertising the investment opportunity to the public.
A 506(c)-syndication type is reserved for accredited investors only.
According to Investors.gov, an accredited investor is someone who:
- Earned income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, and reasonably expects the same for the current year, OR
- Has a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person’s primary residence), OR
- Holds in good standing a Series 7, 65, or 82 licenses.
Under a 506(c) you can to openly market the investment opportunity to the public.
Pros of Real Estate Syndication
If you’re a small to a medium-sized investor and want to hit the next level but are simply held back due to capital requirements, real estate syndication may be a good option for you. Some of the pros of getting into real estate syndication if you are the syndicator include:
- There is less money out of your own pocket to get into a deal
- More stable cash flow due to higher unit count
- Shared downside risk with the investor
- Additional resources to help you structure the deal
- Larger property assets and longer-term capital structure
As always, it’s important to consider what kind of risks can come with when doing larger deals.
Common Real Estate Syndication Risks
While real estate syndication can provide shared risk amongst investors, there are still some underlying risks you should consider. Some of the risks include:
- Higher deal complexity due to larger size
- More involved parties could lead to more disputes
- Project delays can cause larger capital losses in the short term
- Higher complexities with bank term structures
- Partner risk, investor, or syndicator could run off with the money if the deal isn’t legally sound
By knowing some of the risks that exist with real estate syndication investing, you can ensure that your agreements are clear, concise, and well understood by all parties involved.