Let’s start with what it’s not. It’s not a get-rich quick method. If you’re looking to make a quick return on your investment, real estate syndication might not be the best tool for you. Real estate syndication is a way to create passive income and to build up your wealth over a period of time.
So what is a real estate syndication?
Think group investments.
A real estate syndication is group of investors who pool their resources together to invest in a property. If you are interested in investing in real estate, but may not want to be involved with the typical landlord responsibilities that come with owning real estate, a real estate syndication may be a good option.
When we first came across syndications, we could not believe that something like this existed out there. We always believed that the apartments we pass by everyday were all owned by large corporations. We did not realize that many of them, in fact, are owned by regular people! Not very many people have millions of dollars sitting in their bank account and are able to purchase these multimillion-dollar properties on their own. However, together as a group, the impossible now becomes possible.
In the past, syndications were limited to the wealthy and those within their network. However, through technology and information sharing, many people have been discovering this hidden wealth building vehicle. These opportunities are becoming more and more accessible to the greater population.
Investing in real estate syndications allows you to minimize risk. In a multifamily apartment syndication, you are able to invest in multiple units. In a single family home, if there is no resident, then that property is 100% vacant and there is $0 cash flow coming in. In a multifamily apartment, if 1 unit is vacant, the property is still pulling in rents from the other units and is still sustainable. In many cases, the rents from the other units will be able to cover a portion, if not all of the rents not collected from that 1 vacant unit.
Parts of a real estate syndication
There are several things that make up a syndication, but a simple way to think about it is to compare it to an airline flight. Let’s use a multifamily apartment syndication as an example.
There are the plane itself, destination, passengers, flight tickets, pilots, and flight crew.
The plane can be considered as the multifamily apartment. It is the vehicle that will get us to our ultimate destination. In most cases, many of us do not have the financial means to purchase a multifamily apartment complex alone. This is where we are able to leverage a syndication to pool together resources in terms of capital, time, and experience in order to purchase an apartment.
The destination can be compared to the return on investment. As investors, we are looking to make some type of return on the capital that we’ve invested in. Generally, syndications are structured as a 5–7-year project timeline, before the property is sold. During the hold period, investors will earn cash flow from the operations as well as receive a portion of profits when the property is sold.
The passengers are what we would consider as the passive investor/ limited partner. They have no active role on the plane and how it will operate, but have paid a flight ticket, a.k.a made an investment, so that they can be part of the journey to reach a common destination. The passive investor can generally expect a quarterly or monthly distribution from their investment. By investing as a passive investor, you can still own a part of real estate without having to get involved with any of the day-to-day operations. This is an option that is available for those who do not have the interest nor the time to be an active investor.
There are some requirements needed in order to participate in any type of syndication. Some are limited to accredited investors only. This means that you will need to have either:
- earned $200,000 as an individual or $300,000 with a spouse, for the past 2 years and must expect to make the same going forward, or
- have a net worth of $1M or more.
Some other syndications may be structured as a 506b, which means that you do not need to be an accredited investor, but will need to have a pre-existing relationship with the sponsor. These deals cannot be advertised to the general public, so it’s important to start making connections and networking with people in the industry if this is something you are interested in investing in.
The pilots are the sponsors/general partners. This is an active role because they are responsible for flying the plane, and ensuring the plane safely arrives at the destination. There is a lot of activity and risk involved as a sponsor. They are responsible for acquiring the property, due diligence, the property’s overall performance and communication with the flight crew and investors. When looking to get involved with a syndication, it’s extremely important to find a strong and knowledgeable pilot!
As a sponsor, there is a lot of time required, which is why many busy working professionals and those with families choose to invest as a passive investor. The sponsor also must continually evaluate the current market conditions and the property’s performance to determine what the best course of action is to optimize investor returns.
Finally, the flight crew are also essential members. They can be the property managers, contractors, lenders, etc. who are all part of the team to ensure the safety of the passengers and that the plane arrives at the destination. They are constantly communicating with and taking direction from the sponsors.
Every one of these parts is important to a real estate syndication and there is so much more that is involved, so it is important to conduct your proper due diligence and educate yourself before participating in a syndication. Have safe flight and see you on the other side!
