Real Estate Syndication
Are you looking to invest but unable to take the plunge because of a lack of knowledge about investing and/or inadequate funding? Keep reading because we may have just the right option for your problem. Rather than trying to invest alone, participating in a real estate syndication might be your answer.
What is Real Estate Syndication?
Syndication in Real Estate is an arrangement between a Sponsor and a group of investors. Several investors combine to purchase a property that is otherwise difficult to buy individually.
These groups of investors work with a Sponsor who has sourced the opportunity, generally has it under contract to purchase, and is offering it as an investment opportunity. Real estate syndication creates opportunities for anyone who wishes to invest in a property but lacks the resources to purchase it on their own.
Other than the Sponsor the remaining investors are considered passive. The Sponsor is responsible for the property’s day-to-day operation, including hiring a property management firm, tracking economic performance, handling unexpected matters, etc.
When investment is made passively through commercial real estate syndication, issues like tenants, toilets, and termites do not require your attention.
This brings us to the two important people/parties involved in the investment. As mentioned, two parties are usually involved in this syndication: the Sponsor and the Investor(s).
The sponsors are the active partners. They clearly understand what it takes to handle property and oversee all matters related to its operation. They often share their skills and expertise, and as such, get a greater share of ownership relative to capital investment.
The other party involved in this transaction are the investors. Their role is minimal as they provide the capital to purchase a property and are generally passive investors. They participate to gain a percentage of the profits and will leave most of the major tasks to the sponsor. They generally make a required real estate syndication minimum investment.
To form a syndicate, the Sponsor (lead investor) identifies a property they believe can be a good investment. They will then negotiate to get the property under contract to purchase. After that, they reach out to potential investors willing to participate in the real estate syndication. The investors pool their money to buy a property.
What is the Real Estate Syndication Minimum Investment?
The minimum investment amount in real estate is usually $50,000 – $100,000, but it may vary from one syndicate to another. Real estate syndications are long-term investments, generally for 3 to 10 years.
Real estate syndication is very different from investing in stocks, where you can pull out your money in a matter of hours or days, investment properties are less liquid and it cost a lot to liquefy them so investors need to prepare to leave their money in them for the long term.
Benefits of Real Estate Syndication
After all that investment, you must be wondering about the returns of your investments. How exactly will you benefit from this real estate syndication? Here are five benefits of real estate syndication that might help you decide whether you want to move ahead with it.
1. Tax Advantages – In real estate syndication there are many tax benefits. One of the most beneficial is the ability to apply accelerated depreciation by cost segregation against other income to reduce your tax burden. Further, you can defer capital gains, but even if you do not, the capital gains tax rate is much lower than the generally prescribed income tax rate.
2. Manageable Minimum Investment – Real estate syndication generally only requires you to invest a manageable amount. One can easily get involved with as little as $25,000. You can get huge outcomes, unlike any other investment, even with a relatively small investment.
3. Benefits of Leverage – In real estate syndication, the shareholders generally benefit from the use of leverage. The syndicate is able to borrow a large portion of the purchase price from lenders at interest rates lower than the anticipated rate of return on the investment which increases their rate of return on equity invested.
Challenges of Investing in Real Estate Syndication
While there are many benefits of real estate syndication, one cannot deny there are also challenges involved.
Cons of Real Estate Syndication
1. Lack of Diversification – The first con is that in real estate syndication, you generally invest in one property vs in stock investing where you can buy a portfolio of different stocks in order to diversify risk. You can reduce this risk by investing in a real estate fund which then invests your money across multiple properties.
2. Illiquid Investments – If you have invested in a real estate syndication property, generally it is difficult to receive your money back until the property is sold which is normally 3 to 10 years down the road.
3. Lack of Control – You will have to give up some control of the property to the syndicate Sponsor.
Much like any other investment vehicle, real estate syndication has its fair share of pros and cons, and it is important to consider all of these factors before you invest in real estate syndication.
If you are looking for experienced property managers to take care of your multifamily investment property, get in touch with the experts at Summerfield Property Management.
Real Estate Syndication: FAQs
Q: Do real estate syndications offer enough return on investment (ROI)?
A: Yes, the returns can average from 10% to 20% annually over the life of the investment.
Q: Is real estate syndication risky?
A: Yes, like all speculative investing, there is inherent risk involved.
Q: Who owns the property in real estate syndication?
A: The syndicate owns the property generally in the name of a limited liability company (LLC). The ownership of the LLC is split amongst the investors based on the amount of capital invested by each of them.