What is a Real Estate Syndication?
Why Should I Invest in a Real Estate Syndication?
Drawbacks of Investing in Syndications
How Do I Pick the Right Syndication Team?
The more you look into investing in real estate, the more you may realize it’s not as passive as everyone makes it seem. From fixing toilets in the middle of the night, to spending hours finding a good deal in this competitive market, investing in real estate can take a lot out of you. Oftentimes, the rewards will far outweigh drawbacks.
But not everyone has the time, resources, or skills to get the job done. This dilemma is faced by many that seek the benefits of investing in real estate.
Investing in a real estate syndication is a solution that allows an investor to receive all of the benefits of owning real estate, while still being a truly passive investment.
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What is A Real Estate Syndication?
A real estate syndication is when multiple investors pool their money together to buy an investment property. A syndication is typically formed when investors are looking to purchase a larger property, such as an apartment complex, self storage facility, or mobile home parks.
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How Does a Syndication Work?
There are two key roles in any real estate syndication: The syndicator and the passive investors. Together, they form a Limited Partnership (LP) or a Limited Liability Company (LLC).
The Syndicator: The syndicator, also referred to as the General Partner (GP), takes the active role in a real estate investment. This is typically an investor, or company that has experience in the industry. They are responsible for acquiring, operating, and structuring the prospective deal. The role of a real estate syndicator is a business in itself, and there are thousands of operators in the country. Some other responsibilities include:
- Underwriting the deal
- Conducting due diligence
- Negotiation
- Arranging financing
- Asset management
- Raising capital
- Investor relations
The Passive Investor: The passive investor, or limited partner (LP), is responsible for providing capital to fund the prospective deal. As the limited partner, these investors are not tasked with any decision making responsibilities. Instead, they receive ownership in the property and passive returns.
Why Should I Invest in a Real Estate Syndication?
As a passive investor, you receive all of the upside of investing in real estate without having to perform all of the work. Some benefits of investing in a syndication include:
- No Hassle: As a passive investor, you are not responsible for managing the deal.
- Cash Flow: Passive income is typically paid out monthly or quarterly, but varies from each operator.
- Appreciation: Like any other real estate asset, your equity has the potential to increase overtime.
- Tax Benefits: If you are someone that is classified as a real estate professional, you are able to gain depreciation against your other income. Please consult your CPA to learn if this is something you are qualified for.
- Diversification: Investors can invest in multiple syndications and asset classes simultaneously.
- Inflation Hedging Asset: Owning real estate is one of the best assets to hedge against inflation.
- Low Volatility: Unlike the stock market, real estate is a hard asset that tends to be much more stable and has less price volatility.
Drawbacks of Investing in Syndications
Does it sound too good to be true? Well, along with any other investment, there are still risks and challenges when investing in a syndication. These challenges include:
- Picking the right operator: There are thousands of syndicators, and it is important that you pick the right team to invest your money with.
- Longer payouts: Investing in a syndication will not give you immediate returns overnight. Typically there is a stabilization period in which your returns will be lower, but tend to increase over time. This all depends on the team you invest with and the asset they purchase.
- Eligibility: There is regulation surrounding real estate syndications put in place by the U.S. Securities and Exchange Commission (SEC). Certain syndications may only be offered to accredited investors, such as a 506(c) offering. It is important that you consult with your CPA and syndication team to ensure you are eligible to invest in their deal.
How Do I Pick the Right Syndication Team?
I spoke with Jeffrey Donis, Head of Investor Relations at Donis Investment Group, about the importance of picking the right syndication team. Donis Investment Group is a syndication group with over 1,000 units under management. He stated that “the biggest risk is the team that you invest with.” In order to pick the right syndication, a few things he recommends you look into are:
- The business plan
- Your market
- Track record of the syndication team
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Conclusion
Real estate syndications can be a great solution if you are looking for a passive real estate investment. You have the freedom of investing in an asset of your choosing, without having to take an active role in the investment. However, there are still many things to consider when looking into your investment options. You should always consult with your CPA and attorney to make sure that you are eligible and are investing in the right team.
DISCLAIMER: The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.
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