Your Ultimate Guide to Real Estate Syndication Success

Bricksnwall Trusted Experts

Real estate syndication can be a profitable strategy to get into the real estate investment market. Real estate syndication allows you to own a part of investment properties while reaping the benefits of passive income, tax breaks, and property appreciation. You also save the inconvenience and bother of being a landlord.

So, say you want to invest in real estate without investing a lot of money. Syndicated real estate may be a good fit for you. However, as with any investing plan, there is a lot to learn before establishing a real estate syndicate.

This complete guide to real estate syndication will help you unlock the potential of this possibly successful investment opportunity.

What is real estate syndication?

Real estate syndication occurs when investors and property developers pool their funds and resources to acquire and manage real estate properties. The magnitude of the individual investment determines the percentage of profits, property appreciation, and ownership they can anticipate getting. Real estate syndication usually involves property developers, investors, and real estate experts.

Real estate syndication is an example of "real estate crowdfunding." The syndicate consists of two groups: syndicators and investors.

Real estate syndicators (also known as sponsors) oversee the acquisition and maintenance of real estate assets, such as purchasing, remodeling, and dealing with renters. They handle the physical part of property management. However, they may also invest in the syndication.

Real estate investors often invest funds in property syndication as passive investors, in exchange for a share of earnings and ownership. They are referred to as "passive investors" because, unlike syndicators, they do not actively manage their properties. However, syndicate investors must meet certain eligibility standards. The JOBS Act of 2012 requires "accredited investors" to have an annual income of at least $200,000 for two consecutive years.

The advantages and disadvantages of real estate syndication

Real estate syndication is an investment technique that has advantages and disadvantages for both sponsors and investors.

For example, sponsors gain access to more funds and can invest in larger properties than they would otherwise be able to do. However, they have less control over their investments. On the other hand, investors can diversify their real estate portfolios without having to deal with day-to-day management or property transactions.

Here are the benefits and downsides of investing in a real estate syndicate.

Pros

• A passive investment method without the extra dangers of being in a partnership
• Better cash flow since you can participate in more profitable investment alternatives, such as multifamily or commercial buildings.
• Excellent tax benefits are provided through incentives such as bonus depreciation.
• Enjoy the advantages of real estate investing—cash flow, equity, tax benefits, and passive income.
• Avoid the duties of landlords and property management.
• Real estate syndication enables you to become a passive investor anywhere.
• Join a club of investors and property developers who have similar investment aspirations.

Cons

• Reduced control over your investing assets.
• Capital is often invested for three to ten years, resulting in a lack of liquidity.
• You must meet the minimal standards to become an accredited or sophisticated investor.
• Profits are divided among investors and sponsors, resulting in lower returns.

• Real estate syndication against real estate investment trusts (REITs).
• Real estate syndication and real estate investment trusts (REITs) are two popular methods for investing in real estate. Both investment strategies enable investors to diversify their portfolios without involving property management. Furthermore, both strategies entail combining funds from multiple investors. However, there are significant disparities between the two.

Here is a breakdown of the major differences between REITs and real estate syndications:

Capital: Investing in a real estate syndicate requires more money—sometimes the minimum investment is $50,000. Non-accredited investors can invest in a REIT for as little as $1,000.

Ownership: Real estate syndication allows you to own a portion of the property. REITs, on the other hand, are often responsible for managing many investments. As a result, you are investing in the REIT investment firm rather than a particular property. This also makes it more difficult to track where your money is invested.

Tax breaks: Investing in REITs prevents you from reaping the tax benefits of a real estate syndicate since the IRS considers investment income to be a dividend, which is taxable. Passive losses, like as depreciation on syndicated real estate investments, can help you pay less in taxes.

Returns: Due to the investment structure of syndicated real estate, returns are higher. For example, you may receive monthly payments as well as a portion of the asset's sale proceeds.

Accreditation: The criterion for getting started in real estate investing through syndication can be a barrier for certain people. Accredited investors must have a minimum individual income of $200,000, a joint income of $300,000 if they are married, or a net worth of $1 million, excluding the value of their primary property.

How to start a real estate syndication.

Assume you are a real estate property developer (sponsor) looking to syndicate real estate investments. In that situation, you must undertake due diligence on a property to guarantee that it is suitable for accredited investors.

Here are the processes for forming a property syndicate to attract prospective investors.  

Find a property

The first step in forming a real estate syndicate is deciding on an investment strategy and identifying the syndicate's target market, which entails conducting market research and analyzing the local real estate industry for possibilities and trends. Once you've determined your target market and investing approach, you can look for a good investment property that fits these criteria. Due diligence should be performed on any potential properties to ensure that they fulfill the criteria for the investment plan and are appealing to potential investors.

Here are some ideas for locating the ideal investment property

• Look for distressed properties or properties under foreclosure.
• Connect with local real estate agents, brokers, and wholesalers.
• Find Off-Market Properties for Sale
• Focus on property kinds with the highest demand.

Research your housing market

The second step in ensuring syndicate success is to conduct local market research. After all, attracting tenants is necessary before attracting investors.

Here are some important characteristics to help assess whether a property is in a good location:

• The status of the local real estate market
• trends in population and job growth
• Estimated average property values
• Look at local newspapers and community websites to get a sense of the place. 

Calculate your expected income and ROI

After discovering possible investment properties, it's time to run the math. This is the only method to increase the chances of investors joining your syndicate. Remember that passive investors are solely concerned with earning a return on their assets.

Cash-on-cash return is a typical statistic used by passive investors to evaluate ROI. Here's a basic method for calculating prospective ROI on an investment property:

The cash-on-cash return is calculated as [annual cash flow] ÷ [cash invested] times 100.

Cash flow returns take into account running costs when calculating income distribution to investors. Most investors expect an annual return of 6-8%. 

Form a real estate syndicate

After discovering an outstanding real estate investing opportunity, it's time to form your syndicate. Here are some strategies to find potential investors:

Search real estate investment websites

• Connect with possible investors using social media, such as Facebook groups.
• Discover local real estate investing groups.
• Look for websites offering crowdfunding for real estate.
• Consult relatives and friends.
• When engaging potential investors, make sure your pitch is clear and succinct, and that you have a well-planned company plan and investment strategy.

Negotiate with your partners

A solid real estate investment opportunity is heavily reliant on your bargaining abilities. The ability to acquire the best deal begins with negotiating the best price when purchasing a property. However, when interacting with your investors, you will need to have strong bargaining abilities.

As the sponsor, you are in charge of the real estate transaction, syndication agreements, business plan, due diligence, and property management. In addition, you must arrange the partnership agreement and structure the transaction for your investors. Therefore, you must negotiate with them their part of the profits.

Structure the deal

The next stage in establishing real estate syndication is to record everything in writing. A real estate syndicate can be structured in two ways: as a limited partnership or as a Limited Liability company. A typical real estate syndication structure pays out 70% to investors and 30% to sponsors.

A real estate syndicate can also be structured as a distribution waterfall. However, because of this structure, possible returns are determined by specific criteria. Here are a few popular methods for customizing returns:

Return on Capital (ROC): Limited partners receive their initial investment before the sponsor receives any payments.

Investors receive their preferred return % after the initial capital contributions have been made.

General Partners (GP) Catch-Up: The sponsor (general partner) receives a sizable portion of the returns until they reach a predetermined percentage of profits.

What is the ideal approach to establishing a real estate syndicate investment? An LLC is typically the greatest option for a fix-and-flip project, while a partnership is perfect for a buy-and-hold.

Close the transaction

The last steps in syndicating a real estate venture include signing contracts, paying the investment, and transferring property ownership. Closing the deal might feel like a marathon. You have to go through all of the typical stages to conclude a real estate transaction. In addition, you must form a partnership or LLC, secure funding from investors, and verify that all legal documentation are in place.

In most circumstances, employing a real estate attorney or agent to help with the process makes sense.