There’s power in numbers when investing in real estate. That’s why one of my favorite investments is through real estate syndication.
Real estate syndication brings a group of investors together to pool their money to purchase a revenue-generating property. You don’t have to be a millionaire to participate in real estate syndications, and it’s a great way to raise capital for real estate investments.
Thanks to the JOBS act passed in 2012, investors can now crowdfund real estate deals to earn passive income.
Here’s a glance at what you need to know about real estate syndication deals.
How Real Estate Syndication Works
Prior to real estate syndications, single investors were forced to take on the full burden of funding the purchase of a property. Investors were also forced to manage every detail of property ownership. The income earned was anything but passive.
While most people were simply locked out of investing in real estate due the cost and time required, the ones capable of funding investments had to put in full-time “landlord” hours just to keep a property profitable.
However, real estate syndications allow you or your real estate LLC to pool your money with hundreds of other investors to invest in high-value real estate assets. While investing in a simple single-family home would be a bridge too far for most people, syndications make it easy to hold partial ownership in a high-value apartment building in a hot market.
Once the property is purchased, it is managed by the syndicator responsible for originating the deal. That means that an investor isn’t forced to deal with tenant issues, and profits and losses are distributed among the investors.
The Real Estate Syndicator
Investment opportunities offered by a real estate syndication are initiated by a real estate syndicator. Also known as a sponsor, a syndicator is responsible for bringing the deal to life.
Think of the syndicator as the general partner in the business arrangement. Here’s a rundown of everything the syndicator handles in a typical deal:
- Arranging the financing for purchasing a property.
- Negotiating prices and terms with the seller.
- Building a business plan.
- Attracting investors.
- Raising capital.
- Hiring a team to manage the property.
- Managing investor relations.
- Handling all tax and financial reporting.
In many ways, an investment is only as good as the syndicator behind it.
A syndicator should be a real estate expert with experience in investing.
They make everything happen by applying their experience and familiarity with real estate to handling underwriting, making deals, and performing due diligence on behalf of the investors pooling money into a deal.
The investor is an individual who decides to invest in the real estate deal being offered by the syndicator. You can think of an investor as a limited partner in the deal.
As an owner of a percentage of the property, the investor gets all of the general benefits of property ownership without the administrative burdens that accompany owning property.
Syndicators may take a larger cut due to their active role in deals, but investors have far less liability.
Benefits and Drawbacks of Real Estate Syndications
- Grow your real estate portfolio without investing large amounts of time, money, and research toward each investment.
- Gain greater buying power by pooling money with other investors.
- Access real estate in hot markets outside of your financial reach.
- Offset gains with “paper losses” to reduce your tax burden.
- Invest passively (investor) without the headache of property management.
- Generate a high return on investment.
- Gain knowledgeable advice on lucrative deals from trusted syndicators.
- Real estate syndication is available in a real estate IRA via self-directed investing.
- Syndication deals have very specific investor requirements (must be an accredited investor).
- Deals may be geographically limited.
- Deals may take a long time to develop and actualize.
- Investors have limited control over property management.
In many ways, syndications are similar to real estate investment trusts (REITs). However, many investors prefer syndications over REITs because syndications allow investors to choose the properties they want to invest in instead of being forced to go in blindly.
Eligibility is where real estate syndications begin to look different from other crowdfunded real estate options. While many investing platforms allow anyone with a few hundred dollars in their pocket to get in on deals, syndications come with very specific investor requirements.
A person must be an accredited investor to participate in a real estate syndication.
An accredited investor is defined as someone with an annual income of at least $200,000, a combined spousal income of $300,000, or a net worth of at least $1 million.
How to Start Investing in Real Estate Syndication
Real estate syndication all starts with finding the right syndicator.
It’s important to look for a competent, experienced syndicator with a history of finding revenue-generating properties.
A syndicator should also bring experience in property management, a successful track record with previous investments, and knowledge of real estate deals.
Real Estate Syndication Tips
- Don’t rush into anything.
- Conduct your due diligence.
- Becoming familiar with the portfolio of a syndicator you are considering.
- Be ready for the long-haul–most syndicators hold a property for five to seven years before seeking buyers willing to purchase the property at a higher price.
Real estate syndication can be a very high-risk, high-reward proposition.
If you are eligible for real estate syndication, I would strongly recommend considering it as an investment option for your portfolio.
Real estate syndication provides a great opportunity to earn high returns or to ramp up your retirement portfolio using a self-directed IRA.
Quick Q&A Recap
1. Who Can Invest in Real Estate Syndications?
Unlike REITs, real estate syndications are generally only open to accredited investors. People who qualify as accredited investors are wise to take advantage of syndications instead of using crowdfunding platforms that allow anyone to invest because syndications provide access to high-value residential and commercial real estate.
2. How Many People Can Participate in a Real Estate Syndication?
A real estate syndication technically only needs to have two investors. However, many have several hundred.
3. What Are the Tax Benefits of Real Estate Syndications? Investors in real estate syndications can enjoy tax deductions, deferred income taxes, and lower tax rates. As a syndication investor, you also enjoy the benefits of depreciation for potentially paying capital gains taxes at lower rates. In addition, the 1031 exchange tax rule that allows you to defer capital gains taxes if you swap one property for another can apply to syndication investors.