As an investor, there might come a time when you can’t grow your own investments, since you have exhausted all of your resources. There may be situations where you find that you do not have the time to research potential investment opportunities. In those instances, real estate syndication might work for you. Investors use real estate syndication to pool their intellectual and financial resources in projects and properties that they would most likely not afford or manage on their own.
Some years back, not everyone could participate in real estate syndication. Only the individuals who were wealthy and connected could. The syndications used to invest millions in commercial properties across the country. There has been an increase in individuals’ access to real estate syndication due to the development of real estate crowdfunding after the JOBS Act passed in 2012.
What is Real Estate Syndication?
In simple terms, “syndication” in real estate is the term used to define a temporary alliance between individuals who invest in a significant transaction that initially would have been impossible for any of them to handle alone. Commercial real estate assets don’t come cheap; they’re expensive! That is why most of them tend to be purchased by a syndicate of investors. In real estate syndication, there are mainly two groups of participants: General Partners and Limited Partners.
The General Partners (managers) are the ones who manage the arrangement. Their roles include arranging the financing, finding a property, and managing the asset after being purchased. While making the funding arrangements, the General partner selects a group of Limited Partners (LPs). Each of them has to invest a certain amount of capital towards the real estate transaction. The LPs are passive investors, meaning they don’t have an opinion on anything involving the management of the property. The capital raised from the General Partners and the Limited Partners is incorporated with debt to purchase the property.
Real Syndication Vs. REIT
A REIT (real estate investment trust) is a company that focuses on income-generating real estate. The goal of real estate syndication isn’t very different from that of REIT investment. They both aim at earning a higher return. Nonetheless, there are some significant differences that every investor should be aware of before making any decisions involving deploying their capital. Some of the differences include:
Ownership
When you invest in a REIT, you own shares in a company that owns real estate. You do not own the property directly. That’s not very different from what syndication investors do, but there’s a difference. The investors in real estate syndication all have direct ownership of a single property. The General Partners and Limited Partners both have shares. Hence they own a right to a portion of the positive cash flow from the underlying investment property.
Investment Minimums
The only minimum involved in a publicly traded REIT is the total capital required to purchase one share. It could be less than $100. However, private syndications and REITs require a much higher minimum investment amount. Each deal has a different amount, but it’s mostly between $25,000-$100,000.
Number of Properties
A REIT investment can contain a large number of properties. Therefore, investors tend to have a highly diversified portfolio. If one property doesn’t perform as expected, many other properties might offset positive results. A real estate syndication deal only involves one property. It tends to have some diversification risk since there are no other properties. However, the syndicate has an advantage because they’re aware of where all their money goes. Therefore, they’re able to perform their due diligence on issues affecting the property.
Returns
The returns for both are highly dependent on several factors, including the property and manager. They can both deliver either a high or mediocre return. The returns for private REITs and real estate syndications aren’t very volatile because the price isn’t constantly changing, and properties may be evaluated once or twice a year. However, the publicly traded REITs are volatile because they’re subject to several factors, not just the property’s performance, such as monetary policy, interest rates, and unemployment.
Tax Benefits
REITs investors get tax breaks, hence high dividend yield, because they pay at least 90% of their taxable income, so they won’t be taxed at the entity level. Syndication investors also get some tax breaks. A tax deduction can be taken from the property’s operating expenses, and the investors can also defer taxes on a profitable sale through reinvesting in other properties (1031 Exchange).
Investment Access
If you’re an investor with a brokerage account and have enough capital to buy at least one share, you can access publicly traded REITs. However, the syndicated deals and privately traded REITs only give access to investors who pass as “accredited” under SEC regulations. That means those accredited investors meet specific income requirements or understand the risk involved in a real estate investment.
Liquidity
Private REITs and syndications aren’t very liquid. A business plan for a property can take years to implement. The managers might require minimum commitments of approximately ten years. Within that period, the investor’s capital can be accessed. If you’re an investor, you might have to sell your shares at a discount if there’s an emergency. For publicly traded REITs, they’re liquid and can be sold on major stock exchanges at will. Shares can be converted to cash in a short period depending on the broker and the demand.
Risks
The risks between the two commercial real estate options are similar. Both include the liquidity risk that no property can be sold at the end of an investment period, market risks that could lead to changes in rent, and credit risk where tenants might default on payment.
Real Estate Syndication Vs. Crowdfunding
Real estate doesn’t compare to crowdfunding. Syndication is the type of funding relationship that’s there between the funders and the funded. On the other hand, crowdfunding is a method used for finding those who will provide funding. They’re typically not part of someone’s network. At times, crowdfunding is syndication and the other way around, but not always.
Crowdfunding can be used to syndicate deals. It’s basically funding from the crowd. Financiers are the ones who syndicate. Only rich people could invest in real estate syndication before the JOBS Act passed in 2012. Even the rich had to know someone who was investing in real estate deals, or they wouldn’t be so lucky.
Real estate crowdfunding is used to raise money for big projects through the internet, with the help of a ‘crowd’ of investors. However, nowadays, many crowdfunding platforms carefully analyze deals before being allowed to be on the platforms. Real estate contracts (REC) provide investors with documentation and research to review. Crowdfunded real estate syndications are more accessible. They also have lower investments minimums, and plenty of project information is online and available to potential investors.
How to invest in real estate syndications
Since the JOBS Act passed in 2012, there has been an increase in crowdfunding accessibility to non-accredited investors. It has been so much easier for people to participate in real estate syndications and find them. There are a number of real estate syndications that are available in different sizes and structures. You can either join as an investor or a sponsor.
The sponsor is the one that has experience and puts in around 5-20% of the total equity. The investors are ordinary people interested in investing in this type of real estate. Hence, they’re passive investors or Limited Partners. As an accredited investor, you have to meet the following criteria:
- An annual income of at least $200,000 for the last two years, with the exception of earning the same amount in the current year
- If you’re married and you and your spouse have a combined income of at least $300,000 every year for the last two years
- You have a net worth of at least $1 million, excluding your primary residence either alone or with your spouse
If you meet the above qualifications, then you can qualify to become an accredited investor in real estate syndications.
Top Real Estate Syndication Companies
In order to find the best companies in real estate syndication, there are many factors to consider, such as networking and building relationships. You get better knowledge regarding who to invest in and what to invest in. Some of the most well-known real estate syndication companies include:
Conclusion
Real estate syndication can open a lot of doors for people who are interested in investing. Some REITs and deals are individually syndicated. General Partners are the leaders in real estate syndication, and they find the deals. A Limited Partner offers passive investment in return for profits from the property and a share of the cash flow. The goal of both options is the same – to earn a significant return on the initial investment. However, there are important differences between them on different fronts, such as tax benefits, liquidity, ownership, and access.