Click here to jump to the list
What is syndicated real estate?
If you’re looking to invest in income-producing real estate, but unwilling or unable to commit the time and effort, then investing in real estate syndication may be a solution. Syndicated real estate serves to help investors share the benefits of owning an investment property without the burden of being a landlord. This is achieved by pooling together assets with other people. Think of it as a type of crowdfunding for an investment property.
Real estate syndication structure
It’s all in the name. A real estate syndication starts with a syndicator. Per Realty Mogul, two parties make up the structure of this organization.
A syndicator is responsible for obtaining and looking after the investment property. A syndicator will perform all the necessary underwriting and due diligence and command a lot of CRE experience.
Investors comprise the rest of the syndication. These participants contribute their funds to the real estate syndication and receive a portion of ownership in the building. The task of sourcing the product, developing financing, and operational management does not pertain to these individuals in the syndication.
What is multifamily real estate syndication?
Working with other people’s money is particularly relevant to the multifamily market. These apartment properties often reach over 100 units and fall far out of reach for many investors.
Multifamily real estate syndication allows people to invest less money with limited experience as the syndicator will be experienced.
According to Active Duty Passive Income, multifamily syndications structure themselves in an official legal capacity as an LLC. Syndicators are the designated General Partners (GPs) and refer to investors as Limited Partners (LPs). A limited liability company allows for rules outlying administrative voting rights and syndicator financial compensation and deal management.
Loans for Multifamily Real Estate Syndication
Much like the composition of the multifamily real estate structure, financing for these organizations fall into two categories. The primary difference between these two loans is which party faces the most liability. Both come with benefits and drawbacks.
Due to the nature of multifamily real estate syndications as starting points for new or intermediate investors, most debt applications tend to fall into a so-called non-recourse loan. In a worst-case scenario, general partners and syndicators will guarantee the loan and are financially on the hook for the entire value of the building.
The best practice for entry-level investors is to take on as little personal liability as possible, but this comes with the downside of higher interest rates and a threshold for exceptional credit and trustworthiness.
On the flip side, limited partners face shared liability in the event of catastrophe but get the upside of better rates and have an easier time getting into the syndication.
How do you become part of a real estate syndication?
While real estate syndication gears itself toward the passive real estate investor with potentially limited access to capital, as a rule, there are some strict requirements. An individual who wants to join a real estate syndication must qualify as an accredited or sophisticated investor. The U.S Securities and Exchange Commission defines accredited as the following:
An accredited investor, in the context of a natural person, includes anyone who:
“· Earned income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, and reasonably expects the same for the current year, OR
· Has a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person’s primary residence), OR
· Are in good standing on anyone of their Series 7, 65, or 82 licenses.”
According to Forbes, many real estate syndications are also available to sophisticated investors. Sophisticated investors must have in-depth knowledge and experience, making them eligible to become passive investors because they can accurately evaluate the merits and demerits of a prospective investment before giving the green signal to close the deal.
How much do real estate syndicators make?
On average, per Syndication Attorneys, General Partners earn between 25% and 50% of operations, refinance, and property sales. Below are examples of how a syndicator gets paid.
Real Estate Syndication Fees:
Syndicators will typically operate on a fee structure; GPs may collect these monthly, quarterly, or annually. Below are examples of fees your syndication pays.
- Acquisition fee (1% to 3% of the purchase price)
- Asset management fee (1% to 2% of gross collected revenue)
- Refinance fee (1% to 2% of the refinance loan amount)
- Disposition fee (1% to 3% of the sale price)
- Loan guarantor fee (1% to 3% of the loan amount or a flat fee)
- Interest on loans made to the company (8% to 12% of the loan amount)
Broker Fees. If the syndicator is a commercially licensed broker in the same state as the property, they are entitled to fees from the following:
- Commissions on the purchase of the property
- Resale commissions
- Property management fees
Expense Reimbursement. As an added expense to the GPs, “the syndicator can get reimbursed for payments it makes to third parties during the organization of the company, due diligence/acquisition or operation of the property.”
Investment Distributions: Limited partners get paid upon completion of operations, refinance, or sale of the investment. On average, investors get compensated between 6% and 10%, calculated off the total amount of what they put in. If there is any money left over, it gets distributed between the GPs and LPs.
Syndication Fees. If an investor signs a loan document (takes on more risk), they could be entitled to a loan guarantor fee; this typically consists of a flat amount or a percentage no more than 3% of the original loan.
Setting up your syndication investment
Before signing onto a syndication deal, you must do your due diligence in vetting your preferred syndicators and the other investors you might be working alongside. The best practice for both is to perform research on platforms such as LinkedIn, join groups and generally participate in networking while simultaneously conducting your research.
Investigate their qualifications and, if you can, look at their case studies or volume of work. You want to see a credible transaction volume and nothing potentially problematic.
Real estate syndication advantages for multifamily
1: Gateway to multifamily
As a new investor trying to get into multifamily investing, a sizeable down payment for an apartment property can be discouraging. Syndication eliminates that discouragement by allowing you to share the load with other investors and take your first step—hopefully, one of many.
2. Access to other investor’s funds
By taking advantage of other people’s money, you now have access to investment properties at a much higher price point. These bigger deals with more units can be extraordinarily lucrative.
3. Bigger deals with more units.
With greater access to capital, you can participate in larger deals; these deals tend to get more visibility, provide more networking and professional growth opportunities, and potentially offer greater upside. They may also look better in your portfolio.
4: Syndication offers minimal risk and low vacancies
The multifamily syndication offers some of the best upsides in minimizing risk. Two major factors help limit your risk as an investor. The first is working with more significant properties. These buildings have more tenants. If there are any problems with a tenant or two in a larger property, it affects the bottom line much less than a similar situation in a duplex or similar investment. The second risk-minimizing factor is sharing losses collectively.
The entire syndication shares a load of any losses as a group. Burdens include rent collection issues or unexpected financial obligations. As part of a real estate syndication, you won’t have to face these alone.
Imagine you own a townhome with four units. If you cannot find a tenant to fill one of them, 25% of your revenue is gone. In the same scenario with a 50-unit property, the vacancy rate drops drastically to 2%. A vacancy is always a risk in every commercial real estate deal, so as a rule, it is best to work with the most extensive property you can.
5. Flexibility to reveal more opportunity and achieve your goals
Your syndicator is doing all the heavy lifting working the deal as an investor. Flexibility gives you much more flexibility to spend time working on other multifamily sales, your career, or your family.
6. Zero management means true passive real estate investing. Stress-free.
The syndicator handles due diligence, property maintenance, inspections, and appraisals. As a passive real estate investor, you only face obligations to put money in and receive a return on your investment. Having someone you trust to take care of all these arduous tasks will remove a tremendous weight off your shoulders.
Despite this, we always recommend learning as much as possible about the real estate process; educating yourself will allow you to be involved in a way that will match your comfort level.
7. Outgrow your competition faster
Getting into syndication is possibly the fastest way to start investing in commercial real estate. This process helps you bypass some of the required steps that slow down your competitors trying to get started.
Eventually, it will be in your best interest to develop a holistic skillset and be able to perform deals without the guidance of a syndicator once you have the know-how and the capital. For now, enjoy that you are making your first moves in the multifamily market sooner rather than later.
Real estate syndication business plan
As an investor in multifamily real estate syndication, your business plan should minimize the downsides of syndication and generally prolong the investment period of investment.
A good syndicator will create a fair environment for the entire syndication by selling at the right time and allowing its investors to collect dividends. Per Jake & Gino, part of your qualification process for syndicators should be to weed out investors who tend to have more of a fix and flip model mentality. Selling quickly ultimately benefits the syndicator more as they receive fees upon closing.
From the get-go, understand that you will have less control over what goes on in this investing model; someone entering syndication should have diplomatic tendencies, work well with others, and want to learn. If you have all of these tendencies, good luck and happy syndicating!
Armed with the know-how, a real estate investor can make more informed decisions and create tremendous value over a long and successful career.
If you like this blog post, please share it!
Multifamily real estate is a one-of-a-kind opportunity for individuals seeking to retire early. Learn how to get started investing in multifamily.