Real estate syndication is an age-old real estate investment technique brought to life again using today’s technology. If your network is tapped out, yet you want to grow your portfolio, real estate syndication may be the answer.
Real estate syndicators work with a group of people to make real estate transactions occur. The investments are often much larger than a single investor could do on his/her own, and the profits are on a much larger scale than traditional real estate investments.
In this article, we'll cover what real estate syndication is, how it works, and the types so you can decide if it's the right investment choice for you.
What is a real estate syndicate?
When a group of investors come together with a like goal and pool their money, in this case, for real estate, it’s a real estate syndicate. The investors put their money together to buy real estate (or build it). Real estate syndicates are more powerful than individuals because they have greater buying power.
History of real estate syndication
Surprisingly, real estate syndication isn’t new. Many people equate it with today’s technology and the ability to solicit investors from around the world, but it’s not. Real estate investing in large-scale partnerships dates back centuries.
However, it had diminished popularity for most of the 20th century. This is because The securities Act of 1933 made it illegal to publicly solicit real estate investments (or any investments). All investments had to be registered with the SEC to provide federal oversight and to prevent fraud.
This made it more difficult for real estate syndicators to find investors because it left them with only their private network to invest in their projects rather than soliciting publicly. As a result, real estate syndication became much difficult to do, but it was still possible.
How does real estate syndication work?
Real estate syndication works a lot like real estate crowdfunding. You have a group of investors who pool their money to fund a real estate transaction.
But in the case of a real estate syndicate, there are different players - the sponsor and investors (more on their roles below). Both parties make money in the real estate transaction.
The sponsor makes money from originating the transaction, rental management fees, monthly cash flow from rent, and capital appreciation. On the other hand, investors only make money from the monthly cash flow from rent and the real estate appreciation.
Here’s how the process looks from the sponsor’s point of view:
- Choose a real estate niche or type of real estate they want to invest in
- Put together an investment plan and create a business plan to pitch to investors
- Find investors from their private network
- Get investors interested in the investment by pitching the business plan
- Find a property, get investors on board, and fund the purchase
Real estate syndicators can also use real estate crowdfunding platforms to find interested investors if they run short in their own network.
Real estate syndicators: Who are the involved parties?
Basically, real estate syndication starts with a sponsor who then looks for investors. The sponsor has the sweat equity, and the investors have the money. The sponsor’s responsibilities include:
- Finding properties
- Underwriting properties
- Raising capital
- Managing the property’s operations
That’s not to say that the sponsor doesn’t invest any money - most sponsors invest between 5% - 20% of the necessary capital, and the investors provide the rest.
Most syndications operate as an LLC or Limited Partnership. The sponsor is the ‘manager,’ and the investors are the partners. Each company has a different structure, and all companies must have an operating agreement to ensure everyone knows and follows their roles.
Types of real estate syndication
Real estate syndicators can tap into their network or find investors outside of their network using online syndication. Here are the differences.
Online syndication is similar to real estate crowdfunding. Rather than only marketing to investors the sponsor knows, they can use an online marketplace to solicit investors, using the marketplace’s tools to manage their investment and portfolio.
Offline syndication occurs when sponsors use their own networks to solicit deals. They use their own personal connections to get the funds needed to purchase properties. Offline syndication occurs either in person or over the phone rather than through an online marketplace.
Private syndication is a combination of online and offline syndication. Rather than tapping into their own network, sponsors have access to their own branded website on a crowdfunding real estate site, such as CrowdStreet, Fundrise, or Realty Mogul.
Sponsors can leverage the technology on these platforms but within their own brand, soliciting potential investors using their own techniques. Sponsors can tap into their current network or reach outside of it, managing everything automatically through the platform.
Pros and Cons of Real Estate Syndication
Like any real estate investment, there are pros and cons to real estate syndication.
- Sponsors can tap into more capital to grow their real estate portfolio without spending their own money. They have a more extensive network to use and can pool the funds to make more significant investments.
- Investors can be passive investors, earning income without taking the risk of investing in real estate alone. They share the responsibility with a pool of other investors.
- Investors don’t need experience in real estate investing since the sponsor does everything.
- Investors don’t take on 100% of the liability. Every investment has risks, but they aren’t funding the entire real estate property.
- It’s a lot of work for sponsors to find investors and pool enough money to make the real estate transaction occur.
- Sponsors need a decent amount of capital to start the investment.
- Investors have no control over real estate investments.
Real estate syndication can be a great way to increase your portfolio, whether as a sponsor or investor. Sponsors do the work but reap the rewards by leveraging their investment with money from a pool of investors.
Investors can also increase their real estate portfolio but with passive income. If you prefer to take a ‘back seat’ but still enjoy the profits real estate can offer, taking the role of investor may be just what you need.