The Ultimate Guide To Investing In Real Estate Syndications
I first learned about real estate syndications at a local real estate meetup here in Dallas, TX. I had been investing in real estate for years at that point, mainly through rental properties, and I had never heard of the term “real estate syndication” before.
Can you imagine? Years. And in that time, I’d never heard of real estate syndications. But in fact, that’s pretty common.
In this guide, we’ll go over all the information you need to start investing in real estate syndications, from what they are, to the returns you can expect, to the risks involved, and more.
Here’s an overview of what we’ll cover:
Real Estate Syndications 101
1. What is a real estate syndication?
2. How does a real estate syndication work?
3. Can you give me an example of a real estate syndication?
Investing in Real Estate Syndications
1. Why invest in a real estate syndication?
2. What are the returns like in a real estate syndication?
3. What’s the minimum amount I can invest?
4. How long is a real estate syndication?
5. Who can invest in real estate syndications?
6. Can I invest in a real estate syndication with retirement funds?
7. What are the risks of investing in real estate syndications?
8. What about taxes?
9. What happens after I invest in a real estate syndication?
Finding Real Estate Syndication Opportunities
1. Where can I find real estate syndication opportunities?
2. How do private real estate syndications compare to real estate crowdfunding sites?
Real Estate Syndications 101
What is a real estate syndication?
Let’s start with the basics. The term syndication simply means a pooling of resources. A real estate syndication, then, is when a group of people come together to invest in a real estate asset together. Instead of buying a bunch of small properties individually, the group of people come together and buy a larger asset together.
Let’s say I have $50,000 to invest. I could take it and invest it in a rental property myself, but I would have to set aside time to find a property, put it under contract, do the inspections, run the numbers, get the loan, then find the tenant and manage the property.
But, maybe I don’t have that kind of time or interest. This is where most people stop. They figure, real estate investing is too hard and too much work, so they stop there.
But, what few people know is that real estate syndications are the alternative that allow you to still put your money into real estate, without having to do the work of finding or managing the property yourself.
With a real estate syndication, I can invest that $50,000 into a real estate syndication as a passive investor. So I put in my $50,000, maybe you have $50,000 to invest, someone else puts in $100,000, and on and on.
By pooling our resources, we now have enough to buy not just a rental property, but something bigger, like an apartment building.
As passive investors, we don’t have to do any of the day-to-day work of managing the property. A lead syndicator or sponsor team does the day-to-day management (i.e., all the active work), and in return, they get a share of the profits. (More on this in a bit.)
When done right, real estate syndications are a win-win for everyone involved.
How does a real estate syndication work?
There are two main groups of people who come together to form a real estate syndication: the general partners and the limited partner passive investors.
The general partners (GPs) are the people who put the real estate syndication together. They do all the hard work of finding and vetting the property and creating the business plan. Essentially, they do the work that you would be doing as the owner and landlord of a rental property, just on a massive scale.
The limited partners (LPs) are the passive investors, who invest their money into the deal. The limited partners have no active responsibilities in managing the asset.
A real estate syndication can only work when general partners and limited partners come together. The general partners find a great deal and put together a great team to execute on the intended business plan. The limited partners invest their personal capital into the deal, which makes it possible to acquire the property and fund the renovations.
Together, the general partners and limited partners join an entity (usually an LLC), and that entity holds the underlying asset. Because the LLC is a pass-through entity, you get the tax benefits of direct ownership (more on this in a bit).
Once the deal closes, the general partners work closely with the property management team to improve the property according to the business plan. During this time, the limited partner investors receive regular and ongoing cash flow distribution checks (usually every 3 months).
Once all the planned renovations are complete, the general partners sell the property, return the limited partners’ capital, and split the profits.
Can you give me an example of a real estate syndication?
Let’s say that Jane and John are working together to find an apartment community in Dallas, Texas. Jane lives in Dallas, so she works with real estate brokers in the area to find a great property that meets their criteria. After looking at a bunch of properties, they find one, listed at $10 million.
John takes the lead on the underwriting (i.e., analyzing all the numbers to make sure that the deal will be profitable), and they determine that this property has a ton of potential.
Since Jane and John don’t have enough money to purchase the $10-million property themselves, they decide to put together a real estate syndication offering. They create the business plan and investment summary for prospective investors and work with a syndication attorney to structure the deal.
Then, they start looking for limited partner passive investors who want to invest money into the deal. Each passive investor invests at least $50,000 into the deal. They continue raising money until they have enough to cover the down payment, as well as the cost of the renovations.
Once they close on the deal, Jane works closely with the property management team to improve the property and get the renovations done on budget and on schedule.
During this time, Jane and John send out monthly updates, as well as quarterly cash flow distribution checks, to their passive investors.
When the renovations are complete, Jane and John determine that it’s a good time to sell. They sell the property for $15 million after just 5 years. They return all of the passive investors’ original capital, and they split the profits from the sale with the passive investors at the 70/30 split that was agreed upon at the outset of the syndication (70% to investors, 30% to the Jane and John).
Investing in Real Estate Syndications
Why invest in a real estate syndication?
Okay, now that you’ve got a decent understanding of how real estate syndications work, let’s talk about what’s in it for you. There are a number of reasons that passive investors decide to invest in real estate syndications.
Here are a few of the top reasons:
· You want to invest in real estate but don’t have the time or interest in being a landlord.
· You want to invest in physical assets (as opposed to paper assets, like stocks).
· You want to invest in something that’s more stable than the stock market.
· You want the tax benefits that come with investing in real estate.
· You want to receive regular cash flow distribution checks.
· You want to invest with your retirement funds.
· You want your money to make a difference in local communities.
What are the returns like in a real estate syndication?
Let’s talk about one of the things people are most curious about – the returns you can expect by investing passively in real estate syndications.
There are two types of returns that you can expect from investing in a real estate syndication.
The first type of return is a cash flow return, which you would receive in the form of a check or direct deposit quarterly from the time the deal closes through the time the asset is sold.
The second type of return is a split of the profits upon the sale of the asset. The exact split depends on each deal’s specific deal structure.
Typically, for the real estate syndication deals that we do, the cash flow returns total 8-10% per year. So, if you were to invest $100,000, you could expect about $8,000 per year in cash flow returns, or about $667 per month.
Then, at the sale of the property, you could expect an additional 40-60% ($40-$60,000), in addition to receiving your original capital back.
Altogether, when counting the $8,000 per year for five years, plus the, say, $60,000 at the sale, you would have received a total of $100,000 in returns over the course of five years, thus doubling your money in that time. When counting the profits from the sale, your average annual return over the course of those five years would have been 20%.
What’s the minimum amount I can invest?
Typically, we see a minimum of $50,000 for the deals that we do.
Your money will be illiquid during the length of the hold time (i.e., you can’t withdraw it until the asset is sold). Thus, you should only invest with funds that you don’t need access to for a while and can afford to lose.
How long is a real estate syndication?
While each real estate syndication is different, we typically see projected hold times of 5-7 years, sometimes longer.
This means that, for a real estate syndication with a 5-year projected hold time, you should prepare to have your money in the project for 5 years. You will not be able to take your money out until the asset is sold.
Who can invest in real estate syndications?
A large majority of real estate syndications are open to accredited investors only, though some are also open to non-accredited, sophisticated investors (i.e., investors who can demonstrate that they understand real estate syndications and their risks).
In order to be considered an accredited investor, you must meet at least one of two requirements. The first requirement is a net worth requirement. You must have at least $1 million in net worth, not counting your primary home.
The second requirement is an income requirement. You must make $200,000 per year as an individual, or $300,000 jointly with your spouse, have made this amount or more for each of the last two years, and intend to make this amount or more this year.
If you meet either one or both of these requirements, then you are an accredited investor.
If you’re not yet an accredited investor, there are still some real estate syndication opportunities out there for you. However, you may need to look a little harder for them. This is because the opportunities for non-accredited investors cannot be publicly advertised.
What are the fees involved?
There are two main types of fees that are paid to the general partners when you invest in a real estate syndication.
The first is an acquisition fee (typically 1-3% of the purchase price), which is paid out upon the deal closing. This is for all the work the general partners have put into the acquisition of the property.
The second type of fee is an asset management fee, which is an ongoing fee (usually 1-3%) that is deducted from the cash flow each month, for the ongoing work of managing the asset.
As a passive investor, you don’t have to write a separate check for either of these fees. These fees are already part of the underwriting. So if a deal deck says projects an 8% annual return, that’s already accounting for the fees involved. You just write your $50,000 check, and that’s it.
Can I invest in a real estate syndication with retirement funds?
Yes! In fact, this is one way that many passive investors get started with real estate syndications.
To invest in a real estate syndication with retirement funds, you need to first roll over your existing retirement funds (401k’s, IRAs, etc.) into a self-directed IRA or 401k account. Once your money is in the self-directed account, you can choose what you want to invest it in.
Any returns you make on the investment must go directly back into the self-directed account, never into your personal accounts.
What are the risks of investing in real estate syndications?
All this sounds great, but what about the risks? Great question. After all, a real estate syndication is an investment, and no investment is a guarantee.
One of the biggest risks is the risk of execution. When you invest in a real estate syndication, you’ll see glossy marketing packages, and the sponsors will answer your questions with lofty ideals.
However, when the rubber meets the road, the sponsor team needs to be able to execute on the business plan in the face of unforeseen circumstances. This is why we invest only with sponsors who have a proven track record and who prioritize capital preservation, so we know that they will protect your investments and will do what they say they’re going to do.
Another potential risk is changing market conditions. No one can predict what market conditions will be like at the end of a project’s hold time. Maybe the entire country will be in a recession. Maybe the local economy will be in a lull.
This is why it’s so important to ensure that the loan provides some buffer time. That is, if the projected hold time is 5 years, check to make sure that the loan term is for at least that long, and ideally longer than 5 years, so there’s a buffer in case we need to hold the property longer than intended.
At the end of the day, as a limited partner passive investor, your liability in the real estate syndication is limited. That means that, at worst, you could lose your original investment, but you could not lose more than that (e.g., you can’t lose your house).
What about taxes?
When you invest in a real estate syndication as a passive investor, you are a part-owner in the underlying asset. That means that you get your share of the tax benefits.
One of the biggest tax benefits is accelerated depreciation through cost segregation.
When you invest in a rental property, you can depreciate the rental property on a schedule of 27.5 years.
When you invest in a commercial real estate syndication, the sponsors will often order a cost segregation study. What this means is that a cost segregation expert will come and take stock of all the assets on the property – light fixtures, carpeting, etc. – and create a cost segregation report. That report shows which assets are eligible for accelerated depreciation.
For example, instead of depreciating the carpeting over thirty or so years, you might be able to depreciate it over 5 years. This accelerated depreciation can front load all the depreciation benefits into the first few years of ownership, which is perfect for a real estate syndication that projects a hold time of just a few years.
What happens after I invest in a real estate syndication?
After you’ve sent in your funds for a real estate syndication deal, your active participation is done. Now you can sit back and wait for the cash flow to start rolling in.
Depending on the particular deal, you will receive quarterly cash flow distributions, and they may start immediately, or not for a few months to a year.
Regardless, you should start receiving monthly updates as soon as the deal closes. These monthly updates will include information on the latest occupancy and progress on the renovations.
Every quarter, you will receive a detailed financial report on the property, and every spring during tax season, you will receive a Schedule K-1 for your taxes, which will report your share of the income and losses for the property.
Finding Real Estate Syndication Opportunities
Where can I find real estate syndication opportunities?
As mentioned above, many real estate syndication opportunities cannot be publicly advertised. The ones that you do see publicly advertised are for accredited investors only.
So, where do you find real estate syndication opportunities?
You can do a Google search, but how do you know that the opportunities that pop up are legitimate ones, put together by experienced teams with strong track records, who will safeguard your money over a period of several years?
The answer is, you don’t. It’s extremely hard to find great real estate syndication opportunities just by doing a few Google searches.
The best way to find real estate syndication opportunities is to get out there and talk to people in the real estate investing space, and particular those in the real estate syndication space. This community is actually small, and once you get connected, you’ll easily be able to find sponsors and real estate syndication opportunities that fit with your investing goals.
How do private real estate syndications compare to real estate crowdfunding sites?
In the past few years, real estate crowdfunding sites have become quite popular as a way to invest passively in real estate. Sites like RealtyMogul, RealtyShares, and Fundrise have helped millions of people invest passively in real estate.
Real estate crowdfunding sites can be a good place to find real estate syndication offerings. However, there are a few things you should keep in mind.
First, most of these platforms require that you be an accredited investor in order to invest in their real estate syndication offerings.
Some of these platforms do offer REITs (real estate investment trusts) as an alternative for non-accredited investors. Typically, you can invest in these REITs with a low minimum investment (you can invest in Fundrise’s eREIT for just $500).
If you’re investing in a REIT, just be aware that you are not investing in a real estate syndication. Rather, you are investing in a fund.
When you invest in a REIT, you’re investing in a company that buys real estate; you don’t have direct ownership of the underlying asset yourself, like in a real estate syndication. You would likely still get good returns, you would just be investing in a bunch of assets rather than a single one, and you wouldn’t get the same tax benefits as with a real estate syndication.
Regardless, if you’re just starting out, you should definitely check out some real estate crowdfunding sites, to see what they’re all about.