How does syndicated real estate work?

While syndicated real estate requires less capital up front, it also comes with risks. Here is everything you need to know before investing

How does syndicated real estate work?

Syndicated real estate is not the most well-known form of property investment. However, it is a good way for investors to capitalize on the high-return potential of real estate without directly becoming property owners.

In this article, we will define syndicated real estate. We will also look at how to invest in real estate syndication, as well as weigh the benefits with the potential risks. Consider this a quick refresher for yourself or an informative piece for clients and contacts.

Here is everything you need to know about syndicated real estate.

What is syndication in real estate?

Syndication in real estate is a partnership among a group of investors who pool their money to invest in larger properties they would be unable to afford individually. These partnerships can also create larger investment opportunities such as industrial real estate or multi-family properties.

Syndicated real estate enables individual investors to passively invest in property. The syndicated real estate structure allows for fractional investment. This essentially means the removal of day-to-day maintenance and liability.

How to get started with syndicated real estate deals

There is no single way to get started with syndicated real estate. For most investors these days, the easiest way to participate is through real estate crowdfunding portals like Realty Mogul, CrowdStreet, or EquityMultiple.

Many syndicated real estate deals are restricted to accredited investors, as opposed to investment funds that purchase several properties.

To get started in real estate syndication, you must satisfy at least one of these criteria:

  • Annual income of $200,000 minimum, or $300,000 for a couple, for the previous two years (with a reasonable expectation for the same amount during the current year)
  • Net worth of $1 million (not including the value of your primary residence)

It is not a fail-safe way of screening investors. However, the purpose of the accredited investor requirement is to limit the riskier investments to anyone who has financial knowledge to assess the risk-reward dynamics. It also helps to ensure that the investor(s) can absorb a loss if the investment goes sideways.

Key players in syndicated real estate partnerships

The key players in syndicated real estate partnerships include the following:

Real estate syndicators

This includes general partners or sponsors. They are responsible for strategizing real estate investments. They also take care of securing financing from passive individual investors.

Passive individual investors

Passive individual investors supply as much money as they are comfortable with. They also work with limited partners (LPs) and general partners (GPs) to better understand their investment.

Limited partner investors

This type of investor is less liable compared to general partner investors. LPs are therefore entitled to smaller shares of the cash returns.

Managing entities

Managing entities act as liaisons between party members. They can also offer private access to asset managers, guidance, and investment opportunities.

Joint venture partners

Joint venture partners are separate entities that carry liability only for their specified role in the investment partnership.

Is real estate syndication worth it?

Yes. There are many benefits that make real estate syndication worth it. Not only is it a low-cost way to invest your capital but it is also a great way to boost your liquidity and diversify your real estate portfolio.

Let’s explore the various ways syndicated real estate could benefit you.

  1. Diversify your portfolio
  2. Earn tax advantages
  3. Boost liquidity/transparency of securities exchange
  4. Reduce your minimum investment amount
  5. Lower your volatility risk
  6. Gain operational flexibility

Here is a breakdown of each of the reasons that make real estate syndication worth it.

1. Diversify your portfolio

One major benefit of syndicated real estate is you avoid complicated legal agreements with multiple partners that require financial and legal expertise. With syndicated real estate, the process starts with an investor purchasing a property, splitting the equity with other investors, and selling it to the next buyer. This process can be managed by an agent, a broker, or real estate syndication software.

Real estate syndication is a great way to diversify your real estate portfolio. Not only does it boost liquidity and generate consistent cash flow, but it is also a low-cost method of property investment. Beyond that, you can syndicate with as few as two investors and the management fee is usually low.

2. Earn tax advantages

Syndicated real estate companies are great choices for tax-advantaged investors that want to benefit from the surging real estate market. When you invest in syndicated real estate, the returns are quoted as a yearly percentage rate.

Additionally, capital gains distributions are usually tax free. Interest and dividend income, meanwhile, are taxed as ordinary income. Capital gains tax rates are also less than the income tax rate.

Here is a look at some common deductions:

  • Depreciation (accelerated)
  • Mortgage interest
  • Operating expenses/repairs
  • Property tax

One of the easiest ways to start a syndicated real estate investment is through real estate crowdfunding portals.

One of the easiest ways to start a syndicated real estate investment is through real estate crowdfunding portals.

3. Boost liquidity/transparency of securities exchange

Syndicated real estate also provides appreciation in the values of underlying properties. Real estate investors can pick between any number of investment options. The most common among these options is usually an actively managed portfolio of real estate assets, which are managed by a portfolio manager.

Other options include real estate investment trusts (REITs), exchange-traded funds (ETFs), and passively managed portfolios. Often overlooked are tax-managed funds, which offer a mix of passive and active real estate tactics. Note, however, that they are managed by a separate entity.

The separation of management and investment tactics makes for more predictable returns and tighter control. Syndicated real estate offers liquidity and transparency that other private real estate funds sometimes lack, including company’s audited financial statements, among other required financial info.

4. Reduce your minimum investment amount

Many private real estate funds require you to put down a significant amount of cash up front. If you need $1 million for a private real estate fund investment, you might be out of capital. Syndicated real estate usually requires lower amounts for minimum investment. In other words, you can get great exposure to the real estate market at a much lower cost.

Not only can you invest small amounts in syndicated real estate, but they offer returns that are usually stable. This also makes syndicated real estate a solid long-term investment.

Typically, the minimum amount required for most real estate investment is between $5,000 and $50,000. Syndicated real estate removes the barrier of entry if you want to put money into real estate but do not have a huge amount of money. You can invest less than $5,000-$50,000 and still get the same returns.

5. Lower your volatility risk

Compared to private real estate funds, syndicated real estate also has a lower volatility risk. In other words, the risk of losing money if real estate values drop is lowered. If you purchase shares of a private real estate fund at a low price and then real estate prices drop, you will likely lose money.

With syndicated real state, however, the volatility risk is much lower. When real estate values decrease, you do not have to sell. Instead, you can wait for the market to recover.

The structure of syndicated real estate essentially means the returns are more predictable. Plus, there are tax benefits. As an investor in syndicated real estate, you get some of the profit from property income that is generated by the pool of similar assets.

6. Gain operational flexibility

As mentioned, syndicated real estate enables you to diversify your assets across multiple properties. This ensures you are not only exposed to any single investment.

This differs from some private real estate funds, which operate on a self-dealing basis. In other words, these funds allow them to benefit themselves instead of the shareholders. Syndicated real estate, on the other hand, is required to operate in the shareholders’ best interest.

Let’s look at some of the ways syndicated real estate offers operational flexibility:

  • You can spread your investments across different properties, meaning you are more likely to experience good returns through the property cycle
  • You can connect with other investors, which may result in lucrative investment opportunities in the future
  • You can benefit from high yields while still owning a portion of the underlying property

What are the risks of syndication?

As we have seen, there are several reasons that investing in syndicated real estate is a good idea. It provides access to big deals with limited capital up front. And it allows you to diversify your portfolio and generate passive income.

As with any investment, it is in your best interest to explore both the pros and the cons. With this in mind, let’s look at some of the risks that come with investing in syndicated real estate.

Less control

When investing in syndicated real estate, you are a limited partner. This means you have almost no say in the management of the property. The syndicator or sponsor makes all of the important decisions. These include everything from the selection of the property to the exit strategy.

Limited liquidity

After you invest in syndicated real estate, your money may be tied up for several years until the property is refinanced or sold. Why? Because real estate is not a liquid investment.

Risk itself

All investments come with risk. Syndicated real estate is not unique in that way. Several factors can affect the success of the syndication, including market downturns, poor management, or property expenses.

Sponsor dependence

The general partner’s (or sponsor’s) integrity and expertise heavily influences the success of syndicated real estate. Therefore, it is important to choose a sponsor wisely. A weak choice of sponsor may result in loss of investment or even just subpar returns.

Syndicated real estate comes with risks—and rewards

At its core, syndicated real estate is when a group of investors collectively raise capital to buy commercial real estate or buy new property. It comes with a number of benefits, including generating passive income and diversifying your portfolio without the burden of day-to-day management and liability.

As with any form of investment, however, there are risks. These include a dependence on the sponsor of the real estate syndication, as well as loss of control. An example of weighing the pros and cons includes the following: is the lower up-front cost required to participate worth having less control?

To find out more about syndicated real estate, get in touch with one of the mortgage professionals we highlight in our Best in Mortgage section. Here you will find the top-performing mortgage professionals across the USA.

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