Real estate syndication offers a new way for investors to pool their resources together and invest in real estate assets that would be too expensive for them to deal in without syndication. Basically, it allows small investors to compete with the larger real estate finance institutions.
A few years ago, only financial institutes with large capital and market connections could invest in profitable real estate syndicates. These syndicates could raise finances to invest in multi-million dollar properties in commercial real estate around the country.
Development of real estate crowdfunding platforms has changed much and opened up real estate syndication for individuals. Here, we review the basic of how real estate syndication deals work.
What is Real Estate Syndication?
A real estate syndication deal establishes a joint partnership between many investors. In such a deal, investors bring their skills, capital, expertise, and other resources together to purchase and manage real estate property.
There are generally two main roles in a real estate syndicate; sponsor and investor. The sponsor scouts, researches, buys, manages and sells properties. They must be knowledgeable about the market and possess skills in negotiation, contracting, property appraisal and management. The investor brings capital to the syndicate which largely determines the scope and size of syndicate.
Investors earn profits based on their proportion of investment in the syndicate pot. Syndicators may or may not invest capital into the venture and earn a fee or commission for their
How Does A Syndication Deal Work?
Every Real Estate Syndicate can have its own set of rules which are outlined in the syndication deal. The rules outline the type of properties that will be invested in, role of each syndicator, how profits will be generated, and profit distribution rates. Rules can be set up for preferred profit.
For example, suppose that five partners create a syndicate where four partners each invest $100,000 in the syndicate. The fifth partner takes over the role of sponsor. The money is invested into a rental property that earns $50,000 net rental income each year. The syndicate sets a preferred rate of return for investors at 5%, a 1% acquisition commission fee and profits are distributed at 20% for each person.
The syndicator will receive a $5,000 commission at the time of property purchase. Out of the net profits, each investing partner will receive a 5% preferred profit on their investment of $100,000, which is $5,000 each or $20,000 total.
After deduction of $20,000 the remaining $30,000 profit will be split at 20% for each partner, i.e. $6,000 for each partner in the syndicate.
Real Estate Syndicate Structure
Real estate syndicates can be structured as a limited liability company or a limited partnership. The sponsor acts as the managing partner, while the investors are passive partners. Syndicates can hold regular meetings to discuss operations.
There are basically no restrictions on the terms you set for the syndicate. You can have voting rights and as many partners as you want. It is best to hire someone who has extensive experience in real estate management to act as the sponsor. Sometimes the sponsor role is played by multiple partners.
How to find Real Estate Syndication Deals
Most good Real Estate Syndication Deals cannot be marketed out in public like a Rental deal, because some are SEC regulated. So in order to find such deals you need to join platform like ours, where we host private webinars when new deals become available to Accredited investors.
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