What is real estate syndication?

Real estate syndication makes it possible for the average person to be able to invest in commercial real estate.  Commercial real estate investing has long been a playground for the wealthy and real estate syndication has changed all of that. 

Imagine being able to own a share of a 200 or 300 unit apartment complex… When you join forces with one another through a real estate syndication you become an owner of the complex without having the responsibilities of changing light bulbs, fixing leaks or raking leaves.  That is the job of the syndicator or the syndication company, the only responsibility you will have is to collect your monthly or quarterly distributions. 

Here’s a quick look at the real estate syndication market:

How Do Investors Make Money in Real Estate Syndication?

Let’s take a look at the process of a real estate syndication and walk thorough it one step at a time.  Let’s imagine there is a 350 unit complex in Chicago for sale.  

  • First let’s look at the property price and purchase.  The property is priced at $23,000,000 and it is providing, the bank has agreed to give us an $18,000,000 loan, they have said you need to put the other $5,000,000 down.  Ok where does that’s $5,000,000 come from?  You guessed it, real estate syndication. 
  • Now let’s say that on top of the purchase price we have decided that if we put another $1,000,000 into the property that we will be able to raise rents way up and increase the profitability of the property.  So that leaves us needing $6,000,000 in order to buy the property and implement our plan. So we set up a syndication to raise the amount of equity we need to raise to get the property closed and renovated.  
  • Now let’s say that we have a 5 year plan for this particular deal.  So for the next 5 years you are going to receive what’s called a distribution. Here’s how the distribution works.  The syndicator collects rents and pays bills associated with the property, next they pay the mortgage payment to the bank, next they split up what’s left and pay it out on a pre-rata share based on your investment in the form of a distribution.  
  • One your preferred (pref) return has been met then the syndicator begins to get their compensation, the fees are set up on a basic % first then to a split once they get to a certain threshold.  
  • Keep in mind that there are also some basic fees for the syndicator along the way, they are putting deals together and making things happen on a daily basis, please read the paperwork associated before making an investment and or consult your attorney or accountant if you have any questions.

How Does A Real Estate Syndication Sponsor Make Their Money?

Typically the sponsor or syndicator will make their money on a few different fees.  As referenced above you need to review each deal’s paperwork and fee structure as they are all different.  However in general a syndicator will make their money by charging an acquisition fee for the asset, they will also charge a disposition fee for the sale of the asset, they will charge a small percentage of the monthly income as well as a profit split, what we refer to as a “back end split”.  Typically these percentages don’t amount to a lot of money  for each investor however they are being compensated for putting the deal together as well as the costs of running the syndication. 

The Legal Structure

The way deals are structured are endless, however a real world structure would look something like this.  There is an LLC and of that LLC there is a manager(Syndicator) and there are members(Investors) the manager has all the say so in every decision made by the LLC, while the members are basically limited partners in the fact that they are limited to their loss based on their investment, meaning if things were to go haywire the only thing you would lose as a member is your initial investment.  It is of course the intention and hope that no money is ever lost and the returns are accomplished without incident.  

Direct Buy vs Real Estate Syndication

Buying an asset directly is always an option of real estate investing.  Most people like to go to their mailbox and pick up a check rather than have to go through the headache of managing every aspect of the property from lease agreements to microwaves and ovens.  Syndication allows someone to simply invest their money and receive a check.  However some folks decide that they would rather have complete control over every aspect of their investment rather than doing a syndication.

How Much Can You Make Investing in Syndication?

Most syndications have what they call a preferred return or pref.  Now what that basically means is the investor will get at a minimum of that before anyone else after the bank and expenses get paid.  So you should generally look at the pref return as your first and most passive amount of money.  Secondly the back end split, the back end split is where the real money is made, this is where the asset is either refinanced or sold and the profit or refinancing proceeds are split and sent out.

Is A Syndication Like A REIT?

No. A REIT is publicly traded on the stoick market exchange.  A REIT and their operators are a business, a business that you own a share of, meaning you own a share of every property that they own which could be 10’s of hundreds or thousands. The REIT operator is going to get a massive split as his compensation all the way down to the aids and people in the office, they all get a salary and it is written off as an expense.  You get what’s in the form of a dividend or a share increase in value.  A syndication you will actually be a passive investor in most of the actual cash flow that comes out of that specific property or that specific property fund.   

Advantages of Investing in Real Estate Syndication:

Buying things in a group is always advantageous, especially when you can diversify in so many ways.  You can move money across multiple operators, multiples markets and multiple asset classes.  

Forced appreciation is another benefit of owning in a syndication.  The back end split from the sale is going to depend a lot on the value of the property at the sale and the value of the property is going to come from the amount of rents that the property brings in.  The more those are the higher the value will be. 

Allows for investing in bigger deals where the profit margins are much higher.  The bigger the asset the bigger potential return because people with more money are willing to pay higher prices for a return. 

Minimized risk across the asset classes, locations and operators.  The risk v reward is the ultimate equation that you need to focus on.  Real estate ion general allows you to take less risk and reap more reward than just about any other investment that you could make.