A real estate syndication, is essentially the joining of financial forces between a group of people to acquire and manage in real estate.
The beautiful benefit to investing with a group and pooling capital funds together is that it gives you the opportunity to purchase larger assets that you could not acquire on your own dime.
Here are general key players in a syndication:
The Sponsor is usually a person or an entity that organizes the whole investment. They are responsible for managing the process on behalf of the investors. They will go out and source the leads, acquire, manage, and handle everything else in between. Other common names used interchangeably for Sponsors include Syndicator, Operator, Manager, or General Partner.
Investors are folks who bring in the capital to pool together with other. Other common names used interchangeably include Limited Partners (LPs) or Members. We can take the Investor definition further here. There are 2 types of Investors - "Accredited" or "Non-Accredited".
Accredited - Under the Securities and Exchange Commission (SEC) regulations, an accredited investor is an individual or a business entity that is allowed to trade securities that may not be registered with financial authorities.
Here is the basic definition:
(Please check with your real estate attorney and the SEC guidelines to confirm the facts as there could be amendments to the definition by the time you read this.)
Have an income of at least $200,000 each year for the last two years, OR
If you’re married, have a combined income of at least $300,000 each year for the last two years, OR
Have a net worth of at least $1 million, excluding your primary residence, either individually or jointly with your spouse
Non-Accredited - A non-accredited investor is any investor who does not meet the income or net worth requirements set out by the Securities and Exchange Commission (SEC).
That's it! A syndication is a fancy term to basically describe a group of people bringing capital together towards a common goal.
Typical Syndication Process
Now that you've learned the terms from the section above, let's dive into an example!
A Sponsor (aka GP) will find a property that meets the investment criteria, puts in an offer, negotiate, get it accepted, and open escrow. The GP will perform the proper due diligence, set up the financing structure (if needed), then create an investment package typically referred to as a Private Placement Memorandum or a PPM.
The PPM is like a business plan for the real estate asset, the items described in the PPM include:
Details of the property (location, sales price, units, etc)
Terms of the deal (sponsor contribution, equity splits, etc)
Investment project projections
Payout and distribution details (quarterly payments? monthly? yearly? etc)
The GP will use the PPM to help raise money from investors. Prior to meeting with potential investors, they will have already decided on a minimum investment amount and have a certain number of open spots (shares) available. When they've reached their capital raising objectives, the property will be purchased and the sponsor manages property operations.
Profits are distributed to investors as outlined in the PPM. When the exit strategy is executed per the PPM - the property is disposed (sold) and the agreed to profits are split between everyone as per the PPM outline.
The strategy is of syndications is basically to improve the operational numbers of the property (increase net operating income which leads to increased profits) and ultimately sell the property down the line either to trade up or disburse the group. The typical time frame is 5-7 years, so plan accordingly! Building wealth takes time and it is definitely a worthy goal!
The PROS and CONs of Syndications
You will always be aware of the real estate investment strategy and by knowing the exact property your funds are being invested in.
This is a low key passive investment - which gives you time to focus on other things important to you! Your hard work is completed up front by vetting the opportunity and sponsor.
You can always trade upward, like in the game Monopoly, but obviously in real life! The process that one can do like-kind exchanges is called a 1031 Exchange.
Diversification of your financial portfolio. Since you end up taking a small share, you don't put all your eggs in this one basket and you can invest in other opportunities you see fit for your investment strategy.
Accessibility to large investments with professional management instead of going solo after smaller deals.
This is one of the most important pros - you get liability protection and your personal credit protection.
The investment returns on these opportunities are often higher than investing in paper money (stocks, bonds, mutual funds etc).
This is a longer term play - you'll locked in for a while. Therefore, you will not have full liquidity of your investment funds.
If having control is big to you, this may not be a best fit because you will not have full control. The GPs will decide on how to manage, dispose, refinance, etc.
When the exit strategy is executed, you will need to have your own financial strategy in place on where to move your funds and further invest, sometimes you may have a large tax implication.
In general, the key take away here is that you need to work with people you TRUST and it's best to consult with legal counsel through this process.
Have you participated in a syndication? What was your experience like? Any tips and advice for the community, especially beginners? Comment below! Thanks!