Today’s real estate market presents a wealth of opportunities for investors. From high-end residential properties to large-scale commercial buildings, the landscape is constantly growing and evolving. As an investment manager, it’s vital to have access to the right tools, so you can capitalize on these opportunities for your clients. One way to acquire more property and maximize profitability is through real estate syndication.
What Is a Real Estate Syndication?
Real estate syndication is on the rise. In fact, in 2018, over 100,000 investors participated in syndications. According to Financial Samurai, a real estate syndication is when multiple investors pool their financial and intellectual resources together to purchase or build a particular property. Being able to share the cost makes it easier for investors to gain access to bigger properties or projects they would otherwise not be able to afford.
The idea of real estate syndication is nothing new — families have come together to purchase land and institutions have collectively funded building projects for hundreds of years. However, in the past you either had to know or be well-connected to a network of syndicate partners in order to facilitate a deal. Recent advancements in technology have now made it easier for investors to get access to hard-to-reach real estate opportunities and profitable deals from anywhere in the world.
Who are the Players?
A real estate syndication involves a sponsor and group of investors. The sponsor brings his or her skills and knowledge to the table to find and manage the deal, and then carries out the day-to-day operations of the asset, while the group of investors provides the majority of the capital and generally plays a passive role. In other words, the sponsor makes most of the strategic decisions and typically does not involve investors unless they need more capital. According to RealtyShares, investors typically invest anywhere from 80-95% of the total, while the sponsor puts in between 5-20% of the total.
Types of Real Estate Syndication
A real estate syndication can be structured in a few ways, depending on the type of business and the number of investors involved. Legally speaking, these types of structures make it easier to manage the asset as a separate entity. Plus, they provide more protection for both the investors and the sponsor if something goes wrong. Here’s a breakdown of the two main structures we see in real estate syndication:
Also referred to as an LP, a limited partnership structure has both a sponsor and a group of investors. The sponsor assumes full liability, while the investors are only liable for the amount of capital they contribute. In this structure the sponsor takes on all operating and managing tasks, and the investors are typically not involved with anything outside of the financial transaction.
Limited Liability Company
Providing a little more flexibility than an LP, a limited liability company (LLC) can be managed and operated by both the sponsor and the investors. In this structure everyone has the same liability and can make decisions. One big differentiator between an LP and an LLC is that an LLC dissolves if a member leaves, dies, or is replaced.
How Does a Real Estate Syndication Make Money?
The amount of money a real estate syndication generates depends on the agreement, type of property, structure, and the time it takes for the investment to mature. Both the sponsor and the investors benefit financially. Here are the two primary sources of revenue from a real estate syndication:
- Rental Income:
This is distributed to investors from the sponsor on a monthly or quarterly basis. As time goes on, the property value increases, and thus the rent increases, generating more profit for all parties.
- Property Appreciation:
This is how much the property’s value increases over time and depends on the location, demand, and the state of the market. Once a property is sold, the sponsor and investors would split the profit.
In addition, sometimes a sponsor will take a lump sum of money from investors upfront in order to source and obtain the property. This is also known as an “acquisition fee” and is generally paid back to investors with interest over time as a preferred return.
Benefits of Real Estate Syndications
The benefits of real estate syndications are plentiful. They allow investors to reap the returns of their real estate investment without the responsibility of day to day management, and give sponsors access to the financial support they need to acquire and manage larger properties. Below are a few of the many perks of a real estate syndication:
- Provides access to larger, more expensive properties
- Team format brings in a broader range of skills and knowledge
- Decreases the overall cost of the investment
- Raises capital more quickly
- Makes it easier for investors to diversify their portfolios
- Gives investors and sponsors ownership of tangible assets
- Delivers consistent returns
- Less volatile than other investments like stocks
Risks of Real Estate Syndications
Generally speaking, real estate syndications are less risky than other types of investments because the level of risk is split among a group of people rather than a single individual. Plus, a sponsor’s previous track record can be used to determine the likelihood of future outcomes. However, real estate syndications don’t come risk-free.
Since investors aren’t involved in the day-to-day operations of the business or decision making, it can be hard for them to know what’s actually going on. In addition, the amount of time it takes for a real estate syndication deal to play out can be a drawback — especially if investors are planning to use their profits to put towards new investments.
How Technology Can Help with Real Estate Syndications
Real estate syndications can be complex, fortunately innovative technology can simplify the process. Modern real estate investment software can save you time and money, and allow you to communicate more effectively and focus on growing your business. Here are some of the ways a purpose-built investment management software can help streamline the syndication process:
- Investor Portal:
With everything in one place, it’s easy for investors to access data and information on a deal from anywhere, on any device.
- Fundraising Tracking & Document Signing:
Online tools streamline communications and track the interest of prospective investors, so you can get your real estate syndication funded in no time.
- Waterfall Distributions:
Automating and streamlining the payment process makes calculating distributions simple and fast, in addition to reducing the risk of error.
- Statements & Reporting:
Innovative software makes it easy to consolidate data and metrics on a syndication into a single, shareable document that you can distribute to your investors digitally.