Real Estate Syndication: How It Works And How To Participate (2022)

Real Estate Syndication: How It Works And How To Participate (1)

Real estate syndication is a way for investors to pool their financial and intellectual resources to invest in properties and projects much bigger than they could afford or manage on their own.

In the past, only the wealthiest and most connected individuals could participate in real estate syndications. After all, these syndications would usually invest multi-millions in commercial real estate properties around the country.

The emergence of real estate crowdfunding since the JOBS Act passed in 2012 has accelerated an individual’s access to real estate syndication.

Personally, I’ve invested $810,000 in real estate syndication since 2016. As a multi-property owner in San Francisco, I wanted to diversify into the heartland of America.

Let’s look into the basics of real estate syndication and how it works in more detail

Real Estate Syndication Basics

Real estate syndication is a transaction between a Sponsor and a group of Investors.

As the manager and operator of the deal, the Sponsor invests the sweat equity. This includes scouting out the property and raising funds. In addition, the Sponsor acquires and manages the investment property’s day-to-day operations. Meanwhile, the Investors provide most of the financial equity.

(Video) Real Estate Syndication Structures Explained

The Sponsor is usually responsible for investing anywhere from 5-20% of the total required equity capital. Then investors put in between 80-95% of the total.

Most importantly, the more the Sponsor invests in the deal, the better for the Investor. You want the Sponsor to have as much skin in the game as possible.

Real Estate Syndication Legal Structure

Syndications are usually structured as a Limited Liability Company or a Limited Partnership. The Sponsor participates as the General Partner or Manager. And the investors participate as limited partners or passive members.

Further, the LLC Operating Agreement or LP Partnership Agreement are vital documents. They set forth the rights of the Sponsor and Investors. This includes rights to distributions, voting rights, and the Sponsor’s rights to fees for managing the investment.

The LLC or Limited Partnership structure is very similar to the set ups of other private funds in the Venture Capital, Private Equity, and Venture Debt space. Such legal entities are there to protect both the Sponsor and the Limited Partners if the deal goes south.

Real Estate Syndication Profits

Property appreciation and rental income are the two main ways the Sponsor and the Limited Partners make money from real estate syndication.

Rental income from a syndicated property is distributed to investors from the Sponsor. This typically occurs on a monthly or quarterly basis according to preset terms. A property’s value usually appreciates over time. Thus, investors can net higher rents and earn larger profits when the property is sold.

Payment of rental income or profits depends upon the time the investment needs to mature; some types of syndications are over within 6-12 months while others can take 7-10 years. Everyone who invests receives some share of the profits.

(Video) Real Estate Syndication [How it works and how to invest]

Sponsor’s often take an upfront profit at the beginning of the deal for sourcing and acquiring the property. This is call and acquisition fee. An average acquisition fee of 1% (although it can be anywhere from .5 to 2% depending upon the transaction).

Before a Sponsor shares in the profits for their work as manager and promoter, all investors receive what is called a ‘preferred return.’ The preferred return is a benchmark payment distributed to all investors. That is usually about 5-10% annually of the initial money invested.

Real Estate Syndication: How It Works And How To Participate (2)

A Real Estate Syndication Example

Real estate syndications are structured so that the Sponsor is motivated to ensure the investment performs well for everyone. The more the Sponsor invests in the deal, the more aligned the sponsor is with Investors.

Let’s look at an example of a preferred return.

Let’s say you’re a passive investor who invests $50k in a deal with a 10% preferred return. You could take home $5k each year once the property earns enough money to make payouts possible.

After each investor receives a preferred return, the remaining money is distributed between the Sponsor and the investors based on the syndication’s profit split structure.

If the profit split structure is 70/30 — investors net 70% of the profits after receiving their preferred returns and the sponsor nets 30% after the preferred return.

For example, after everyone receives their preferred return in a 70/30 deal, and there is 1 million remaining, the investors would receive 700k and the Sponsor would receive 300k.

(Video) WS71 - How to Syndicate Your First Real Estate Deal

Below are some examples of various real estate syndication deals on the Fundrise platform. Today, Fundrise mostly focuses on private eREITs, diversified real estate funds. This way, non-accredited investors can invest in long-term, diversified real estate portfolios. I believe investing in a diversified eREIT is the way to go for most investors looking to gain exposure and earn income 100% passively.

Real Estate Syndication: How It Works And How To Participate (3)

Real Estate Syndication Statistics

  • In 2021, over 300,000 investors participated in syndications.
  • The average size of a real estate offering was $3 million.
  • Passive investors came up with 80-95% of the initial capital investment
  • Sponsors came up with 5-20% of the initial capital investment
  • Investors received a preferred return ranging from 5-10%.
  • The average preferred return was 8%.
  • Sponsors netted an acquisition fee of .5 to 2%. The average acquisition fee was 1%.
  • Sponsors netted a property management fee between 2 and 9%.

As time goes on, investors should expect Sponsor fees to go down and the number of deals to go up. However, as more capital chases more deals, this will put pressure on returns.

Therefore, it is imperative that investors only invest with the best real estate syndication platforms. The best real estate syndication platforms are Fundrise and CrowdStreet. I have reviewed over 30 of the best real estate syndication platforms and these two are the best.

CrowdStreet focuses on individual commercial real estate deals in 18-hour cities. If you have a lot of capital, you can use CrowdStreet to build your select real estate syndication portfolio.

Fundrise managed over $2.5 billion and has over 210,000 clients as of 2022.

Real Estate Syndication and Crowdfunding

Before the JOBS Act passed in 2012, you had to be rich and connected to invest in real estate syndication. Even if you were rich, you had to know someone who invested in private real estate deals. Otherwise, you were out of luck.

Today, there are several major real estate crowdfunding platforms. They carefully analyze deals before they are allowed on their platform. The REC provides the research and documentation for investors to review. In addition, they help make sure the investments move along as planned once funded.

Real estate crowdfunding is a way to raise money through the internet for a big project with the help of a ‘crowd’ of investors; if a project gets enough funding, it’s a “go”, and if not, the money is returned to investors.

(Video) What is Private Equity & Real Estate Syndication?

Crowdfunded real estate syndications are more accessible, have lower investment minimums and offer a wealth of online project information available to potential investors.

Invest On The Best Real Estate Syndication Platforms

With real estate crowdfunding, you don’t need to risk hundreds of thousands, if not millions to invest in commercial real estate around the country. Instead, you can invest as little as $1,000 and be much better diversified.

The best real estate investing platforms today are:

1)CrowdStreet, founded in 2014 and primarily for accredited investors.They are based in Portland, Oregon and are focused on investing in 18-hour cities (secondary cities) that have lower valuations, higher job growth, and higher cap rates. CrowdStreet is unique in that it allows investors to invest directly with the sponsors it screens.

2)Fundrise, founded in 2012 and available for accredited investors and non-accredited investors. I’ve worked with Fundrise since the beginning, and they’ve consistently impressed me with their innovation. They are pioneersofthe eREIT product, which allows for real estate investors to gain a diversified exposure into various regions and types of real estate.

I’ve personally invested $810,000 in real estate syndication to take advantage of lower real estate valuations in the heartland of America. Thanks to technology and the pandemic, there should be a continued spreading out of America. Cap rates are much higher too.

Big Companies Are Investing In The Heartland

Google in 1H2019 announced they will be buying $13 billion worth of heartland real estate in Nebraska, Nevada, Ohio, Texas, Oklahoma, South Carolina and Virginia. Other big companies have followed suit.

“With this new investment, Google will now have a home in 24 total states, including data centers in 13 communities. 2019 marks the second year in a row we’ll be growing faster outside of the Bay Area than in it,” writes CEO Pichai.

(Video) How Cardone Capital Works - real estate syndication

With the work from home trend here to stay, I see so much opportunity investing across America. Mortgage rates will likely stay low and corporate earnings and employment will continue to rebound post pandemic. Real estate syndication is one of the best ways to invest in real estate today.

About the Author:Sam started Financial Samurai in 2009 as a way to make sense of the financial crisis. He proceeded to spend the next 13 years after attending The College of William & Mary and UC Berkeley for b-school working at Goldman Sachs and Credit Suisse. He owns properties in San Francisco, Lake Tahoe, and Honolulu. Further, he has a total of $810,000 invested inreal estate crowdfunding.

FAQs

How do I get into syndication? ›

To be eligible for a real estate syndication, you must either be an accredited or sophisticated investor. To be classified as an accredited investor, you must have an annual income of at least $200,000, or $300,000 with a spouse, to meet the basic financial threshold for investment.

How does investing in a syndication work? ›

This strategy invests in a physical real estate asset. Investors are locked in for the agreed term, and the sponsor decides on when to sell or refinance the property. It offers access to large, lucrative investment opportunities with property management services.

How does a syndicate make money? ›

A syndicate is an investment vehicle that allows a group of individual investors pool their money and make an investment in a single company led by a lead investor.

Are real estate syndications risky? ›

One of the risks of real estate syndication investments is that you may need to exit the investment early. This could be for a variety of reasons, such as personal financial difficulties, changes in the market, or problems with the property itself.

What are the 3 phases of real estate syndication? ›

Syndicating a real estate deal is a big task, but it's made much more approachable by distilling it down to the three fundamental phases: origination, operation, and liquidation.

How much do you need to invest in real estate syndication? ›

For all the real estate syndications that we do, the minimum investment is $50,000. Which, for anyone, is a LOT of money. It could very well be an entire year's salary for some folks. It's enough to buy a car, pay for private school tuition for a year, or be a down payment on a house.

How much money can you make in real estate syndication? ›

On average here are the average returns you can expect as an investor in a real estate syndication: Average annualized return (Your yearly return): 15-20%​ Internal rate of return: 10-15% Cash on cash return (The return on your initial cash invested): 7-12%

How do I start a real estate syndication? ›

Here's a 10-step checklist on how to start a Real Estate Syndication:
  1. 1 – Select an asset class. ...
  2. 2 – Obtain training in that area. ...
  3. 3 – Brand your company. ...
  4. 4 – Pick a business model. ...
  5. 5 – Get training on syndication. ...
  6. 6 – Build your database. ...
  7. 7 – Analyze deals and make offers. ...
  8. 8 – Get a property under contract.

How much does a real estate syndication make? ›

The share of profits for real estate syndication investors is paid in proportion to the amount invested. For example, if you want to invest $100,000 in a deal and receive a 10% preferred return, you may potentially make $10,000 per year if the property generates sufficient revenue.

What is an AngelList syndicate? ›

AngelList Syndicates allow investors (Leads) the ability to invite other accredited investors (Backers) to share in their deals. Leads source and support the investment, but are able to contribute more capital to the company and generally make some percentage of the profits that their investment creates.

What is an example of a syndicate? ›

Two or more businesses normally form a syndicate when they're in the same industry. For example, two banks might create a syndicate to offer a particularly big loan to a high-risk party. Each bank would offer up a part of the loan amount. They'd then share in any risks, such as a default, and also share in any profits.

How do multifamily syndicators make money? ›

The first primary way that a multi family syndicator makes money is with an acquisition fee. The acquisition fee compensates the syndicator for their time for putting the entire deal together, from start to close. The acquisition fee charged can be anywhere from 1% to 5% of the purchase price.

What is the difference between a REIT and a syndicate? ›

A syndication is a company built by the sponsor to buy a specific property. On the other hand, a REIT is a company that invests in a variety of real estate projects. REITs almost always have multiple projects, and as an investor, you may not have visibility into exactly where your investment is going.

Can non accredited investors invest in syndications? ›

A 506(b) real estate syndication investment can have up to 35 non-accredited investors, so if you're considering a smaller 506(b) syndication investment with just a handful of investors, there should be plenty of room for you, whether you're accredited or not.

What qualifies you as an accredited investor? ›

The SEC defines an accredited investor as either: an individual with gross income exceeding $200,000 in each of the two most recent years or joint income with a spouse or partner exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.

What are the tax benefits of real estate syndication? ›

Tax Benefits of a Real Estate Syndication
  • Depreciation Deductions. Over time, the physical condition of a commercial property deteriorates due to exposure to weather and normal wear and tear. ...
  • Lower Tax Rate on Capital Gains. ...
  • Refinancing. ...
  • Mortgage Interest. ...
  • Carried Over Losses. ...
  • 1031 Exchanges.
1 Jun 2022

Can an LLC invest in real estate syndication? ›

Syndicated co-ownership is most effectively accomplished when structured as a limited liability company (LLC). The real estate broker who negotiates the acquisition of the property and organizes the group is known as the syndicator or manager.

What is the purpose of forming a syndicate? ›

A syndicate is a temporary alliance formed by professionals to handle a large transaction that would be impossible to execute individually. By forming a syndicate, members can pool their resources together, and share in both the risks and the potential for attractive returns.

What do real estate syndications look for? ›

8 Tips to Evaluate a Real Estate Syndication [Infographic]
  • A Plan of Action.
  • Proper Synchronization.
  • Track Record Matters.
  • Their Holding Duration.
  • Relations with Investors Count.
  • Asset Management Skills.
  • Analyze Their Failures.
  • Evaluate the Financial Sources.

What do with $50000? ›

Here are the best ways to invest $50k:
  1. Take Advantage of the Stock Market.
  2. Invest in Mutual Funds or ETFs.
  3. Invest in Bonds.
  4. Invest in CDs.
  5. Fill a Savings Account.
  6. Try Peer-to-Peer Lending.
  7. Start Your Own Business.
  8. Consider Real Estate Investing.
2 Jun 2022

What is the last phase of a real estate syndication? ›

With the final phase, liquidation, the goal for investor's returns is selling the property for a profit so they can move on to the next syndication deal.

How do you deal the real estate syndicate? ›

7 Steps To Syndicating Real Estate Deals
  1. Get the Deal Under Contract.
  2. Due Diligence.
  3. The Legal Stuff.
  4. Regulations.
  5. Publish the Offering Online.
  6. Raise Money.
  7. Close the Deal.
  8. Summary.

What is Syndicator? ›

Legal Definition of syndicator

: one that syndicates especially : one that organizes investment in limited partnerships by different parties.

What is a syndication partnership? ›

Syndication Partner means a third party with whom Company or its Affiliate has contracted to provide Paid Search Services.

What is a syndication fee? ›

Syndication costs are those incurred to market or sell an interest in the fund. These costs can include printing marketing materials and paying commissions to a broker who identifies investors for the fund, in addition to professional fees incurred in connection with the issuance and marketing of interests in the fund.

What does syndication mean in real estate? ›

Real estate syndication is “crowdfunding for real estate” before crowdfunding for real estate ever existed. In its most simple form, both syndication and crowdfunding involve pooling capital with other individuals for a common purpose or a common goal.

Which is not a form of syndication real estate? ›

Which is not a form of syndication? An Equity Trust.

How do real estate sponsors make money? ›

As noted above, real estate sponsors generally earn their income two ways. The first is through fees (detailed below). The second is through a return on their own investment, often referred to as a "promote".

What is multifamily real estate syndication? ›

Multifamily syndication is a real estate deal in which several investors combine their funds to buy a property. A sponsor is responsible for locating the deal, coordinating the transaction and funding, and managing the investment once the transaction has been completed.

What is a syndication deal? ›

A syndicated loan, also known as a syndicated bank facility, is financing offered by a group of lenders—referred to as a syndicate—who work together to provide funds for a single borrower. The borrower can be a corporation, a large project, or a sovereign government.

Can you make money on AngelList? ›

AngelList makes money via Syndicates, a “pop-up” venture capital fund. Also, for fund or syndicate managers, AngelList Venture is a one-stop solution for legal, regulatory, and back-office services. Lastly, AngelList Recruit is a recruitment platform for start-ups of all sizes to fill vacant positions.

How do I start an angel investing syndicate? ›

How AngelList Syndicates work
  1. Create your syndicate profile. Enter a few pieces of information to get started.
  2. Submit a deal. We'll create a private deal page for your SPV.
  3. Invite LPs. Investors close into the SPV electronically.
  4. Deploy capital. AngelList wires funds to the company.

Is AngelList free? ›

There are over 2,000,000 active candidates looking for jobs on AngelList Talent, and connecting with them by posting a job is completely free.

How many people are in a syndicate? ›

A syndicate is a temporary self-organizing group of two or more individuals, companies, corporations or entities formed to handle a large transaction and to promote a shared interest.

What is the leader of a syndicate called? ›

Boss – Also known as the capomandamento, capocrimine, rappresentante, don, or godfather, is the highest level in a crime family. Underboss – Also known as the "capo bastone" in some criminal organizations, this individual is the second-in-command.

What is a syndication model? ›

Traditionally, companies have connected with one another in simple, linear chains, running from raw-material producers to manufacturers to distributors to retailers. In syndication, the connections between companies proliferate. The network replaces the chain as the organizing model for business relationships.

What is an investment syndicator? ›

Syndicator/Sponsor

A person or company with investor relationships, who has experience structuring a deal and raising funds for it.

Is Fundrise a syndication? ›

Real estate syndications exist for both residential and commercial properties. Fundrise is known as the first company to crowdfund real estate investments successfully and they focus mainly on residential projects.

What is a real estate investment trust a syndicate? ›

A real estate investment trust, or REIT, is a company that owns, operates, or finances income-producing real estate. A real estate syndication is when a group of investors pools their money together to buy and own real estate.

What is the difference between a REIT and a real estate fund? ›

REITs vs.

A real estate investment trust (REIT) is a corporation, trust, or association that invests directly in income-producing real estate and is traded like a stock. A real estate fund is a type of mutual fund that primarily focuses on investing in securities offered by public real estate companies.

Do you have to be accredited to invest in a syndicate? ›

Yes. Investors are required to fill out a questionnaire to establish that they are accredited. Investors in companies or funds that are fundraising publicly must also verify their accreditation status according to SEC regulations.

How do I find a syndicator? ›

The best way to find pre-qualified commercial real estate syndicators is from referrals. In addition to referrals, use websites, like 506 Investment Group and FormDs, to find and review prospective syndicators. Network with other high net worth individuals in your network to learn who they are investing with.

Do angel investors need to be accredited? ›

Yes. All investors in AngelList RUVs must be accredited. For most Roll Up Vehicles, a self-attestation of accreditation status is sufficient.

How much money do you need to be a qualified investor? ›

The Securities and Exchange Commission (SEC) defines an accredited investor as someone who meets one of following three requirements: Income: Has an annual income of at least $200,000, or $300,000 if combined with a spouse's income. This level of income should be sustained from year to year.

How long does it take to become an accredited investor? ›

To gain accredited investor status, an individual must meet those thresholds for all three years either individually or with a spouse. The only exception applies if the individual was single and then married or vice versa during that three-year period.

How do I become a private investor? ›

In addition to meeting the minimum investment requirements of private equity funds, you'll also need to be an accredited investor, meaning your net worth — alone or combined with a spouse — is over $1 million or your annual income was higher than $200,000 in each of the last two years.

Are syndications a good investment? ›

Part of the reason syndications make such fantastic investments is that they offer returns consisting of both capital appreciation and passive income. Put another way, the building and land the syndication purchases will likely go up in value.

Can you 1031 into a syndication? ›

The answer is yes. The common misconception that you cannot do a 1031 exchange into syndication stems from the fact that when you invest in multifamily real estate syndication, you are purchasing shares of an entity that owns the property, not the property itself, and that this would not amount to a property swap.

Can non accredited investors invest in syndications? ›

A 506(b) real estate syndication investment can have up to 35 non-accredited investors, so if you're considering a smaller 506(b) syndication investment with just a handful of investors, there should be plenty of room for you, whether you're accredited or not.

What is the difference between a REIT and a syndicate? ›

A syndication is a company built by the sponsor to buy a specific property. On the other hand, a REIT is a company that invests in a variety of real estate projects. REITs almost always have multiple projects, and as an investor, you may not have visibility into exactly where your investment is going.

How do I start a real estate syndication? ›

Here's a 10-step checklist on how to start a Real Estate Syndication:
  1. 1 – Select an asset class. ...
  2. 2 – Obtain training in that area. ...
  3. 3 – Brand your company. ...
  4. 4 – Pick a business model. ...
  5. 5 – Get training on syndication. ...
  6. 6 – Build your database. ...
  7. 7 – Analyze deals and make offers. ...
  8. 8 – Get a property under contract.

How much money do real estate syndicators make? ›

Syndicators typically earn between 25% and 50% of distributable cash generated from operations, refinance or sale of a property, which may be paid as a direct split between the members and the syndicator (i.e., 65/35) or as a preferred return.

What are the tax benefits of real estate syndication? ›

Tax Benefits of a Real Estate Syndication
  • Depreciation Deductions. Over time, the physical condition of a commercial property deteriorates due to exposure to weather and normal wear and tear. ...
  • Lower Tax Rate on Capital Gains. ...
  • Refinancing. ...
  • Mortgage Interest. ...
  • Carried Over Losses. ...
  • 1031 Exchanges.
1 Jun 2022

What is a syndication fee? ›

Syndication costs are those incurred to market or sell an interest in the fund. These costs can include printing marketing materials and paying commissions to a broker who identifies investors for the fund, in addition to professional fees incurred in connection with the issuance and marketing of interests in the fund.

What is DST syndication? ›

A DST syndication is a private placement of interests in a Delaware statutory trust to retail investors, including 1031 exchange investors. Unlike interests in a corporation, LLC or limited partnership, interests in a DST constitute valid exchange property in a 1031 exchange transaction if certain conditions are met.

What is a syndicated offering? ›

Syndicate offerings

A syndicate offering is a means of bringing a new security to the market. The lead underwriter will put together a "syndicate" of several investment banking companies and broker-dealers to jointly underwrite and distribute the new offering to the investing public.

Where can I find a good real estate syndication deal? ›

The best way to find real estate syndication opportunities is to get out there and talk to people in the real estate syndication space. This community is quite small, and once you get connected, you'll easily be able to find sponsors and real estate syndication opportunities that fit with your investing goals.

Do you have to be accredited to invest in a syndicate? ›

Yes. Investors are required to fill out a questionnaire to establish that they are accredited. Investors in companies or funds that are fundraising publicly must also verify their accreditation status according to SEC regulations.

How do you become an accredited real estate investor? ›

In the U.S., an accredited investor is anyone who meets one of the below criteria: Individuals who have an income greater than $200,000 in each of the past two years or whose joint income with a spouse is greater than $300,000 for those years, and a reasonable expectation of the same income level in the current year.

Is Fundrise a syndication? ›

Real estate syndications exist for both residential and commercial properties. Fundrise is known as the first company to crowdfund real estate investments successfully and they focus mainly on residential projects.

What is the difference between a REIT and a real estate fund? ›

REITs vs.

A real estate investment trust (REIT) is a corporation, trust, or association that invests directly in income-producing real estate and is traded like a stock. A real estate fund is a type of mutual fund that primarily focuses on investing in securities offered by public real estate companies.

What is a real estate investment trust REIT )? A syndicate of working real estate professionals? ›

REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges, and they offer a number of benefits to investors.

Videos

1. Real Estate Syndications for Dummies
(Wander CPA)
2. How to Structure a Syndication Deal for Your Fund
(Bridger Pennington)
3. The Ultimate Guide to Real Estate Syndication Investing - Part 1 | FFWS EP209
(Integrity Holdings Group)
4. How To Structure A Real Estate Syndication | Fees
(Jesse Fragale)
5. Real Estate Syndication (How it works and acquire the Best Deals!)
(Infinity Investing)
6. What is a Real Estate Syndication? How It Works | SmartCapital TV
(SmartCapital TV)

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