What is Syndication in Real Estate?
There are a lot of opinions on what syndication is and what it’s not. It’s an appropriate subject to be addressed regarding what syndication is and how it is accomplished.
A syndication is an act of pulling money together to purchase an immense asset that could not be done individually. In real estate, investors partner up and merge their capital, skills, and resources to buy and run a property neither could on their own. Ease in the restriction on solicitation has given a rise in crowdfunding in real estate.
Basics of Syndication.
Through syndication, investors have access to property management without hassles and top-notch deal flow. Some real estate projects run into millions, which one or two sponsors cannot pull in the funding on their own. Considering that banks cannot fund a whole project, sponsors must merge and develop the equity (the difference between bank financing and crowdfunded finance). There are two parties in syndication, namely the syndicator, also known as the sponsor, and the investor.
The Role Played by a Syndicator in syndication.
The syndicator is the perfect scout for properties across the country or state. In most cases, the syndicator scouts secure and manage the property. The sponsor might put in a little money in the investment (5-10%) or put in the effort and time. He/she receives a commission of around 1% for managing to secure a transaction, whether they put in money or not, which runs for the project’s lifecycle. The syndicator is set to receive operational fees under which property management, construction, acquisition, financing, refinancing, syndication, and disposition fees.
Based on the total profits, the sponsor stands to gain compensation that acts as an incentive to perform above original projections.
The Role of an Investor in a Syndication.
The investor puts in the money to purchase, renovate, and operate the property. They are considered passive in this venture and only compensated for taking the risk with their financing. A share of the profits and a preferred return goes into the pocket of the investor.
An investor is guaranteed a preferred return, which is a compensation from the cash flow, or once the project has considerable cash to make payment. In case the preferred return is 10% from an investment of $200,000. The investor receives $20,000 each year. This amount is not compounded but accumulated until the investor receives their initial investment in full.
Properties accumulate profits in due time, which means an investor stands to gain from participating in the transaction in terms of appreciation and profits. So long as the investment is generating enough income, an investor receives 10% from his/her initial investment. The remainder of the preferred return is split between the investors and sponsors.
Tips on Syndicating Your First Deal.
Research is an essential tool to gain knowledge in this heavily regulated market. Understanding this market’s laws and rules makes you a fortified investor with a reduced risk of running into problems down the road.
Find The Best Properties
Syndications run different kinds of properties. Identifying the best-suited property to invest in, for example, the multifamily property makes it easy to plan and execute goals set by the group.
Finding a group of investors with a similar goal and vision should be on top of your to-do list. Networking is the most suitable way to engage and share ideas with like-minded individuals in the game. Attend local meetups and join masterminds.
Call to Action
With real estate syndication, you have an opportunity to invest in deals you never would be able to take down by yourself. Not only will you get access to great deals, but this also give you the opportunity to diversify your investment portfolio outside of the markets.