Real estate syndication is a way for investors to pool their financial and intellectual resources to invest in assets and projects much larger than they manage or control on their own.
In the past, only the richest and most connected individuals could participate in real estate syndicates. After all, these syndications typically invest millions of dollars in commercial real estate across the country.
The advent of real estate crowdfunding since the passage of the JOBS Act in 2012 has accelerated access to real estate syndication by individuals.
Let’s take a closer look at the basics of real estate syndication and how it works
Table of Contents
- Real Estate Syndication Basics
- What is Real Estate Syndication Structure
- Real Estate Syndication Profits
- A Real Estate Syndication Example
- Real Estate Syndication Statistics
- Real Estate Syndication and Crowdfunding
- Invest On The Best Real Estate Syndication Platforms
- Real Estate Syndication Company
- FAQs: Frequently Asked Questions
Real Estate Syndication Basics
A real estate syndication is a transaction between a sponsor and a group of investors.
As manager and operator of the deal, the sponsor invests sweat capital. This includes property scouting and financing. Additionally, the sponsor acquires and manages the day-to-day operations of the investment property. Meanwhile, investors are providing the majority of the financial assets. Sponsors are typically responsible for investing 5% to 20% of the total required capital. Investors then invest 80-95% of the total amount.
Most importantly, the more sponsors invest in the business, the better it will be for investors. They want sponsors to have as many skins in the game as possible.
What is Real Estate Syndication Structure
Syndication is usually structured as a limited liability company or limited partnership. Sponsors participate as general partners or managers. Investors then participate as limited partners or passive members.
Additionally, the LLC Operating Agreement or LP Partnership Agreement is an important document. They determine the rights of sponsors and investors. This includes rights to dividends, voting rights, and the sponsor’s rights to property management fees.
The LLC or Limited Partnership structure is very similar to setting up any other private fund in the venture capital, private equity, and venture debt space. Such legal entities exist to protect both the Sponsor and the Limited Partner if the deal goes wrong.
Real Estate Syndication Profits
The two main ways Sponsors and Limited Partners benefit from real estate syndicates are property valuations and rental income.
Rental income from the consortium properties will be distributed by the sponsor to the investors. This is typically done on a monthly or quarterly basis according to preset conditions. Real estate values typically increase over time. This allows the investor to obtain higher rents and a greater profit when selling the property. Payment of rental income or profit depends on the maturity of the investment. Some syndications are completed within 6-12 months, while others take 7-10 years. Everyone who invests receives a portion of the profits.
Sponsors often receive an upfront profit on property procurement and acquisition at the inception of the transaction. This is the call and completion rate. The average acquisition fee is 1% (although some transactions can range from 0.5 to 2). All investors receive what is known as a “priority return” before the sponsor distributes its profits as manager and promoter. Preferred Yield is a benchmark payment that is distributed to all investors. This is typically around 5-10% of the initial annual investment.
A Real Estate Syndication Example
Real estate syndicates are structured in ways that motivate sponsors to ensure that investments work well for everyone. The more the sponsor invests in the business, the more the sponsor will work with the investor.
Let’s look at an example of a desired rate of return.
Let’s say you’re a passive investor and invest $50,000 in a business with a preferred yield of 10%. If you make enough money that the property allows withdrawals, you can take home $5,000 each year. After each investor receives a preferential rate of return, the remaining money will be distributed between the sponsor and investors based on the syndication profit-sharing structure.
If the profit split structure is 70/30 – the investor receives 70% of the net profit after receiving the preferred return and the sponsor receives a net 30% of the preferred return.
For example, if everyone received their desired return on 70/30 trade and had 1 million left, the investor would receive his 700,000 and the sponsor would receive his 300,000.
Below are examples of various real estate syndicate deals on the Fundrise platform. Fundrise is currently focused primarily on private eREITs, and diversified real estate funds. Therefore, non-accredited investors can invest in long-term diversified real estate portfolios. I believe investing in decentralized eREITs is the way forward for most investors looking to gain exposure and income 100% passively.
Real Estate Syndication Statistics
- In 2021, over 300,000 investors have joined the syndication.
- The average size of real estate listings was $3 million.
- Passive investors set aside 80-95% of the initial capital investment.
- Investors received preferential yields of 5-10%.
- The average senior yield was 8%.
- The sponsor charged an acquisition fee of 0.5-2%. The average closing fee was 1%.
- The sponsor charged a property management fee of 2-9%.
- Investors should expect sponsorship fees to decrease and deal numbers to increase over time. But with more capital chasing more deals, this puts pressure on returns.
- Therefore, it is imperative that an investor invests only in the best real estate syndicates. The best real estate syndication platforms are Fundrise and CrowdStreet.
- CrowdStreet focuses on individual commercial real estate deals in 18-hour cities. If you have sufficient capital, CrowdStreet can help you build a select real estate syndicated portfolio.
- Fundrise manages over $2.5 billion and has over 210,000 clients as of 2022.
Real Estate Syndication and Crowdfunding
Prior to the passage of the JOBS Act in 2012, investing in real estate syndicates required wealth and connections. Even if you were rich, you had to know someone who invested in a private real estate deal. Otherwise, you were out of luck.
There are currently several major real estate crowdfunding platforms. Trades are carefully analyzed before they are allowed on the platform. REC provides research and documentation for investors to refer to. In addition, it helps ensure that post-funding investments proceed as planned.
Real estate crowdfunding is a method of raising money for large-scale projects with the help of a “crowd” of investors via the internet. If the project gets enough money, it will be ‘done’, otherwise the money will be returned to the investors.
Crowdfunding real estate syndication is more accessible, has lower minimum investment requirements, and provides potential investors with a wealth of online project information.
Invest On The Best Real Estate Syndication Platforms
With real estate crowdfunding, you don’t have to risk hundreds of thousands, if not millions, to invest in commercial properties across the country. Instead, you can invest as little as $1,000 and enjoy greater diversification.
Today’s best real estate investment platforms are:
CrowdStreet was founded in 2014 and is primarily for accredited investors. Based in Portland, Oregon, they focus on investing in 18-hour cities (secondary cities) with low valuations, high job growth, and high cap rates.
Founded in 2012, Fundrise is available to accredit and non-accredited investors. They are pioneers in eREIT products that allow real estate investors to have diversified exposure to different geographies and property types.
Real Estate Syndication Company
Google in 1H2019 introduced they’ll be buying $thirteen billion really well worth of heartland actual property in Nebraska, Nevada, Ohio, Texas, Oklahoma, South Carolina, and Virginia. Other massive groups have accompanied suit.
“With this new investment, Google will now have a domestic in 24 general states, inclusive of statistics facilities in thirteen communities. 2019 marks the second one yr in a row we`ll be developing quicker outdoor of the Bay Area than in it,” writes CEO Pichai.
With the work-at-home fashion right here to live, I see a lot of possibilities for making an investment throughout America. Mortgage fees will probably live low and company income and employment will hold to rebound after publish pandemic. Real property syndication is one of the excellent methods to put money into the actual property today.
Real estate syndication has the dual role of syndicator and investor. Syndicators are tasked with acquiring properties and may also be tasked with renovating and managing properties. Investors bring more money to acquisitions but play a more passive role. Investors typically make more money in real estate syndicates, but the syndicator’s returns vary depending on their responsibilities.
Making an informed real estate investment is all about understanding the options available to you. Knowing what real estate syndication is, anyone with real estate management experience and sufficient capital can delve deeper into the world of real estate to generate passive income and diversify their portfolio.
FAQs: Frequently Asked Questions
Are real estate syndications risky?
One of the risks of investing in real estate syndication is that you may have to exit the investment early. This can be for various reasons, including Personal financial difficulties, changes in the market, or problems with the property itself.
What is the difference between a REIT and a syndicate?
Syndication is a company set up by a sponsor to purchase a specific property. REITs, on the other hand, are companies that invest in various real estate projects. REITs almost always have multiple projects, and as an investor, you may not have a clear picture of where your investment is going.
Is Fundrise syndication?
Fundrise is another leading real estate syndicate company. This company allows investors to invest in real estate.
Has anyone made money with Fundrise?
Investing in non-trading REITs carries significant risks, but may also have benefits. According to Fundrise, the average annualized return of the platform from 2017 to Q3 2021 ranged from 7.31% to 16.11%. Alternatively, you can invest in a listed REIT that trades on an exchange like a stock.
Is real estate syndication the same as crowdfunding?
A real estate syndication is a financing relationship or contract between an investor and a sponsor. Crowdfunding is a way to find investors. Investors can participate in real estate investments through fractional ownership without being involved in managing the property.