Takeaways:

  • Real estate syndication pairs professional sponsors with investors looking to put capital to work.
  • Multifamily syndicates allow investors to share the benefits of rental income, tax breaks, and appreciation.
  • Commercial real estate syndication typically focuses on larger assets and projects with multiple income-producing tenants.

Real estate syndication is a collective investment process that allows multiple equity partners to pool their capital on one or more properties.

Through the secure fusion of equity stakes, investors can share the benefits of passive rental income, asset appreciation, and some worthwhile tax breaks—without having to tackle landlord and management responsibilities on their own. Such partnerships are usually carried out through real estate syndicates or investment trusts, which adhere to specific rules and regulations.

Some of the biggest differences between multifamily and other types of commercial real estate syndication often boil down to building codes, net operating incomes (NOI), and various tenant protections.

Multifamily investors today face rising interest and insurance rates, persistent inflation, high construction costs, supply chain hurdles, and other economic challenges. On both a macro and micro level, these factors can erode a single investor’s buying power and access to financing.

Real estate syndications can help individual investors take on a largely passive role and yet still find risk-adjusted assets that produce stable yields. This article takes a closer look at some of the best practices when diving into real estate syndication and how individual investors can familiarize themselves with syndication strategies.

Real Estate Syndication Structure

Real estate syndication usually involves the pairing of experienced real estate professionals with passive investors interested in putting their capital to work.

But there are also some caveats. All sponsors and investors involved in a syndication deal should agree on accounting and profit distribution terms. All parties should also know the risks that come with real estate investing and the necessary frameworks to protect residential and commercial tenants as well as individual investors.

Secure real estate syndicates and related investment opportunities—including multifamily assets, manufactured housing communities, and other income-producing rental properties—are subject to federal securities laws under the SEC.

The structures of real estate syndicates can vary depending on the size of the partnership and the number of properties that the syndicate will acquire. In many cases with real estate syndicates, organizational structures are like those of REITs and crowdfunding platforms, with a few key distinctions.

Unlike with most other real estate investment platforms, syndicate partners can choose the properties they want to invest in rather than leaving this key decision up to an executive team or board of directors.

Two entity structures that are most used to form real estate syndications are limited partnerships and LLCs, which include multiple partners.

Syndicate Roles and Responsibilities

The main players in every successful real estate syndication deal are:

  • General Partners (GPs): The GPs are the sponsors or companies that bring all of the pieces of a deal together, including sourcing limited partners. The GP—also referred to as the operator, syndicator, or sponsor—takes on the most active role in these partnerships. This includes finding the best deal opportunities, raising the required capital and necessary financing, as well as overseeing due diligence and day-to-day operations and maintenance.
  • Limited Partners (LPs) and Passive Investors: The LPs are the individuals who collectively invest in a property, portfolio, or development site. The main responsibility of each LP and passive investor is to provide the capital needed to complete a deal. LPs and passive investors can be structured as sole proprietorships, LLCs, and other legal entities.
  • Managing Entities (MEs): TheMEs serve as liaisons between the many party members and can help with finding new investment opportunities and asset managers, while providing investment guidance on specific deals and properties.
  • Joint Venture (JV) Partners: With real estate syndicates that involve JV partners to help manage a property or portfolio or the investor group itself, the JV partners carry liability for their specific roles within the group.

Syndicate investors can earn monthly or quarterly distributions from their individual holdings through passive rental incomes that are divided among all shareholders.

In most cases, the syndicate investors provide the bulk of the funds, while the sponsor will hire the necessary contractors and oversee capital improvements, maintenance, and other logistics. The sponsor is tasked with fulfilling due diligence requirements on every property, negotiating with sellers and brokers to get the best price, finding the right investors, and securing the necessary financing in most cases.

The sponsor is also the designated party that oversees day-to-day operations, including property management and maintenance, as well as investor relations. The sponsor typically earns 1% to 5% of the property’s gross monthly income through asset management fees.

Commercial Real Estate Syndication

Commercial real estate syndication typically focuses on larger assets and projects with multiple income-producing tenants.

Larger commercial properties—including office and retail—contain more rental units which typically provide greater NOI stability. Of course, the commercial real estate industry is still navigating transformational changes brought on by the COVID-19 pandemic. That is especially true with office and retail properties, which have seen vacancies rise and asset values decline.

Considering these risks and the highly complex nature of keeping large commercial properties in the green, commercial real estate syndication is best suited for seasoned investors. On average, investors can earn between 7% and 10% in annual rental property income.

For the sponsors of large commercial properties, having a relatively large syndicate means less money out of each investor’s pocket.

Commercial real estate syndication companies provide a platform for investors and locate and underwrite potential deals. These companies help ensure that enough capital is raised going into a deal and that all investors receive their share of profits.

Syndication companies also provide routine financial updates and important tax information to all investors in a rental property or portfolio.

Multifamily Real Estate Syndication

Multifamily syndication typically starts with a group of investors who share similar financial planning and capital deployment goals. The investors will then team up with an experienced sponsor who can manage the finer details of acquiring or developing a property in accordance with local laws and property codes.

Multifamily syndication allows individuals to launch and expand their own rental portfolios by teaming up with like-minded investors, while having minimal involvement in day-to-day management. The sponsor takes care of the building and tenants’ needs and reports all property activity and updates to the investor group.

Who is Eligible to Invest in Real Estate Syndication?

In most cases, real estate syndication is best suited for experienced and accredited investors who understand securities regulations and have a clear track record of success.

In most cases, accredited investors in the U.S. must have reported income of more than $200,000 per year over the past two years or joint income with a spouse that exceeds $300,000 over the past two years. Accredited investors must also provide a documented projection of the same income levels in the current year to the SEC.

Non-accredited investors can also find potential opportunities with real estate syndicates, though some of these opportunities may be riskier and less regulated than others. In worst-case scenarios, unregulated syndicates can lead investors into scam territory, which Lument and all other responsible lenders are committed to identifying and flagging in advance.

Sophisticated investors will have a competitive advantage in nearly all cases, due to their institutional knowledge, experience, industry connections, wealth, and access to capital.

Pros and Cons of Real Estate Syndication

Advantages of Real Estate Syndication

Many eager real estate investors are unable to buy or build a large property by themselves. Syndicates of a few dozen investors are usually able to raise enough capital to do so. There are several advantages that individual investors can leverage after successfully joining a real estate syndication. Some of the biggest upsides include lower minimum investments, passive liquid incomes, tax benefits, property appreciation, and portfolio diversification.

While tax benefits vary, depending on location and an investor’s financial commitment, they can offer savings to all investors who own stakes in a property or portfolio. One of the most sought-after tax benefits is the accelerated depreciation deduction, which allows investors to write off a portion of their investment in a property every year.

Experienced investors can spread their capital across multiple real estate syndications, allowing them to earn greater profits and additional tax breaks through K-1 tax filings provided by the sponsor.

Another plus is the chance to earn a higher ROI from appreciation, especially in the case of a sale. With the right investments and capital improvements, the value of a property will typically increase over time.

Disadvantages of Real Estate Syndication

There are also some disadvantages that all potential syndicate investors should be mindful of, including illiquid capital and limited control when it comes to key decision-making.

Entrepreneurial investors who tend to pursue deals on their own terms with minimal paperwork may have a tougher time adjusting to the limitations and many rules tied to real estate syndications.

Another hurdle for some real estate syndications is limited access to debt financing— especially in today’s volatile market environment. Investors should talk to trusted real estate sponsors and lenders about potential disadvantages before joining a syndication deal.

What Are the Risks Associated with Real Estate Syndication?

One of the biggest risks with real estate syndication is the GP selling its stake in a property or, even worse, disappearing or suffering an unforeseen accident.

Sponsor companies with executive management teams are viewed as the safest GPs for this reason.

Having a clear idea about the associated risks and processes is essential to making the right decisions at the right time. Investors who have been in the multifamily industry for quite some time know that anything can happen.

In worst-case situations that may involve evictions, damage from natural disasters, insurance rate spikes, and other sensitive matters, investors in a syndicate will need to remain in a passive role, while communicating with the sponsor through an appropriate channel.  Other potential issues include:

  • Sponsors and other partners pulling out unexpectedly;
  • Higher vacancies when profit targets drive rents too high;
  • Difficulties with traditional financing due to lender restrictions; and/or
  • Economic and climate impacts driving up costs beyond initial projections

How to Navigate Real Estate Syndications

The first step to determining a good real estate syndication opportunity is to carefully research a potential investment, including projected NOI, local cap rates, insurance costs, and potential climate impacts.

Before investing in real estate syndications, all investors should consider the risks and rewards, as well as the money, time, and care required with every investment opportunity.

Summary

For multifamily and other CRE investors who want to leverage new opportunities without managing everything from beginning to end, syndication can offer valuable opportunities under the right circumstances.

  • Real estate syndication can allow multiple investors to share the rewards of a successful investment, while spreading out the costs and associated risks of owning and managing a property.
  • Commercial real estate syndication typically focuses on larger assets and projects with multiple income-producing tenants.
  • Syndication is best suited for experienced and accredited investors who understand securities regulations and have a clear track record of success.

Leap to Loans

In today’s highly connected and tech-enabled investment landscape, real estate syndication has become increasingly accessible through a growing number of online platforms. For this reason, it is essential that all investors and sponsors do their homework before pursuing any new syndication opportunities involving real estate.

Lument’s Leap to Loans can help multifamily borrowers tap into relevant property data and market insights to better inform potential syndication deals.

FAQs

How profitable is real estate syndication?

This depends on the size and value of each property, the sponsorship structure, and the number of investors or LPs involved in each deal. On average, syndicate investors can earn between 7% and 10% in property rental property income.

How much money do I need to invest in a real estate syndication?

Minimum investment requirements vary depending on the sponsor and deal. In most cases, individual investors and LPs will need to have $50,000 to $100,000 in liquid capital to join a real estate syndication.

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