Real estate syndications have emerged as a dynamic and growing investment strategy, opening doors for both seasoned investors and newcomers alike to collectively participate in real estate projects. In this guide, we will navigate through the fundamentals of real estate syndications, exploring what they entail, who participates, the respective roles, and the advantages and considerations tied to investing in these types of projects.

What is a Real Estate Syndication?

At its core, a real estate syndication refers to a business strategy where multiple investors pool their resources to acquire, manage, and operate a real estate investment property. For example, most people could not simply decide to finance a large apartment complex, hotel, or mobile home park all by themselves, but a syndicate or group of investors might be able to raise enough capital to do so. In practice, real estate syndication typically pairs knowledgeable real estate professionals with investors who are looking to put capital to work. The goal of a real estate syndication is to allow smaller investors to participate in large-scale real estate investments that they may not have been able to make on their own. It also provides the opportunity to spread risk and achieve economies of scale in property management and financing.

Who is Involved in a Real Estate Syndication?

There are two main parties involved in any real estate syndication – the general partners (i.e. the sponsors) and the limited partners (i.e. the investors). 

General Partners (GPs): The general partners also referred to as the sponsors are responsible for structuring and operating the real estate syndication. Primary duties of the general partner(s) would include:

• Locating the deal 
• Underwriting the deal
• Developing a business plan
• Negotiating with the seller
• Completing thorough due diligence on the property
• Arranging the financing
• Finding investors
• Raising capital for the transaction
• Working with the property management company
• Managing and coordinating any renovations on the property
• Overseeing the asset
• Handling investor relations
• Providing investor updates
• Selling or refinancing the property

As you can see, the general partners handle everything from finding the property, arranging the transaction and operating the asset upon closing. The general partner’s role is to execute the business plan and deliver strong returns to the passive investors in the real estate syndication.

Limited Partners (LPs): The limited partners are the investors who provide the capital for the project. While they maintain a more passive role, LPs gain access to potential returns without the responsibility of day-to-day project management

Prospering Together: The Advantages of Investing in a Real Estate Syndications

There is no such thing as a perfect investment, however there are some distinct advantages to real estate syndications. Below are some that I find most compelling: 

• Diversification: Real estate syndications allow for diversified investments across multiple projects, properties, and markets.
• Access to More Experienced Investors: Limited partners benefit from the expertise, knowledge, network, and experience of the sponsor team. 
• Passive Income: Investors can earn monthly or quarterly passive income distributions from their investments without the burdens of active management.
• Scaling Opportunities: Syndications grant access to larger and more complex projects that would be out of reach for most individual investors.
• Tax Benefits: By owning a piece of the real estate, tax benefits are passed down to investors through their K-1 tax filings.
• Appreciation: Like any piece of real estate, while there may be fluctuations, over time the value of the property should gradually increase, thus increasing the return on investment (ROI).
• Control: Unlike real estate investment trusts (REITs) or crowdfunding platforms, investors can choose which specific properties and sponsors they want to invest with.

No Investment is Perfect: The Challenges of Real Estate Syndications 

There are many benefits when it comes to investing in real estate syndications. However, as with any investment, nothing is risk-free. Here are a few things to consider before investing:

• The Sponsor Team: When it comes to investing in syndications, the most challenging and risky decision an investor will make is who they choose to invest with. As an investor, you must ensure that you are working with an experienced and trustworthy real estate syndicator before jumping into an investment.
• Liquidity Constraints: Real estate investments are generally illiquid. Your initial investment cannot be withdrawn and will only be returned upon the sale of the property.

As noted above, every investment has its risks. Before investing in any asset it is wise to do your due diligence to understand the specific risks involved. Ask questions, speak with other investors, and get to know the sponsor team.

Eligibility Criteria for Investing in Real Estate Syndications

Before investing in real estate syndications, there are specific eligibility requirements that investors must meet. To be eligible for a real estate syndication, you must either be an accredited or sophisticated investor. Now, let’s delve into the eligibility criteria for investing in a real estate syndication. 

Accredited Investor: An accredited investor is a person or entity who qualifies to invest in real estate syndications by satisfying one of the requirements regarding income or net worth, or who holds certain securities licenses. The current requirements to qualify an individual are an annual income of $200,000 (or $300,000 for joint income with a spouse or life partner) for the last two years with the expectation of earning the same or higher in the future; a net worth exceeding $1 million, either individually or jointly with a spouse or life partner (not including the value/equity in a primary residence); or by holding one of a specific set of securities licenses. An entity is accredited if its assets exceed $5 million or if each of its equity members qualify individually as accredited investors.

Sophisticated Investor: A sophisticated investor is an individual who might not meet the stringent income or net worth criteria of an accredited investor but can demonstrate an understanding of complex investments and their associated risks. These investors have experience in evaluating non-traditional investment opportunities and can make informed decisions based on their knowledge.

While some syndication offerings are only open to accredited investors, many also allow for a certain number of sophisticated investors. 

How to Get Started Investing in Real Estate Syndications 

So, how do you get started and start finding real estate syndication deals? Here are a couple of tips:

Networking: First of all, start networking with other investors, preferably those interested in a similar asset class as you are. Building relationships with like-minded investors can help you find recommendations for reputable real estate syndicators that are trustworthy and have a solid track record in the industry. Attending events organized on Meetup.com, interacting in Facebook groups and going to real estate conferences are great ways to meet other investors, expand your knowledge, and ultimately find your first deal.

Get Educated: Start reading books, listening to podcasts, and signing up for industry newsletters and publications. These are all great ways to expand your knowledge which will in turn help you determine if an investment opportunity is right for you, your goals, and your risk tolerance.

The Bottom Line

Real estate syndication can be an excellent investment opportunity for accredited and sophisticated investors who want to diversify their portfolio into real estate investments but don’t necessarily want the work involved with owning properties directly. As mentioned above, a real estate syndicator will do most of the heavy lifting, from finding the deal, structuring the real estate syndication and executing the business plan. .As a passive investor, your primary role is to identify the real estate syndicator(s) that you can trust to partner with. Additionally, like any other investment, real estate syndications have their pros and cons. As with any investment, it is important to understand the risks and opportunities before investing your hard-earned money.