What Is Real Estate Syndication?
A real estate syndication is a type of investment that involves bringing together a group of individuals, usually between 2 and 10 people, to pool their money and purchase a property.
A real estate syndication can be a fantastic way to get involved in real estate investments without being on your own.
For example, instead of purchasing a single-family property on your own, you instead pool together your money with other professionals and investors and invest in a larger asset (like an apartment building) together. The property is then owned and managed by the group, with each limited partnership member sharing in the profits (or losses) generated.
When you invest in a multifamily real estate syndication you don’t have to deal with the burden of tenants and toilets. You can also tap into real estate markets and opportunities that would otherwise be unavailable or unaffordable to an individual.
The limited partners (LPs) are the investors who provide the capital needed to purchase and revamp the property. In turn, the general partner (GP) is responsible for finding and acquiring the property, overseeing its renovation or development, property management, and executing the business plan.
In exchange for capital invested, the LP receives a percentage of ownership in the form of shares. These shares entitle the LP to a portion of the cash flow created by the property as well as a percentage of the profits when the property is sold or refinanced.
The LPs get all the upside of investing in real estate such as cash flow, equity, appreciation, and tax benefits without being a landlord.
Furthermore, syndicate investments in multifamily real estate offer the potential for high returns.
Investors in a real estate syndicate typically see annual returns of 8-12%, and sometimes even higher. Of course, as with any investment, there are risks involved and you should never invest more than you can afford to lose.
How the syndication works
A real estate syndication comes together when a general partner (GP) team (that's us!) finds a qualified commercial real estate asset and puts together an offering to potential investors.
You are a potential investor looking to get to passive income island. To get to passive income island, you need to take a flight. Your plane ticket is a $100,000 investment in a multifamily syndication. You get to the airport and board the plane. Other passengers are on the flight with you, other limited partners. The pilot and the flight attendants are the GP team. The GP team is in control of getting you to passive income island while you sit in the back, kick up your feet, and look out the window.
The minimum investment amount can vary from different syndications but it’s typically between $50,000 - $100,000. A multifamily syndication can last anywhere from a few years to over ten years. However, the average syndication has a lifespan of 3-7 years.
During that time, the asset typically goes through a specific business plan. This could involve anything from making cosmetic improvements to renovating and adding new amenities.
The goal is to increase the property’s value so that the asset sells for a large profit.
Are real estate syndications good for you?
There are a few things to consider before investing.
You need to reflect on your personal investing goals. Are you investing for cash flow, appreciation, tax advantages, or some combination?
What is your risk tolerance? If you have a very low-risk tolerance, you want to have full control over the investment, or you’re not comfortable with the idea of investing alongside other partners, a multifamily syndications might not be a good fit for you.
Do you trust the team? A real estate syndication is only as good as the people running it. You have to trust the team. If you’re thinking about investing and craving that passive role, there's work to be done upfront by you. You must research and learn about all the risks involved.
What is your timeline? Multifamily syndications are long-term investments. If you’re looking for a quick buck or fast cash, multifamily syndications are not for you. It can take years for the asset to be fully stabilized and to see the business plan through completion.
Who can invest?
The SEC is the U.S. Securities and Exchange Commission. The SEC has very strict guidelines on real estate syndications. Due to SEC regulations, many real estate syndications are open to accredited investors only.
There are a few ways to qualify as an accredited investor, but the most common ways are based on net worth or income.
Over $1 million in net worth, not counting a primary residence.
Annual income of $200,000+ per year (or $300,000+ together with your spouse), have done so for the last 2 years, and have the intention you’ll make the same or more this year.
If you do not meet either of those criteria, you may be considered a sophisticated investor (non-accredited). Non-accredited investors can still invest in a real estate syndication but must be doing so in a specific deal type (506(b)). These opportunities operate the same way as the accredited-only deals except for who can invest.
Another way to invest in a multifamily syndication is to use your self-directed retirement account. There are some strict rules on using your SDIRA so we recommend contacting your accountant to find out further details on how you can tap into it.
Projected returns and hold time
If you're still reading this, you’re probably trying to find out how much you could make if you were to invest in a multifamily syndication. The answer, as you might expect, it depends. Each syndication is structured differently, so the projected returns can vary. However, we can tell you about the types of returns you can expect.
When you invest in a real estate syndication, you can expect to receive:
Ongoing cash flow, 7-8%+ per year
Profits from the sale or refinance of the asset
Average annual return typically comes to around 14-20%
Several factors will affect your potential return, including the type of real estate being syndicated, its location of it, the business plan, the property management, the management team’s experience, and more. There are no guarantees when it comes to real estate investments, so your actual return could be higher or lower.
One of the largest benefits of investing in real estate is the tax advantages. When you invest in a multifamily syndication, you are purchasing shares of an LLC (or similar entity) that owns the asset.
An LLC (limited liability company) is a disregarded tax entity. The tax benefits of real estate ownership (depreciation and cost segregation) are passed through to you as a passive investor.
Pass-through taxation means that the income (and expenses) from the real estate investment “pass-through” to the individual investor(s), and are only taxed at the individual level.
The depreciation deduction allows you to take a tax deduction each year for the "wear and tear" on the asset. This is a non-cash deduction, which means you can deduct it even if you don’t receive any cash distributions from the investment. Every year, you will receive a schedule K-1 showing your income and losses for the syndication. In many cases, due to cost segregation and accelerated depreciation, the paper losses can be substantial.
This means that you could show a paper loss, even while you continue to collect ongoing passive income. This is a big benefit because it allows you to offset other income from your day job or other investments. Also, If you qualify for Real Estate Professional Statis (REPS), you could have a more substantial benefit to your overall tax situation.
If you were to invest in a rental property on your own, you would get to call all the shots (good or bad). When you invest in a multifamily syndication, you are putting your trust in the GP team that manages the asset on your behalf. Putting your trust in the GP team can be a great way to earn passive income but it also means that you need to vet them carefully before investing.
The GP team is responsible for managing the property, so it’s imperative they have experience and a proven track record. Their interests must be aligned with your own, they take a conservative approach, and communicate transparently with you. You also want to look at the financials carefully to make sure that the deal makes sense and that you are comfortable with the risks involved.
Of course, there are many other potential risks, but having the right team on your side will be your best protection against any surprises that come up during the life of the investment.
When done correctly, multifamily syndications can provide you with a more stable income than many other types of real estate investing, as well as some significant tax advantages to go along with it.
How to invest
The process of becoming an investor in a multifamily syndication is only a few key steps.
First, you’ll need to "sign up" with the GP you’re interested in investing with. For example, if you were interested in learning more about our company, you would schedule a call with us. Talking with the team ensures that they can get to know you and your investing goals and that you can get a chance to ask your questions before moving forward.
Choose which offering you would like to participate in.
Once you have chosen an investment, you will go through a due diligence process. This is where you will review the financials, the property, the team, and anything else that will help you make an informed decision. Due diligence is done primarily by the GP, but it is your job to ensure it all checks out.
If everything looks good, you will sign the necessary paperwork and wire your capital to escrow.
Once your funds are in escrow, you wait until the deal closes
The deal closes and you officially become a co-owner of the property alongside the general partner(s) and other limited partners.
You will begin receiving cash flow from the property’s income, which will be deposited directly into your bank account.
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