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In the past, only the wealthiest people with the most connections could participate in real estate syndications. Admittedly, these syndications would often spend millions of dollars on commercial real property sites around the nation.
After the implementation of the JOBS Act, there has been a rise in the practice of real estate crowdfunding, which has sped up the process of real estate syndication for individuals. You now have a better chance of entering the scene.
Now, let’s dive deeper into this ultimate real estate syndication guide that will benefit you further!
Real Estate Syndication’s Gist
A real estate syndication involves a group of individuals combine their resources to acquire real estate, typically a considerable property like an apartment building, that would otherwise be challenging or impossible for any one of them to achieve on their own.
Two Types of Role in a Real Estate Syndication
In real estate syndication companies, we have the sponsor who serves as the syndicator and the limited partner who are the investors. These are the two prominent roles in this process.
Aside from the two aforementioned primary roles in real estate syndication, there could also be the third party which is the joint venture partner. Read on to learn about the differences between the three!
Sponsor, aka The Syndicator
One of the essential people involved in the process is the syndicator, who is also frequently and colloquially referred to as the “sponsor.” The task of purchasing the property, making improvements, and overseeing it has been delegated to the syndicator.
These are often persons that possess professional experience inside the real estate and are well aware of what it takes to successfully manage and administer a real estate property.
The syndicator or sponsor is usually the individual that sets the real estate syndication in motion and organizes the engagement of all legal parties.
The syndicator will work as the General Partner for the contract, sometimes even utilizing their funds to invest in the project. It’s also typical for the sponsor to donate their skills, labor, and knowledge to the venture instead of investment capital.
The sponsor will always be vital to any successful real estate syndication despite the particular arrangements.
Investor/s, aka Limited Partner/s
The investor or investors are the other significant actors in a real estate syndication and play an essential role in the transaction. They are also sometimes called Limited Partners, another frequent name for them.
Investors are the ones who supply the money needed to buy a piece of property, but other than that, they play a relatively unimportant role. These investors often desire to purchase property to obtain a share of the profits.
Nevertheless, they will generally leave the day-to-day operations to the sponsor, who has gained more direct experience in the field. For this reason, investors will often pay the sponsor fees for their competence in exchange for the return on their investment.
They will be the capital source for the real estate syndication in which they participate, and they will own a portion of the real estate that is proportional to the amount of their investment and the number of possible parties.
Joint Venture Partner
When it comes to syndications real estate does operate, there is frequently the involvement of a third party referred to as a joint venture partner (JV partner) or an “equity partner.”
It is essential for openness and appropriate communication between all parties involved in any substantial real estate investment; this is especially true for any real estate syndication that includes multiple investors.
The joint venture partner is responsible for ensuring robust communication and complete transparency between the investors and the syndicator. There are situations in which the JV partner can assist the syndicator with taxes and reporting.
Legal Structure of Real Estate Syndication
A real estate syndication structure in terms of law is a limited liability company or limited partnership. The sponsor is involved in the event in the capacity of the Managing Partner. And the investors are either limited partners or members who take no active role in the business.
In addition, essential documents include the operating agreement for a limited liability company or the partnership agreement for a limited partnership. They detail the rights the investors and the sponsor have in the venture.
It incorporates the right to receive distributions, the chance to vote, as well as the right of the Sponsor to receive fees for running the investment.
The organizational form of a limited liability company (LLC) or limited partnership (LP) is comparable to those of other private funds operating in the venture capital, private equity, and venture debt markets.
Suppose the commercial deal does not go according to plan. In that case, these legal companies will step in to safeguard both of the previously mentioned parties, and they will do so by intervening in the situation.
How Does Profit Works in Real Estate Syndication?
An essential part of a real estate syndication guide is discussing how the profit works. The first thing you need to know is that the most important ways that the Sponsor and the Limited Partners make money off real estate syndication are through the value of the properties they invest in and the income they receive from renting out those properties.
The Sponsor is responsible for distributing the tenants’ monthly rent payments from syndicated real estate investments to the investors. In most cases, this takes place on a quarterly or monthly basis following the terms that have been established.
Typically, the value of a property will increase as time passes. As a consequence, investors might realize higher net rents and higher margins when the real estate is eventually put up for sale.
The settlement of rental profits or income is contingent upon the time the investment needs to mature before it can be cashed out; certain syndications are finished within six to twelve months, while others can take seven to ten years. Everyone who puts money into the venture earns a cut of the profits.
Typically, sponsors will accept an up-front profit at the beginning of the transaction in exchange for their assistance locating and purchasing the property. It is the fee for the call and the acquisition. A usual acquisition charge of one percent.
On the other hand, this figure may be anywhere from half of one percent all the way up to two percent, depending on the specifics of the transaction.
All investors will first receive what is known as a “preferred return” before the Sponsor will earn their portion of the profits for their services as manager and promoter. A benchmark payment dispersed to all investors is the preferred return. This is often between 5 and 10% of the initial money each year.
Are You Eligible to Invest in a Real Estate Syndication?
Participation in a real estate investment syndicate is typically restricted to only “accredited investors” in most circumstances.
You may be considered an accredited investor in the eyes of the Securities and Exchange Commission (SEC) if you have an annual income of at least $200,000 or a joint income of $300,000).
Alternatively, you are eligible if you have a net worth of at least $1,000,000, not counting your primary residence. Feel free to visit the website of SEC to read more information about this.
Unaccredited investors are welcome to participate in some syndication offerings, including those structured as “506(b) offerings.”
Most syndications involving multiple families are 506(b) offerings, which indicates that they are available to unaccredited investors; nevertheless, these unaccredited investors must be “sophisticated” to participate.
A sophisticated investor has amassed sufficient knowledge and experience in the art of investing in non-traditional assets. They might have experience investing in areas other than the stock market or have attended a lecture on investing.
The person can make an informed decision regarding a particular syndication offering, regardless of whether or not they have previous experience investing.
The investor already needs to have a substantial relationship with the deal’s sponsor before they may participate. This requirement is on par with the importance of the investor being wise, based on their discretion.
Although the SEC does not define what it means by “substantive relationship,” it did provide some hints in a letter that it sent to a business named “Citizen VC.”
Investment Options in Real Estate Syndication
Before finding real estate syndication companies to work with, you must know your investment options.
Syndications of real estate are more prevalent for more valued commercial real estate, including mobile home parks, multifamily, retail, office, self-storage, or light industrial assets, as opposed to single-family homes, which are more likely to be owned by a single-family.
Among these, the usually recommended investment is on multi-family. To know more about how to syndicate your first real estate deal, or learn the expected returns in syndication, feel free to supplement your learning today by reading Holdfolio’s real estate syndication guide.
Bottomline
To summarize this real estate syndication guide, a real estate syndication is when you join forces with a group of other investors to buy a piece of real estate that you otherwise wouldn’t be able to afford.
In a real estate syndicate, there are two types of participants: investors and syndicators. Syndicators are assigned with the acquisition of the property, and they may also be tasked with the responsibility of administering property or rehabilitating the property.
Investors provide a more significant financial contribution to the acquisition but do not actively participate in its completion. Investors will, on average, receive more money by participating in a real estate syndication. However, the revenues of the syndicator can fluctuate based on the obligations they take on.
To make informed investments in real estate, you must first have a solid awareness of the many open opportunities. By understanding what a real estate syndication is, anyone with prior experience in property management and sufficient funds can delve deeper into real estate in the hopes of generating passive income and diversifying their portfolio.
