Real estate syndication allows you to invest funds into a real estate property without taking full responsibility for the investment. A group of investors combine assets, including capital, expertise, and resources, to acquire an investment property. The profits are allocated based on the agreement once the property is rented, sold, or refinanced.
Real estate syndication is when multiple investors share resources to purchase an investment property. Real estate investing can be profitable but often requires sufficient cash flow, capital, and a strong understanding of the real estate market. A real estate syndication allows you to enter into a professional partnership with others to share in the risks and rewards of a real estate investment.
Investors participate in syndication deals to acquire a wide range of properties, including:
The most common use of syndication is to raise money for commercial real estate projects. Commercial projects tend to be riskier because of the higher capital requirements, making them a good option for real estate syndications.
Real estate syndication requires finding a good general partner or team that works well together and pooling funds. Many potential investors work with a sponsor team, which is a company that helps identify other potential investors interested in a syndicated real estate project.
A sponsor team may include other like-minded investors, accredited investors, real estate developers, property managers, real estate lawyers, and licensed realtors.
The best way to find assets suitable for a real estate syndication project is to work with a sponsor. These accredited investors typically have connections to unlisted properties or networks that help them find the best deals. Creating strong investor relations can also help you find future investment opportunities.
It's important to note that real estate syndications aren't the same thing as real estate investment trusts (REITs.)
While both allow investors to generate passive income, a REIT is typically on a much smaller scale. Additionally, REITs may be available to non-accredited investors. The Securities Act and 506(b) laws do allow some non-accredited investors to participate in real estate syndications, but there are limits.
A real estate syndication team often includes the following members:
A typical real estate syndication is made up of sponsors and investors. Sponsors are project organizers who typically have previous real estate experience. Investors are individuals who invest capital into a larger project. Investors may be active or passive, depending on their expertise and the agreement.
The sponsor is sometimes referred to as a General Partner (GP), and the investor is known as the Limited Partner (LP.) This refers to the payout split. Most syndication projects are set up as a straight split, which means the GP and LP share in profits via a split, which is a percentage agreed upon before investing.
The most common straight split is 80% to GPs and 20% to LPs, but a 70/30 split may also be possible.
There are also three types of real estate syndications, which are important to know before investing. The different real estate syndication types refer to how profits are earned and include the following:
In an equity syndication, investors share resources and capital to obtain partial ownership of a property. Each partner owns a percentage of equity, which is typically determined before the deal closes. Equity investors and sponsors can earn profits via appreciation once the property is sold or refinanced.
Debt syndication is combining resources to lend to other real estate investors. Property owners or land developers rely on these loans to purchase property, especially larger ones like multi-unit rentals. Debt syndication is similar to crowdfunding in that investors pool funds to help another investor acquire a profit-making project.
Hybrid syndications typically include a mix of equity and debt syndications. Some syndication projects lead to earned equity in a property, whereas others may only pay out a percentage of the borrowed funds.
Entering into a real estate syndication comes with both pros and cons. It's crucial to consider these to decide if real estate syndication deals are right for you.
Some pros of real estate syndications include:
Some of the considerations of real estate syndications include:
There is another way to use your home equity to secure funds for investment properties — cash-out refinancing. A cash-out refinance occurs when you replace your current home loan with one that has a higher balance. The difference between these two is given as cash that you can use.
For example, perhaps you have lived in your primary residence for many years, and you only owe $50,000 on the principal. With a cash-out refinance, you can replace that loan with a new one for $100,000, which gives you $50,000 in cash to work with. However, there are usually closing costs and other fees that would decrease that amount.
A debt-service coverage ratio loan is the perfect way to finance rental properties. Rather than being approved based on your income, a DSCR loan broker will evaluate the projected income of the rental property in question to determine whether the loan is approved.
Though they will also look at your cash reserves and debt-to-income ratio, a property that has a great rental income history is more likely to be approved for DSCR financing.
Other funding methods are available for your real estate investment if you are not interested in using a
HELOC on an investment property or your home. You could go with conventional financing through home loans from a bank, credit union, or private lender.
If you know other investors through personal connections, it is possible to secure financing from individuals or real estate investing groups who want a piece of your rental income.
Figuring out how to pay for your next investment property depends on your goals for the property, your current income situation, and the structure of your debt repayment plan. Whether you choose an unsecured personal loan, a home equity loan, or a HELOC, the financing method will impact your long-term financial goals.
If a real estate syndication is right for your investment goals, you can initiate the process with the following steps:
Many sponsors require investors to meet specific financial requirements. The minimum investment amount varies, depending on the sponsor and intended project. Crowdfunding offers all the benefits of syndications but with a lower investment and acquisition fee. However, with a lower investment comes a lower reward.
Additionally, the Securities and Exchange Commission (SEC) limits the investment of some real estate syndication projects to accredited investors.
Reviewing securities laws before you buy or sell securities, including in property syndication deals, is always a good idea. Investors who want to earn more through real estate syndications can do so by choosing a larger real estate syndication team.
An individual investor may need a minimum annual income and net worth to qualify for these deals. Typically, the requirements of investing in real estate syndications include at least one of the following:
Real estate syndications are available through a few different methods. You could use real estate crowdfunding to acquire your first real estate asset. Real estate crowdfunding involves buying into a real estate project rather than acquiring physical property. Depending on your professional connections, you could also create your own real estate syndication deal.
You'll also want to choose the real estate investing project type carefully. While syndication may be ideal for traditional investment opportunities, including residential rentals, it can also be used for acquiring commercial real estate.
The easiest way to invest in a real estate syndication is to work with a sponsor. This passive, hands-off approach allows you to profit from a property without investing too much time or resources.
When it comes to any real estate investment, choosing the right team is crucial. You want to select a general partner with a good track record, as your sponsor is directly responsible for choosing the property and negotiating a good deal. Of course, reviewing the contract before investing gives you a clearer idea of how much you can expect to earn.
You should also explore your financing options. Visio Lending offers many affordable, easy financing options that can help you acquire your first real estate investment.
Real estate syndications may be a good investment strategy for some investors. Syndication allows for a high-risk, high-reward investment, which may be a good addition to your real estate portfolio. Syndications can be a suitable option for a more passive investor, too, since you can rely on the expertise of others to make important real estate decisions.