A real estate syndication is a legal partnership where investors pool their funds to purchase and manage a property they couldn’t afford individually. This structure allows for shared investment in larger properties (such as commercial buildings) with a managing partner handling day-to-day operations. Asset classes vary, as do returns. Investment in the Limited Partnership is considered to be a passive income stream.
A syndication is typically managed by a syndicator, operator, or General Partnership. They handle the acquisition, management, and sale of the property, making strategic decisions on behalf of the investors.
While other structures exist, syndications often operate as Limited Liability Companies (LLCs) or Limited Partnerships (LPs). Passive investors in the Limited Partnership usually have limited liability, meaning their risk is limited to their investment amount.
Different investment opportunities have unique structures. For example, one investment may allow for investments from non-accredited investors, while another may limit investments to accredited investors only. Guidelines differ between 506(b) and 506(c) offerings.
The determining factors of accreditation are set forth by the SEC. Accredited investors must meet certain income, net worth, and experience requirements. Individuals that are yet to qualify as an accredited investor are considered non-accredited, and can only invest in 506(b) opportunities. Criteria for accredited investors can be reviewed using this link: https://www.sec.gov/education/capitalraising/building-blocks/accredited-investor
Using a self-directed IRA (or “SDIRA”) is a great way to invest in real estate syndications. The use of a SDIRA will require a custodian. After you have chosen a custodian, due diligence is performed on individual deals and the investment is funded with the help of the custodian and syndicators. For more detailed information, follow this link: https://www.forbes.com/advisor/retirement/real-estate-ira/
Risks include market fluctuations, property value changes, and management performance. Returns are usually higher than those of traditional investments. Like all investments, higher risk usually offers higher returns, while the converse is also true. Historical data can provide return estimates, but past performance doesn’t guarantee future results. Risk for Limited Partnership (passive) investors is usually limited to the amount of the initial investment.
Syndications diversify risk by pooling funds to invest in larger (often more stable) properties. The Limited Partnership has very little personal liability, if any.
Minimum investments can vary between opportunities and particular syndicators. This allows investors to participate in larger projects with relatively smaller individual contributions. Larger deals may require larger individual minimums (but again, these can vary greatly).
The investment horizon typically ranges from 3 to 10 years. It includes acquisition, management, and the eventual sale of the property. Exit strategies vary as well, hence the large variation in hold periods.
Investments in real estate syndications are not considered liquid. While exceptions may be granted (such as the sale of your share in the deal), these are rare. Investments in this type of investment should be considered illiquid.
Returns are usually distributed either monthly, quarterly, or annually, based on the framework laid out by the General Partnership. The distribution structure should be outlined in the investment agreement.
Investors can benefit from tax deductions like depreciation, mortgage interest, and operating expenses. However, tax implications vary based on individual circumstances, so it is necessary to consult a tax advisor.
Syndications should provide regular updates on property performance, financial statements, and strategic changes. Transparency is essential to building trust between the management team and investors. Different syndicators will have different practices, but will generally be on a predetermined timeline.
Syndications invest in various property types like commercial, residential, industrial, or retail spaces. Market analysis (including location, economic trends, and property demand) guides these investment decisions. There are many different asset classes suitable for many different types of investors.
Properties are valued based on market comps, income potential, and replacement costs. Professional appraisals are typically conducted to ensure accurate valuation. Appraisals are ordered by lenders, and rely on multiple factors.
Syndications often use leverage (debt) to finance purchases. The debt structure includes loan types, interest rates, and repayment terms. Having a balanced debt structure is crucial for risk management. This is also referred to as the “capital stack.”
Capital is used for property acquisition, improvements, operational expenses, and debt servicing. The exact allocation depends on the property’s needs and the investment strategy. Use of investment capital is commonly addressed in the business plan.
Typical exit strategies include selling the property at market peak, refinancing, or holding long-term for steady cash flow. Exit strategies depend on market conditions and investment objectives. They will be determined before the investment, but are also subject to change based on the syndication’s determination of conditions (such as market timing).
Syndication agreements usually outline the resolution process for disputes, which might include mediation, arbitration, or legal proceedings. Passive investors typically have limited decision-making power, so disputes are less frequent among them. You will want to check the operating agreements presented for an investment for details.
If more capital is required, the sponsor might issue a capital call where existing investors are asked to contribute more funds. If they don’t, then external capital might be raised, which can dilute the ownership percentages of existing investors. During underwriting, keep an eye on the amount of reserves being accounted.
Performance is often measured using metrics like Internal Rate of Return (IRR), Cash on Cash return, and Equity Multiple. Investors typically receive periodic reports (quarterly or annually) detailing the property’s performance, financials, and market conditions. A member of the General Partnership is usually tasked with the role of investor relations.
Many syndicators offer reinvestment opportunities for existing investors, either in new deals or through reinvestment of distributions in the current deal.
