What is Real Estate Syndication?
In simple terms, real estate syndication is the pooling of financial and intellectual resources for buying large real estate deals that generate economies of scale.
A real estate syndication has two main players: 1) General Partner, and 2) Limited Partners.
The main pilot of a syndication is called general partner. The general partner brings on board investors who are also called limited partners.
While the general partner is responsible for operations, preservation and growth of capital, limited partners have a strictly passive role. Limited partners are typically accredited investors.
This brings us to our first question.
Who is An Accredited Investor?
This is a question that real estate investors often ask us. An accredited investor is:
- An individual or couple with a networth of $1 million or more, excluding their primary residence or,
- Annual salary of $200,000 filing single or $300,000 filing jointly for the past two calendar years and a reasonable expectation to do so going forward.
Who Are the Players Involved in a Real Estate Syndication?
- General Partners (Deal Sponsor and Operator)
- Key Principal
- Broker
- Passive Investors (also called Limited Partners)
- Property Managers
As you can see, there are many moving parts to a syndication. Every player has a specific, defined role which helps drive project efficiencies and achieve economies of scale.
So, let’s understand the roles of each player in a real estate syndication.
The general partner can act as a deal sponsor as well as an operator. While the deal sponsor is responsible for acquisition and underwriting, the operator is the one with their boots on the ground.
When syndicating a value-add property, the operator plays a significant role in the success of the project. The property manager reports to the operator.
Sometimes, the syndication might be too large to be funded entirely by the deal sponsor. In this scenario, the deal sponsor will get one or more key principals on board. The key principal is a passive player who guarantees the loan and arranges for the necessary funds to get the project going.
Who is Real Estate Syndication For?
Now you have a basic idea how a real estate syndication works. But, how do you know if a real estate syndication is the right investment option for?
These are some of the main reasons why investors participate in a real estate syndication:
- You are a high-paid professional or high net-worth entrepreneur looking for reliable ways to generate better returns
- You are aware of the benefits of investing in real estate. But, you do not have time to actively manage a property
- You are uncomfortable with the volatile nature of the stock market
- You are paying too much in taxes
- You don’t want to put all my money in stock markets and mutual funds. You are more comfortable with a diversified portfolio.
If any of the above situations holds true for you, you should seriously consider investing in a real estate syndication.
What is Multifamily Investing?
In simple terms, multifamily investing involves buying and selling of properties that have more than two units. Multifamily units include duplexes, townhouses and condominiums. You can still get conventional financing on a property that has up to 4 units. But anything over 4 units, you will have to go for commercial financing.
The two main reasons why investors transition from single-family investing to multi-family investing are: 1) Scalability, and 2) Risk mitigation.
Managing a single multi-family property is far easier when compared to managing multiple single-family homes spread out all over the place. Further, because the revenue stream is much larger, it becomes commercially feasible to hire agencies to manage multi-family properties.
The biggest risk of investing in a single family property is that you are relying on a single tenant and a single stream of income. So, if you lose your only tenant, you will have to fork out the entire mortgage payment from your own pocket. However, in a multifamily property, multiple tenants and multiple streams of income alleviate this economic loss to a large extent.
The ticket size for multifamily properties with several hundred units can run into millions of dollars. It is common for investors to syndicate such large deals.