Creating a diverse real estate portfolio means branching out and learning about different investments. After all, if your investment portfolio only has several single-family homes, you may want to consider investing in a commercial or multifamily property. However, keep in mind that managing large properties takes a lot of time and experience. As such, you might consider participating in real estate syndication. Read along as we go over all you need to know about syndication and how to profit from your investment.
Contents of This Article:
- What Is Real Estate Syndication?
- How Does It Work?
- Structuring Your Syndication Agreement
- How Can Investors Profit from Syndication?
- Pros and Cons of Real Estate Syndication
- Invest in Management for Your Rental Business
What Is Real Estate Syndication?
Real estate syndication, or property syndication, is a partnership between several investors to invest in real estate. Essentially, syndication allows investors to come together and obtain a property that they wouldn’t be able to purchase alone. Then, they work together to manage the property if it’s used as a rental.
People invest in real estate syndications for several reasons. For instance, it’s a generally safe investment that can lead to passive income and massive tax benefits. Additionally, it’s great for investors that don’t have enough capital to buy a certain type of property. Or, it’s great for those that want to acquire more properties but don’t have time to manage them all.
Real estate syndication became popular after Congress passed the JOBS Act in 2012 to open the door for more investors. That said, there are generally two types of roles in syndication–the syndicator and the investor.
The syndicator acquires the property, renovates it, and manages it. On the other hand, the investor provides the capital to obtain the property. Generally, syndicators or sponsors arrange the syndication and the involvement of legal services. Conversely, investors provide capital to earn a percentage of profits but don’t deal with day-to-day operations. Next, let’s go over their specific roles in real estate syndication.
How Does It Work?
As mentioned above, real estate syndication has two roles–a syndicator and an investor. Your investment strategy ultimately depends on your skill set, goals, and starting capital. That said, the syndicator usually has a more demanding job, while investors provide capital and then earn passive income from the property. Here are the primary responsibilities for each role.
Syndicator or Sponsor Responsibilities
- Finding suitable investment properties
- Finding investors and handling investor relations
- Asset and rental property management
- Accounting and reporting for real estate investments
Syndication Investor Responsibilities
- Provide enough capital to invest in real estate
- Participate while earning passive income
Sometimes, there’s an exit strategy while investing in syndications. For instance, if your goal is to fix and flip the property for a profit, your exit strategy may be to produce steady cash flow from tenants to pay off your investment. Once you’ve accomplished your strategy and goals, the syndication is done.
Structuring Your Syndication Agreement
Generally, syndications are structured as limited liability companies (LLCs) or limited partnerships. Then, investors are limited partners or members who work out a syndication agreement between all parties. The agreement typically outlines communication practices, voting rights, and profit distribution to ensure everyone’s on the same page.
Communication practices generally refer to an agreement between syndicators and investors. The agreement is made to ensure transparency throughout the investment and syndication process.
Furthermore, voting rights are crucial when creating a syndication agreement. These rights can ensure everyone involved gets a fair say in what to do with the property once it’s acquired. Finally, profit distribution is another important point to document how much of the profits each investor gets.
Overall, each syndication has different rules and agreements. While each may look different, the three main points mentioned above are important for any structure. After all, syndications involve legal processes and documents, so it’s crucial to come up with a thorough syndication agreement.
How Can Investors Profit from Syndication?
Profits earned from real estate syndication largely depend on your role and investment strategy. For instance, some companies split profits equally between all members, while other syndicates do not. It’s most common for investors to receive around 70% of profits and syndicators get around 30%.
That said, here are a few different ways you can increase profits with syndication.
- Cash Flow and Appreciation
- Acquisition Fees
- Asset Management Fees
Cash Flow and Appreciation
Even if you’re a syndicator and not a primary investor, you can still earn profits from rental income. However, passive investors earn higher returns. For instance, syndicators may earn around 20% to 30% of profits, while investors earn 70% to 80%. So, ultimately, it depends on your syndication structure and responsibilities.
Additionally, most properties appreciate in value over time. Then, if the property is sold, each investor gets a portion of the profits, which ideally includes appreciation.
Another way to earn profits from real estate syndication is through acquisition fees. If you’re the syndicator, you earn acquisition fees for overseeing the property transaction. Generally, the fee is around 1% to 5% of the transaction’s value, which you may be able to negotiate.
Asset Management Fees
While investing in rental properties, some syndications may opt to hire a Philadelphia property management team. However, the syndicator can take over property management duties and earn a management fee, usually around 10%. That said, syndicators can earn even higher returns for taking on a fix-and-flip project.
Pros and Cons of Real Estate Syndication
Like any investment strategy, real estate syndication has a few pros and cons to consider. As such, read along as we go over the advantages and disadvantages to help you decide if this strategy is right for you.
Advantages of Syndication
- High Return Potential- One of the main reasons investors like syndications is the high return potential. Commercial rental properties have opportunities for massive returns, which investors split amongst themselves.
- Tax Benefits- Real estate investing has several tax benefits. Tax benefits are passed down through K-1 tax filings when you invest in syndication.
- Diversification- Instead of putting all your capital into one investment, you can expand across several syndications or investment properties.
Disadvantages of Syndication
- Less Control- As a passive investor, you could have less control over the investment property. Generally, syndicators take control of operational decisions while investors earn passive income.
- Sensitive to Market Cycles- All real estate investments are susceptible to market cycles. However, you can mitigate risks with smart investment strategies.
- Lack of Liquidity- Real estate syndication is not the way to go if you’re looking for a liquid investment. Generally, your money is tied up for the length of the deal, which could be several years.
Invest in Management for Your Rental Business
Investing in real estate goes hand in hand with investing in property management, whether you’re investing in a single-family home or a real estate syndication. After all, if you want to earn passive income while investing in rentals, you’ll want to have a solid management team on your side. That’s why Bay Property Management Group offers comprehensive services to landlords across Baltimore, Philadelphia, Northern Virginia, and Washington, DC.
Whether you need assistance with tenant screening, property marketing, or rent collection, we’ve got you covered. Our team of dedicated professionals is here to help keep your properties and your tenants well-managed. So, contact BMG today if you need rental management services near you.