An Introduction To Real Estate Syndications
Commercial real estate has always been considered an “alternative investment,” but it is fast becoming more mainstream. With housing prices skyrocketing, the increasing cost of raw components and lumber, and labor shortages, the idea of owning a piece of income property is just not in the cards anymore for many individuals. So, most investors are turning toward small multifamily or other hands-off type commercial real estate properties.
Aside from buying an entire storage facility or small multifamily complex on your own, another more affordable entry point into commercial real estate can be found through real estate investment syndications. These Syndications appeal to investors who want to own commercial property but would rather be passive in their investing approach, meaning they do not want to directly partake in property management activities.
Investors pool money to purchase an asset within a syndication. The syndication’s sponsor then directs all of the syndication’s operations, including property management. If the syndication team purchases and renovates or buys and holds the property for an extended duration of time, the sponsor team will need to make stronger efforts in property management. Real estate syndications are a fantastic strategy for individuals who want to generate passive income by investing in real estate, but don’t want to be responsible for the property.
Below, you will find everything you need to know about real estate investment syndications, their benefits, the structure, profits, returns, and more!
What Is A Real Estate Syndication?
Real estate syndications are a single purpose investment entity. A single purpose investment allows investors to invest in a specific commercial real estate property at the same time (group investing), and with the same sponsor. This way, investors circumvent the need to have the entire capital amount that would be required to invest in whole properties as an individual. Investors can purchase a portion of a single property in the form of shares.
Rules for each real estate syndication vary. But generally, the syndication offers investors the chance to invest in real estate and earn passive income when rent is paid on the properties and when the value of the real estate increases.
How To Invest In Private Equity Real Estate Syndications
Once you connect with a firm or sponsor who is offering an investment opportunity, you have a couple of choices as to how you can invest your capital. You can either send in capital you’ve saved in a highly accessible account or you can invest using your retirement savings.
Wire Liquid Funds
If you’ve saved your investment capital in a highly-accessible, highly liquid savings or other bank account, you can simply wire the entire investment amount to the sponsor, according to the instructions provided in the investment documentation. The sponsor will then buy shares in the fund on your behalf and list them in an account that is maintained at the transfer agent.
Self-Directed IRA Funds
The self-directed IRA is one of the most popular ways to access real estate investment funds. This version of an IRA isn’t much different from a Roth IRA. Self-directed IRAs are more popular because they allow investors to invest in a wider range of assets, such as real estate investment syndications.
Traditionally, brokerages do not allow investors to invest money in non-traditional investment possibilities from a Roth IRA, Traditional IRA, or 401K. As a result, investors interested in a real estate syndication strategy may need to transfer funds from their existing, likely traditional brokerage account to an IRA custodian that offers self-directed investing choices.
The main benefit of investing in a real estate syndication instead of buying and managing an investment property is it allows the investor to diversify their portfolio and still keep a hands-off approach. Investors should remember that self-directed IRAs are self-directed, which means it is 100% up to the individual to do their research and conduct thorough due diligence, find good sponsors, and explore potential opportunities and risks prior to investing in any real estate syndication or other alternative investment.
Who manages a syndication?
You gain from the sponsor’s qualifications, connections, and experience when you invest in real estate syndications. The sponsor is often a sector expert or group with extensive expertise in managing real estate investment opportunities. They’ve already performed detailed due diligence on the property, the market, and analyzed the projections extensively.
Sponsors will provide investors with thorough financial information to evaluate and evaluate prior to asking for financial commitment to the syndication. They will also be accessible and delighted to answer any questions about the syndication’s strategy or how it will be a success for investors. Keep your eyes and ears open for any calls, webinars, or presentations in regard to the syndication, as this is an excellent opportunity to get to know the team and the strategy on a deeper level.
Benefits of Investing in Real Estate Funds
Real estate syndications often provide higher than average, consistent returns, that are independent from the stock market’s fluctuations, further proving that investing in real estate is a dependable way to generate revenue and profits over time. Real estate investing allows you to diversify your portfolio instead of having all of your eggs in one basket like with buying an investment property or stock market investments alone.
Investing in real estate syndications also gives you access to the real estate market without the hassle of being a property owner or manager. You can pick and choose from different types of real estate investments without having to do all the research yourself – the syndication team sponsor will have already done that for you.
Diversification
You combine your money with other investors’ to buy an identified asset in a specific location. You can even diversify across asset types, markets, and appreciation profiles by investing in multiple syndications. Diversification lowers risk while increasing the potential for greater returns for investors.
Profitability
Most real estate investment syndications are designed to pay investors back before the syndication’s sponsor makes any money. As a result, the sponsor is under great pressure to ensure that the transaction meets its intended profit goal. The structure of investments is designed to maintain the interests of the sponsor and their investors in alignment.
Tax Efficiency
Most syndications are structured to last longer than one year, meaning they will be taxed as long-term capital gains instead of short-term. Real estate syndications also allow you to invest in real estate without worrying about depreciation.
Investors may benefit from pass-through depreciation, and the tax benefits will rest on the investor’s shoulders and be driven by their circumstances. Real estate syndications offer investors a way to defer taxes on their share of income and capital gains until the investment goes full-cycle (disposition).
Preferred Returns
When it comes to preferred return, the investor is paid first. If the investment offers a cash-on-cash preferred return, investors will receive their distributions throughout the life of the investment. This sort of return is necessary because you’ll be paid before the syndication team, which is crucial when dealing with higher-risk assets.
Will Your Next Real Estate Investment Be In A Syndication?
There are many reasons people decide to invest in real estate and an additional list of reasons they might decide to invest in a real estate syndication. Real estate investment syndications are a great way to diversify your portfolio without having to take on all the hassles of owning property directly.
Not all syndications are created equal, and you always want to do your research and due diligence before investing in a particular real estate syndication. Be sure to vet the syndication’s sponsor, management team, and explore the syndication teams track record. Evaluate the syndications’ targeted returns, then determine if you believe in or agree with their strategy and how long it will take to hit their target metrics.
As with any investment, research the opportunity thoroughly. No investment comes without risk, and no investment is foolproof. But the more you know about how the syndication is structured, the team running it, and the asset being acquired, the more likely you are to invest your hard-earned money in a profit-making machine!
