Real Estate Syndication: A Complete Guide

The best investments are those that limit your risks, reduce your exposure to market volatility, and lower overhead and operating costs, all while protecting your core assets, and real estate syndication offers just that!  

Managing properties and navigating legal details can sometimes be challenging. However, real estate syndications are the perfect solution. They allow investors to take a share in complex, multi-tenant property investments without having to manage the property themselves, making it easy to invest passively. 

Real estate syndications offer an opportunity for you to grow your wealth by investing in larger real estate deals along with a group of other investors. As an active investor in these syndications, you gain an opportunity to strengthen your investment portfolio while reducing your risk exposure.   

In this guide, we will discuss how real estate syndication works, what its benefits are, and how it can strengthen your portfolio. 

What is Real Estate Syndication? 

Real estate syndication is an investment strategy where a group of investors collectively park in real estate properties by pooling their resources, knowledge, and expertise.  

For example, if there is a property worth $5,000,000 but you only have  $500,000 to invest, you can still purchase the property with other investors. In this way, you can easily invest your capital in big properties and expect decent returns. Once you purchase the property, the rental income and other profits will be shared among all investors. 

Usually, there are two groups of people involved in real estate syndication investing – the General Partners and the Passive Partners.  

General Partners (GPs) 

They are referred to as the sponsors (syndicators) and are responsible for all major tasks in the syndication process. Here is a list of their tasks and responsibilities: 

1. Underwriting the deals 
2. Negotiating with sellers 
3. Finding investors 
4. Educating investors  
5. Property management 
6. Transparent communication with investors  

Limited Partners (LPs) 

Limited partners (passive investors) fund their capital in real estate projects to get the perks of this syndication investment. So, being a passive investor, you just need to sit back and enjoy the cash flow. For any action required in the deal or property management, syndicators are there to invest their time and effort on behalf of LPs. 

Real Estate Syndication Structures 

In a real estate syndication, passive investors are grouped into a distinct legal entity known as a “special purpose vehicle” (SPV). While several legal structures can be used, forming an LLC is the most common for real estate syndications. However, this type of organization isn’t required by the SEC. Typically, these syndications involve the following members: 

1. Real Estate Syndicators (Sponsors or General Partners): They handle the overall strategy for real estate investments and secure financing from passive investors. 
2. Passive Individual Investors: They invest capital based on their comfort level and work with general and limited partners to monitor the health of their investments. 
3. Limited Partner Investors: These investors have less liability than general partners and, in return, receive a smaller share of the cash returns. 
4. Managing Entities: They serve as intermediaries between party members and provide access to investment opportunities, asset managers, and guidance. 
5. Joint Venture Partners: These are separate entities that only have liability for their specific role within the investment partnership. 

Types of Syndications in Real Estate 

While real estate syndication agreements can differ significantly, they usually follow the same basic principles. Generally, partners in a real estate syndication either set up a limited liability company (LLC) or create a custom agreement. 

Members of the syndication pool their capital, resources, and industry connections to invest in real estate. The agreement typically includes several key elements: 

• Communication Practices: When, where, and how syndications will hold meetings to discuss their partnership and make decisions about future investments. 

• Profit-Sharing Procedures: A comprehensive outline of how profits will be distributed among syndication members. 

• Voting Rights: Clear guidelines to outline how decisions will be made on matters not specified in the syndication agreement. In most syndications, the legal entity (LLC) participates as a limited partner (LP), focusing on passive investment and typically enjoying streamlined decision-making processes with minimal voting responsibilities. 

Further, here is a list of types of real estate syndication: 

1. Commercial Real Estate Syndication 

Given the scale of commercial real estate, financing as an individual investor can be challenging. This is where syndications prove invaluable, allowing multiple investors to access new market opportunities together. 

The Securities Act of 1933 has played a crucial role in restoring investor trust by enhancing transparency. Companies required to register under this act must disclose information about their market position. Similarly, even though commercial real estate crowdfunding is a newer form of syndication, these companies are still obligated to share important details to build investor confidence. 

2. Equity Real Estate Syndication 

Passive investors seeking active management of their real estate investments might find it beneficial to work with a sponsor, or real estate syndicator. Accredited investors may also explore opportunities in online real estate syndications through platforms. These platforms offer a user-friendly experience with low investment minimums and a range of syndication options. They also provide proactive asset management. 

With a general partner (GP) involved in your syndication, they can access a broader range of capital sources, including preferred equity. This helps secure the necessary financing to acquire and manage the investment effectively. 

3. Real Estate Debt Syndication 

A syndicated real estate debt financing structure allows a private loan to be offered fractionally to a group of investors. This setup enables lenders to recover their capital while providing an appealing return rate to those participating in the syndicated loan. 

Real estate debt syndications are particularly useful for financing large-scale commercial real estate projects due to their leverage on debt within the capital stack. 

Benefits of Investing in Multifamily Real Estate Syndication 

Multifamily syndication offers a wide range of benefits, like reduced taxable amounts, high rental income, low-risk financing, and much more. Here are some of the key advantages of this syndication: 

1. Passive Income

Multifamily properties can serve good rental income to investors without any stress of managing the property. LPs just need to provide the capital, and there will be a regular cash flow of rental income. The additional profit (if any) also gets split among the syndicators and the investors.
 

2. Tax Benefits

Investing in multifamily syndication helps in tax saving. By showing the accelerated depreciation deductions, the investors can reduce the taxable amount and earn profit. 

3. Diversification

When you park your funds in a single type of investment, it can become risky. So, it is important to invest small amounts in different types of properties. With this strategy, investors can have long-term profits with reduced risk. 

4. Leverage

In multifamily syndication investment, leverage comes in many forms. One is leverage through lending money for purchasing the property. Also, investors are leveraging the capital of other investors as well as the skills and expertise of the GPs, resulting in better investment options. 

Disadvantages of Real Estate Syndication 

To make an informed decision about real estate syndication, it’s important to consider both its benefits and drawbacks. Its disadvantages include: 

• Sponsors can profit if partners don’t: Syndicators (sponsors) may earn fees, such as acquisition and asset management fees, even if investors don’t see returns. Effective negotiation with the sponsor can help mitigate this risk. 
• Loss of Control: Investors typically give up most control over the asset in exchange for the ability to invest passively and choose a less risky role in the syndication. 
• Limited Liquidity: Real estate syndication investments are relatively illiquid, meaning it can take time and effort to convert the investment into cash. 

While real estate syndications can reduce individual risk, they also require you to trust your investment partners and manage entities with decision-making. It’s important to carefully evaluate the sponsor and their past performance before committing to make sure they align with your investment goals. 

How does Real Estate Syndication Work? 

Real estate syndication works when a group of passive investors collectively invest in a property under the guidance of sponsors (syndicators). The working process of the syndication is explained below: 

1. Property Analysis

This syndication process begins when a sponsor finds a real estate property with good potential for cash flow. For in-depth property analysis, consider the factors such as location, demand in the market, basic expenses, and cash flow potential. 

2. Forming the Syndication Entity 

For initiating the legal process, the syndicator creates a legal entity as an LLC (Limited Liability Company) or LP (Limited Partnership). This entity defines an ownership structure where passive partners (investors) become the members of an LLC/LP. 

3. Deal Structuring 

The syndicator presents investment terms and business plans to investors. It includes the total capital required for purchasing this real estate property, cash flow projection, and profit-sharing among general partners and passive partners.  

4. Capital Raising

The general partner (syndicators) looks for potential investors who wish to invest in this real estate property. Passive partners can be individuals, families, offices, institutions, or anyone meeting certain financial criteria set by the Securities and Exchange Commission (SEC). These investors invest their funds or capital in exchange for equity in an LLC. 

5. Acquisition and Management 

Once the required capital for syndication is raised, all funds and finances are combined to purchase the real estate property. General partners are then responsible for managing the property. Responsibilities may include tenant management, maintenance of property, rent collection, expense management, and implementing strategies to maximize cash flow. 

6. Equity and Appreciation 

As the property starts generating good rental income and appreciates over time, the equity of investors also grows. Equity buildup contributes to the return of individual investors.  

7. Exit Strategy

The exit strategy is a part of syndication’s business plan, which has details about how and when the real estate property will be sold. This usually happens when the predetermined hold period comes to an end. After this, investors have their profits which they can potentially use for other investments. 

8. Dissolution of Syndication 

When the real estate property is sold or refinanced, including the settlement of all its financial obligations, the syndication is dissolved. LLC is then terminated, and investors receive their profit share along with the return on capital, finally completing the investment cycle. 

The real estate syndicators lead this investment process by investing their time and expertise, whereas passive investors only provide capital for investment. 

Important Factors to Consider During Multifamily Syndication 

In a multifamily syndication structure, investors completely rely on sponsors for the deal. So, it becomes important for investors to consider the following before finalizing the deal: 

1. The syndicator: 

Choosing the right and trustworthy syndicator is important for any multifamily syndication deal. For this, it is best to check the syndicator’s past performance, transparency in communication, and interest in the investment deal. 

2. Mitigate risks: 

To avoid risks in multifamily syndication investment, you should ideally conduct a deep market analysis to understand the market trend. Also, property evaluation and investment underwriting are important to understand before making the deal. 

3. Exit strategy: 

The hold strategy and refinancing come under the exit plan. It is important to know whether the syndicator is planning a long-term investment or has a strategy to sell the property after completing a successful investment cycle. 

Beach Front Property Management Inc.: Your Partner in Real Estate Syndication Investment 

Expert property managers at BFPM monitor changing market trends to offer you the best real estate properties. Our goal at BFPM is to find the property options for you that are worth investing in with maximum cash flow. You can share your requirements with our property managers and get the best investment options for your real estate property investment. Our financial advisors will analyze your priorities along with the market trends and available real estate properties. 

Once you find a good real estate property for investment, BFPMInc. will help you initiate the investment deal. Furthermore, BFPMInc. will be responsible for providing you the updates about the property details and helping you get maximum cash flow.  

You can reach us for hassle-free property management and investments. We, as your trusted property partners, are here to guide you through the whole process of real estate syndication investment.