What is a Commercial Real Estate Syndication?

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Real Estate Syndications

Most people are familiar with the term “real estate“. However, many of us are not familiar with the word “syndication.” By definition, real estate syndication is the cooperation of two or more investors partnering to raise capital for commercial and residential projects. These partnerships are available to accredited investors who meet specific net worth requirements, as well as smaller investors through specific raise types. Using syndications, investors can provide funds to invest in projects and earn a percentage of the profits in return as a partial owner.

Parties Involved in a Syndication Deal

When it comes to syndications, there are multiple parties involved; the general partner (GP), “syndicator/sponsor,” limited partner (LP), lenders, key principals, contractors, legal, appraisers, etc. 

As the active party in the investment deal. Syndicators seek investment properties, find investors, capital raise, oversee property management, and distribute payout funds. 

Investors play a more passive role in this transaction, allocating funds for a share of the returns as a partial owner in the asset. Unlike publicly-driven crowdfunding projects, to get involved in syndicates, investors must meet specific financial requirements, which include:

  • Earning an annual income of at least $200,000, or $300,000 as a joint income with a spouse within the last two years.
  • An individual or married couple with a net worth of at least $1 million.
Investors who don’t meet the SEC requirements for an accredited investor, still have the ability to invest in multifamily syndications, so long as you are a sophisticated investor. This requires the investor to hold previous experience investing outside the stock market, or education in alternative investments.

Why Commercial Real Estate Syndications

Syndications carry a variety of benefits for investors and sponsors alike. For starters, an Investor’s ability to benefit from owning a piece of property without the need to directly oversee the logistics involved in managing a property is a huge benefit. 

Other benefits include: 

Diversification: Diversification of assets is an investment strategy that enables investors to spread out their investments across multiple asset classes and property types. 

Passivity: Investing in syndicates gives Investors the ability to contribute passively, earning monthly to quarterly distributions. After contributing, the investor has done their part, the long-term management operations will be handled by the syndicator. 

Tax Benefits: Investors receive tax-deferred status when investing in pooled investments. Due to the structure of Limited Partnerships and LLCs, their investments compound 100% for years with no disruption; this is only until the property is sold when investors will pay taxes on gains received from distributions.

How To Start Investing Into Real Estate Syndication Deals

Suppose you’re an investor interested in getting involved in syndication deals. In that case, the first step is to network and build relationships with other investors interested in similar property types as you. Commercial real estate investing events, Meetups, and online social communities are open sources to gather more information into the syndication process and open doors for obtaining your first deal. 

Another critical factor to look out for is the sponsor’s credibility, as you will be working with them for a lengthy period of time. The relationship between you and your sponsor is consequential regarding the amount of money on the line. Solidify any terms of agreement before a deal is made. Connecting with a syndicator you trust allows for a string of proper communication and transparency throughout the deal. 

Lastly, keep the syndicating to the syndicator and enjoy the passive benefits as the investor. Investors are protected by law if anything goes south. Your due diligence was finding a sponsor you can trust.

How To Start As a Syndicator

Starting out into the market requires more than calling yourself a “syndicator”. It takes experience and careful examination. Partnering with a mentor grants access to their circle of investors and lenders that can share their background with you into the industry.

When getting started, you’ll also want to put together a team of experts, including syndication and real estate attorneys, lenders, brokers, and property managers. Lastly, understand the numbers. You want to understand every detail and ROI projection on the property that you are pitching; this is in the form of a private placement memorandum (PPM). A PPM outlines the investment being set up, returns, and risks. 

As a syndicator, your day-to-day flow of meetings, account management, and payment distributions can take an overwhelming toll if you lack the proper tools to manage important documents cohesively. By investing in a solid investment management platform, you’ll have the tools you need to communicate project updates with investors, oversee deal performance, payments, and legal documents in an investor portal.

InvestNext offers you one common area to manage the entire lifecycle of your real estate syndication. From capital-raising to waterfall calculations and distribution payouts. InvestNext gives you a high-quality experience while simultaneously giving your investors an institution-grade experience.

Learn more on how InvestNext can meet your syndication needs by clicking the link below:

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