At first, getting involved in real estate syndication might sound complicated and high-level — maybe even above the average investor’s pay grade. However, none of these assumptions are true.
Like anything else, once you understand real estate syndications and have slowly walked through the process once, your next trip down the same path will be a bit faster and easier. In fact, you may find yourself becoming a real estate investor who prefers to only participate in syndication. Ultimately, it will depend on what your goals are.
Below is a brief thumbnail sketch of real estate syndication. In coming posts, I’ll delve into the details of these points, but for now, this is a 30,000-foot view of real estate syndication.
What Is Real Estate Syndication?
Real estate syndication is simply a property deal between several investors. Hopefully, each of the investors will bring some skill, resources, and capital to the deal and help manage the property once the deal has been consummated.
Investors syndicate deals to get into properties they otherwise could not afford on their own. This may be an oversimplification, but don’t run for the hills. It actually could be easier for you than you think.
General vs. Limited Partners
Generally, there are two levels of investors: general partners and limited partners. The general partners are the syndicators who are sponsoring the project. They are finding the property, underwriting the property, raising the capital for the purchase and financing of the property, and they will manage the asset after the deal is consummated. These general partners will get a piece of the equity of the deal for their efforts, whether they put money into the deal or not.
The limited partners are those that have invested their funds into the deal with the goal of receiving dividends and a return on their investment. These limited partners take a passive role in the syndication while the general partners take an active role.
Choosing Your Role
Choosing your role in a syndication is important. Speaking with the syndicators from the outset will help guide your decision-making process. Oftentimes, it is your skillset and level of comfort that will determine if you want to be a general partner or a limited partner. For example, if you are good at underwriting, management, or finding opportunities for value-adds on a property, you might want to be a syndicator.
On the other hand, if you want to set it and forget it, you might be more comfortable with being a passive investor as a limited partner that lets the general partners do the heavy lifting while you reap the financial rewards of your investment’s return. However you choose to be involved, property syndication is the best economical way to grow your real estate portfolio quickly.
Syndication deals require an evaluation of many different aspects of deal-making like choosing the best structure (LLC or LP) and crafting the operating or partnership agreement to set the rules for the structure and its partners. These aspects also include understanding and agreeing upon the profit splits, and importantly but often not discussed, how to exit the deal once you are ready to do so.
These are all matters that you should explore with your lawyer, CPA, real estate mentor, or other trusted advisor. To learn more about syndications, you can also check out Syndication School, our free how-to audio course, here.