Growing a real estate investment business on your own is not easy. Like many other businesses, you might have to start small and slowly work your way up. The problem is that it could take years before your real estate portfolio experiences any significant growth. Fortunately, real estate investors can accelerate their progress through a concept known as real estate syndication.
What Is Real Estate Syndication?
This is the process by which real estate investors pool their expertise and capital to invest in major projects that would be too complicated or capital-intensive for an individual investor. Though real estate syndication was originally exclusive to the very wealthy in society, it is now accessible to the ordinary investor. The number of investors in a real estate syndicate could range from a few to even hundreds.
The Benefits of Real Estate Syndication
Here are some benefits of investing through a real estate syndicate:
- Economies of scale – Just like in other businesses and industries, your cost is reduced when you buy in bulk. And this is made possible through syndication. Besides a decreased cost of capital, you will also enjoy lower contracting costs, property management costs, and operational expenses.
- Diversification – Diversification is usually very difficult for an individual investor. A real estate syndicate makes it easy for investors to diversify their portfolio between different property classes and different housing markets. For example, a syndicate can invest in single family homes, condos, multifamily homes, apartments, and mixed-use properties.
- Superior expertise – One of the main advantages of investing with a real estate syndicate is the expert skills and knowledge acquired by partnering with other real estate gurus. Instead of depending on your limited knowledge, you can leverage the brilliance of an experienced team.
The Structure
Before we look at how to syndicate a real estate deal, let us consider the parties involved. Every real estate syndicate deal has two main parties; the sponsor and the investors.
The sponsor is the developer of the project at hand. Being the most important player in a syndicate, the success of real estate syndication is mainly dependent on the expertise of the sponsor. The roles of the sponsor include:
- Knowing how to find real estate deals
- Raising enough funds to facilitate buying of property
- Executing the purchase and acquisition of the investment property on behalf of the syndicate
- Handling the real estate investment management
On the other hand, the investor (also known as the ‘limited partner’) is responsible for investing cash. A syndicate can have as many investors as possible and they can contribute up to 95% of the total capital required. Unlike sponsors who are involved in the day-to-day running of the property, the role of investors is almost 100% passive.
How to Syndicate a Real Estate Deal
1. Choose a housing market
Syndicating a real estate deal begins with choosing a suitable market to invest in. You will want to find a location where investment properties for sale are affordable and where your investment will generate a good return on investment. One of the best ways of finding such locations quickly is by using Mashvisor’s real estate heatmap. Also known as the heatmap analysis tool, this real estate investment software allows you to analyze data in different neighborhoods in the real estate market. You can analyze different areas using four main filters; listing price, cash on cash return, rental income, and Airbnb occupancy rate. For example, if your budget for investment is $800,000, the real estate heatmap will help you identify the neighborhoods that fit your price range.
2. Find and analyze investment properties
After finding a good location, the next step is investment property analysis (or rental property analysis). Knowing how to analyze real estate deals is crucial for successful real estate syndication. Rental property analysis is all about analyzing properties for sale to establish their profitability based on certain calculations. Your goal should be to find cash flow properties.
Mashvisor’s investment property calculator will assist you in your analysis as it provides three main numbers; cap rate, cash on cash return, and cash flow. The calculator will also let you see the estimated occupancy rate and help you determine the optimal rental strategy for your investment property.
3. Conduct a home inspection
Before getting a deal under contract, a property inspection is a must. The inspection should focus on areas such as the home’s foundation, roofing, plumbing and electrical systems, home appliances, and heating and air conditioning. You can find a qualified and licensed home inspector from the American Society of Home Inspectors (ASHI). Alternatively, solicit recommendations from family, friends, or real estate agents.
4. Get the deal under contract
If you are satisfied after the home inspection, act fast to get the deal under contract. This means that you have a binding agreement with the seller regarding the investment property. When an income property is under contract, the seller cannot enter into a contract with any other buyer.
5. Hire an attorney experienced in real estate syndication
Don’t make the mistake of syndicating a real estate deal without the assistance of an experienced attorney. The attorney will inform you of the disclosures and paperwork required for real estate syndication. If you skip any of these, it could result in a lawsuit or worse. The Security and Exchange Commission (SEC) is a government agency mandated to protect investors from illegal or dangerous financial practices. Your attorney will ensure that you fulfill all the regulations of the SEC.
6. Find real estate investors
Knowing how to find real estate investors is another important aspect of real estate syndication. Look for investors that share your vision and that have the capacity to contribute to the projects you have in mind. You can find real estate partners by networking in your local Chamber of Commerce, fundraiser events, toastmaster groups, and even high-end gyms. Alternatively, you could look for investment clubs to join via Google, social media, or meetup.com. Finally, you could ask an experienced local real estate agent to connect you with other property investors. If you managed to find a cash flowing property in step #2, you should be able to convince real estate investors to join your syndication.
7. Close
Once you’ve raised all the funds and due diligence is done, you can then go ahead and close the deal. Your attorney will guide you on all the legalities involved in the closing.
Conclusion
Every serious real estate investor should know how to syndicate a real estate deal. If you can start a real estate syndicate, it will open up infinite possibilities for growing your real estate portfolio.
Remember, finding a cash flow property is key to syndicating a deal and you can easily find one with Mashvisor. To start your 7-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.