Making money in real estate is, naturally, the desire of every property investor. And there are many real estate investment strategies to choose from that, if done right, can be lucrative.
A real estate syndication is one of these strategies. Before you decide to get involved, however, there are a number of questions you need to ask yourself. For one, you have to understand what you are investing in to be successful. This means having a clear understanding of what a real estate syndication is, how it works, its pros and cons, whether you should join or start one, and how to do either. Let us start with the question “What is a real estate syndication?”
What Is a Real Estate Syndication?
Some of you may not be familiar with this term and may be asking yourselves, “What is a real estate syndication?” Do not worry, I am going to explain.
A real estate syndication is quite similar to real estate partnerships. It is the pooling of funds from a number of investors to channel them into the acquisition of investment property. Real estate syndication is an effective way for real estate investors to invest in properties that could be too expensive for individual investors.
Financial resources are not all that goes into the investment property. The real estate investors that have skills to offer or experience also contribute to the syndication in an important way. After all, it can be hard for individual investors to manage such investments without efficient rental property management. This is because these real estate investments are usually large and exclusive but offer much greater returns.
How Does a Real Estate Syndication Work?
A real estate syndication is a transaction between a group of investors and a syndicator or sponsor.
The sponsor is responsible for the investment property search, obtaining the cash investment, acquisition, and management of the real estate.
Looking for investment properties for syndication? Start your search here.
On the other hand, the investors are the individuals who are responsible for most of the investment property financing. As a result, the real estate investors own a percentage of the investment property and get the benefits of ownership. The investors may be just a few or hundreds.
A real estate syndication can be structured as a corporation, limited partnership, or limited liability company.
Learn More: The Ultimate Guide to Real Estate Syndication
So you see, the answer to the question “What is a real estate syndication?” is quite simple. The harder question is whether or not you should get involved in one. For that, I can present you with the pros and cons to help you decide.
Advantages of Investing in a Real Estate Syndication
1. Diversification
Diversification is a good way to protect yourself against significant risk and financial loss. Buying multiple investment properties to diversify is easier for a real estate syndication than for an individual investor. Therefore, this strategy allows real estate investors to benefit from diversification even when they have limited funds.
2. Access to Different Real Estate Investment Opportunities
With property syndicates, investors gain access to different investment opportunities that they may not have been able to invest in alone. For example, commercial properties are some of the best investment properties. However, this asset class usually has high property prices. Since real estate syndications enable investors to pool their funds, investors can gain access to this asset class. They can do this without too much investment of their personal funds or exposing themselves to credit risk. A lot of commercial real estate out there was actually acquired using some form of a syndicated structure.
3. Ability to Be a Passive Investor
A real estate syndication structure enables the investors to have passive investments while the sponsor handles aspects of rental property management and the day-to-day duties of the project. Not every investor has the time to search for and analyze several properties to find the best investment properties. However, there are many real estate syndication companies across the United States that do this.
The sponsors in such companies are responsible for activities like doing due diligence, finding profitable investment properties, hiring the property manager, handling investor relations, etc. Once the real estate investor has provided funds, the only thing he/she has to do is cash the monthly or quarterly checks. As a matter of fact, you don’t even need to be an expert in real estate investing to start making money in this way!
Related: Get Into Real Estate with Passive Income Investments
4. Sharing Risks
Real estate is a risky business. However, investing in a real estate syndication will help you to split the real estate risks rather than carry them on your shoulders alone.
Related: 5 Risks That Come with a Rental Property and How to Mitigate Them
By now, you have probably stopped asking “What is a real estate syndication?” and are wondering where to sign up, right? But slow down! We still need to talk about some of the cons real estate investors face when they participate in a real estate syndication.
Disadvantages of Investing in a Real Estate Syndication
1. No Control Over Investment Properties
A real estate syndication might not be a suitable investment strategy for investors who would like to actively play a role in the management of the properties. They usually have limited control and have to put their trust in the sponsor to manage the investment property successfully.
2. Illiquidity
Investments in a property syndicate are illiquid and cannot be easily traded. Therefore, in the event of an emergency, cashing out on your investment quickly is nearly impossible.
Should I Join or Start a Real Estate Syndication?
You now know the answers to “What is a real estate syndication?” and “What are the advantages and disadvantages of investing in a property syndicate?” Let’s now look at how to get involved. You can choose to either join or start one.
Joining a property syndicate requires you to scout out real estate syndication websites or use your real estate network to find one. You will need to do a lot of homework prior to investing. Knowing how to evaluate a real estate syndication is important when choosing one to join. You need to check the company’s track record, profit split, asset management, investor relations, and exit strategy among other things.
If you don’t want to join an existing syndication company, you can opt to start one. You will need to research and know how to start a real estate syndication company before you begin. There are some steps that you will need to follow to start a real estate syndication:
- Pick a real estate investing niche
- Decide on an investment strategy
- Design a real estate syndication business plan
- Find real estate investors
- Find properties (Mashvisor’s investment property calculator will help you find the best investment properties in the market!)
The answer to the question “Should I join or start a real estate syndication?” will vary from one person to another. Depending on your financial background and skillset, you can choose to get involved in it as an investor or as a sponsor. When done right, it can be a win-win investment for both parties.