What Is A Real Estate Syndication?
Updated: Aug 28, 2021
Syndication is probably one of the least understood and known investing strategies in real estate
Owning real estate is achieved through many different avenues.
You can buy your own home and rent it out after a year.... You can put 20% down on a rental property and manage it yourself or through a property manager.. You can invest in land, notes, single family, multifamily... How do you know which real estate investing strategy is right for you? It really comes down to the amount of time you want to spend actively involved in managing the investment as well as how fast you need the investment to provide you with a return. If you are close to retirement and need steady cash flow in the next 5 years then you will want to make sure that your investing strategy matches your need for income in 5 years. What if you have 30 years before you need steady cash flow from your investment? Maybe starting with one single family home is a good option because you have enough time to build up a portfolio that can cash flow and pay you a return down the road. I want to introduce you to something that may make all the difference in you getting started in receiving income from your real estate investment capital... Have you ever heard of investing into a real estate syndication?? If not... pay attention because depending on your situation it might be a viable option to help you achieve financial success. According to Forbes, "A real estate syndication is the pooling of funds from many passive investors to purchase income-producing real estate. A passive investor has one role: investing cash in a solicited real estate investment for a specified return." What does this mean for you? It means that you can invest in real estate passively without all the headache of tenants, toilets, or trash. The best part is you can participate in a syndication with as little as $50,000 to $100,000!!! I know a lot of you have invested in smaller deals but are interested in getting started in larger multifamily deals. The only problem is that you don't have millions of dollars sitting around waiting to purchase your next large apartment building. That is why syndications are so cool! Because your money is being pooled together with other investors, you are able to invest in much larger income producing real estate then you would be able to on your own. This increases your upside potential many fold while minimizing your risk of investment. So how do you get paid through a syndication? Every operator/syndicator structures their opportunities differently so you will want to make sure that you clearly understand exactly what your payout structure will look like before investing. Typically you are paid a preferred rate of return on a fixed scheduled payment as well as a percentage of the equity and cashflow from the property. The average holding time frame for the property is between 3 to 7 years. Let's use an easy high level example to help you understand how this works. Example 1 (Assumption based on you investing $100,000) Opportunity: 60 Unit Apartment Building Purchase Price: $3,000,000 Capital Needed to Close: $1,200,000
Investment Minimum: $100,000 Total Number of Investors: 12 Annual Preferred Rate of Return: 6% with quarterly distributions Equity Split: 70%/30% between Investors and Managers Cashflow After Expenses: $20,000/monthly Example Payout Structure: - $1,500/quarterly based on a 6% preferred rate of return at $100,000 invested - $3,500/quarterly equity/cashflow distribution - 70% of profit split equally between all the passive investors from sale or refinance of the property So just from the preferred return and the cashflow split you are being paid $5,000 every quarter as long as your money is invested. This does not include any payout from the profit once the property is sold or refinanced. Every syndication deal is structured differently but this is a high level example of how investing in a multifamily syndication could look for you. As with everything there is risk involved. You need to make sure that the active manager/operator is vetted properly and someone that you trust to execute the business plan for the property to ensure the highest profitability possible from the investment. You will also want to consult your tax professional to understand the tax implications associated with participating in a syndication Depending on the type of property that you buy, the returns could be delayed a year or two if there is a large amount of rehab that needs to happen on the property to bring it up to market standard. The entire job of the management and operations team is to increase income and decrease expenses in a timely manner to produce the highest net income on the property possible which in turn provides higher returns to the investor. Being that your only responsibility is to bring the money to closing, investing in a real estate syndication as a passive investor is one of the closest forms of true passive income that I have seen. I hope you can see by now that after regular preferred returns, cashflow distribution, and profit on sale distributions that passively investing in a real estate syndication could be a good option for you to consider as you decide where to place your next investment. Contact Us If you have further questions or interest in working with Maven Capital Group click here to find out more or talk to a member of our team.