Understanding A Real Estate Syndication & How Does It Work?

By: ROS Team

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Investing in a real estate syndication is an excellent way for investors to diversify their portfolios by investing in a relatively low-risk asset.

Simply put, a real estate syndicate is formed when a group of people pools their money to invest in real estate. The pooling of funds means that the investor only needs to put up a small percentage of the capital required for the investment but also makes it easier for them to access relatively expensive properties.

Let’s understand real estate syndication and how does it work.

What is a Real Estate Syndication?

A real estate syndicate is a group of people who invest in a property and share the risk and the profit. A syndicate can be any size and typically has a designated leader or manager to represent the group’s interests and oversee the process.

The investment starts with the person or company buying a property, and the new investors buy shares in the property, which can then be sold whenever they want to exit their investment.

It’s like an apartment building where each floor has several apartments, and all the owners are shareholders. The owners also have shared responsibility for maintenance, management, insurance, and taxes on the building.

The critical difference between this investment and others is that you don’t need to be a high-roller or have millions of dollars to get started. You can buy as little as one share for $1,000 or more with syndication.

Real Estate Syndications
Photo Credit: Elements Envato

There are Two Types of Syndicates: Those formed for investing purposes and those created for financing.

Investment Syndicates are typically composed of people who share the same investment goals and strategy, like buying a property with a long-term view or flipping properties quickly for a profit.

On the other hand, Finance Syndicates typically have people who share credit risk. This includes individuals who want to buy the property as an investment but cannot afford it independently.

How to Invest In a Real Estate Syndication?

There are many ways to invest in real estate syndication, but the most common is to invest in a fund that invests in real estate. The investor purchases shares in the property, which entitles them to a stake in the income generated by the property.

You can also invest directly into a property offered for sale as part of a syndication deal.

Another way is investing in a fund that invests exclusively in such deals.

Finally, one may invest indirectly through an investment vehicle such as an exchange-traded or mutual fund that invests in stocks related to real estate. These funds are professionally managed and diversified, which means that they will offer the best risk-adjusted returns.

Real estate investment is considered relatively low-risk as it doesn’t have high volatility like stocks. It is an excellent way for investors looking for high returns without the hassle of becoming landlords.

How Does a Real Estate Syndicate Work?

Real estate syndicates work by multiple entities pooling money to purchase a property. The group then shares the profits from selling the property and rent. The syndicator is responsible for the acquisition, management, and distribution of profits.

Typically, the syndicate members buy shares in the property, representing their ownership percentage. The stakes are purchased for a fixed price, with no limit on the number of shares sold or bought by any member.

The proportionate shareholding changes based on every member’s investment in the new acquisitions.

Real Estate Syndicate Work
Photo Credit: Elements Envato

What is a Real Estate Syndication Agreement?

Syndication agreements are legal contracts between two or more parties that are intended to share in the risks and rewards of a real estate transaction. The agreement can be used to sell the property to multiple investors and includes details about the property and the terms of the sale.

Typically a real estate syndication agreement can be written by one party on behalf of all parties, or it can be a joint effort. The contract must outline the responsibilities and obligations of each party, as well as the rights and benefits they will receive.

These agreements are often used in commercial investments, such as office buildings, hotels, and shopping centers. In a typical real estate syndication agreement, one investor will be designated as the lead investor and responsible for selecting the property to purchase and managing the investment. The other investors will contribute money for purchasing shares in the property proportional to their investment.

What are Some Real Estate Syndication Companies?

There are many different types of real estate syndication companies. One is the real estate investment trust or REIT, which is a company that owns, operates, and manages a portfolio of income-producing properties.

The second type of syndication companies are cooperatives, which-profit organizations providing affordable housing for residents.

The third type of real estate syndication company is the limited partnership. This investment vehicle offers investors limited liability protection and capital appreciation potential in exchange for their funds.

The fourth type of syndication company is the condominium association, which owns and maintains common areas within a condo complex.

The real estate syndication industry is one of the most competitive industries in the world. Many different companies and organizations provide services for realtors and homeowners.

Some of the Famous Examples of Such Companies Are:

Realty Mogul:

The world’s largest real estate crowdsourcing platform is Realty Mogul. It allows people to invest in commercial and residential properties and crowdfund real estate development projects.

In 2016, the company launched a new product called RealtyShares. The product allows investors to buy shares of properties already acquired by RealtyMogul and are being prepared for sale.

It has been backed by venture capital firms like Andreessen Horowitz and Kleiner Perkins Caufield & Byers. The company has raised $200 million from investors and currently has a valuation of $1 billion.

CrowdStreet:

It provides access to investments in the form of CrowdStreet Syndications- pools of real estate investments typically managed by an investment professional.

Investors can invest as little as $5,000 or more than $1 million through CrowdStreet.

Equity Multiple:

It is a real estate syndication platform that enables investors to purchase fractional shares in residential real estate. The company is headquartered in New York City.

The company provides an online platform where investors can invest in residential real estate equity and receive monthly distributions from the property income. Equity Multiple offers a variety of investment opportunities with different levels of risk and returns, including single-family homes and multi-unit properties.

Investors can purchase fractional shares of ownership for as little as $5,000 or $10,000 per share. Equity Multiple also offers a “Saver” plan for those who wish to invest less than $5,000 or $10,000 per share.

Cadre:

It is a real estate syndication platform that allows accredited investors to invest in commercial real estate. Cadre is an online marketplace that connects investors to the best commercial real estate deals.

They offer a wide variety of investment opportunities, including single family homes, multifamily properties, and commercial properties.

Cadre was founded by Jared Kushner and Ryan Williams in 2014. The company has raised over $250 million from prominent investors such as Goldman Sachs and Andreessen Horowitz.

Understanding Investments in a Real Estate Syndication

Real estate investments are more than just a cakewalk. You need experience along with the expertise to make a wise investment.

Real estate syndications allow you to make wise investments for good returns. We have discussed at length about syndication investments, how to make these investments, and where you can put your money. If you are interested in gaining good returns, you must choose the syndication firm wisely. Go for an established company with a good reputation and brand.

One must remember that out-of-the-ordinary, lucrative investments are often too good to be true, and you must stick to logical and reliable assets that generate regular returns.

Investments in a Real Estate Syndication
Photo Credit: Canva

FAQs: Real Estate Syndication

Are Real Estate Syndications Risky?

Real estate syndications are a low-risk, high-reward investment opportunity for investors.

However, they are not without risk. Here are the risks of a real estate syndication

  • The property doesn’t sell within the specified time frame
  • The property is sold for less than its appraised value
  • There is no equity left after all expenses are paid

 

What are the 3 Phases of Real Estate Syndication?

The three phases of real estate syndication are:

1) The syndicator will create a contract for the purchaser, who agrees to purchase a specific number of units for a particular price.

2) The syndicator will sell individual contracts to investors and distribute profits from rent.

3) The final phase is liquidation, wherein the syndicator sells the property and distributes profits to investors.

How much do Real Estate Syndicators Make?

Real estate syndicators make money by taking a percentage of the sale price as a commission or real estate syndication fees. For example, a real estate syndication may earn a 5% commission on a $500,000 sale worth $25,000 in commissions apart from the fees.

Are Syndications A Good Investment?

Real estate syndications are an excellent investment opportunity. They help diversify your investments and enable access to properties you might not be able to afford on your own.

The key is that you need to find the ideal real estate syndication to fulfill your needs. Some investors prefer large-scale and more expensive deals, while others may look for smaller returns, like an apartment’s syndication returns, to keep their capital at work.

How Much do You Need to Invest in Real Estate Syndication?

The answer to this question depends on the type of syndication. Syndicators have a specific capital required for each property, usually determined by the number of units and the property type.

For example, if an investor invests in a multi-unit residential property. In that case, they will need to have $100,000 as their minimum investment.