You probably know that one of the greatest wealth-builders in history has always been investment in real estate. And, it is worth noting that real estate is a lot more than merely a fallback investment during a bear market. Also, note that unlike the typical “paper” investments of the bond and stock markets in the US, meticulously selected income properties tend to have real long-term value that is secured by tangible assets.
As a real estate investor, you need to have access to readily available funds to capitalize on the several opportunities that are present in today’s real estate market. And one of the best ways to do this is by purchasing properties through real estate syndication.
Note that real estate syndication entails bringing together a group of investors in co-ownership in order to fund the purchase, operation, and eventual resale of income-producing properties. In most cases, syndicated co-ownership is most successfully accomplished when you structure it as a limited liability company (LLC). So, we can say that real estate syndication simply involves the pooling of funds from many investors and then channeling these funds into real estate projects.
There is a partnership between a real estate company and investors, and this partnership is designed to be a win-win situation for everyone involved. Did you know that real estate companies seeking to syndicate real estate deals focus on purchasing the best investment opportunities? These companies also have well-established teams in order to operate and maintain these properties.
If you are an investor, you will have to provide equity to purchase properties without doing the legwork of property acquisition and management. You can benefit from syndication by earning a handsome return on your investment passively while retaining the many benefits of real estate ownership. Isn’t that great!
The money you invest can be used to purchase a property in its entirety. On the other hand, these funds can also be used as an equity contribution to your real estate project in addition to a traditional commercial mortgage, which can fund most of the project’s costs.
Note that the real estate broker who helps negotiate the acquisition of properties and also organizes the group is called the syndicator or manager. Also, keep in mind that the real estate broker renders property management services, such as maintenance, during the group’s ownership of these properties, and also handles the resale of these properties.
While you may know that there are many types of real estate syndications, note that the two most common types are the blind pool and specific offering. The first common type of real estate syndication is called the blind pool. And in a blind pool, a sponsor usually presents a comprehensive business plan to investors and explains the way she or he will acquire and operate these properties. It is worth noting that the sponsor doesn’t identify the specific investment properties.
So, you can imagine that investors have to make their investment decision mainly on the business plan as well as the track record of the sponsor. As a result, to run a blind pool, sponsors need to have a strong background as well as proof of performance. Otherwise, they will find it hard to raise capital.
On the other hand, in a specific offering, a sponsor will identify one or multiple specific assets to be purchased and then raises funds required to acquire and operate the assets. So, in this case, all investors are fully aware of the particular asset or assets that the sponsor is managing. This is a common type of real estate syndication, particularly for sponsors who are fairly new in the business.
In simple words, a syndication company is an organization that gathers or brings together real estate investors. These investors put together the financial and other resources in order to fund a large scale project. Keep in mind that there are no limitations or restrictions on the number of investors.
For example, it could be five or a hundred real estate investors. Also, it is worth mentioning that there aren’t any experience limitations. This is why it is an excellent opportunity for both veteran investors and new real estate investors.
If you work as a real estate syndicator, you will usually receive compensation for activities, such as finding the property, performing due diligence on the asset, and structuring the property deal. Keep in mind that acquisition fees may range from 1% to 5% of the total acquisition costs. On the other hand, it can also be a flat fee (i.e., $35,000).
And you can negotiate this fee with the other real estate investors that you will bring into the property deal. However, note that if your acquisition fees are exorbitant, other investors may be leery of investing with you.
This is another excellent way to earn from real estate syndication. Asset management fees, generally 1% of gross revenue, are usually paid to you as the syndicator of the real estate project. This is because it is your responsibility to manage not just the property but also the syndicate partnership.
To earn this fee, you will have to make sure that the properties are being managed and operated effectively and efficiently. Also, you will need to communicate regularly with your property manager.
For example, if the property is undergoing repairs or renovations, it is your responsibility to ensure that the renovations or repairs are completed on-time and preferably under budget. Apart from managing the investment, you’ll also have to manage the syndicate.
This duty entails that you communicate with your investors on a regular basis with respect to their investment and ensure that they get their compensation regularly.
So, the main motivation for both sponsors and real estate investors are the financial income associated with their participation in the syndicate. These parties come together in order to earn a profit.
If you are a sponsor, you will be compensated by collecting fees for the services and work you perform throughout the transaction and also earn profits on the back end. And the investors receive cash flow as well as back end profits.