Commercial real estate deals typically require far more capital than residential investments. Accordingly, most investors don’t have the cash to cover 100 percent of a deal’s equity requirements. Instead, commercial investors often pool their funds in a real estate syndication, allowing them to pursue a deal not attainable by any single syndication member. But, for new investors, finding one of these syndications can be a challenge. As such, we’ll use this article to provide tips on how to find a real estate syndication to invest in.
Specifically, we’ll cover the following topics:
- What’s a Real Estate Syndication?
- Tips for Finding a Real Estate Syndication to Invest In
- Final Thoughts
What’s a Real Estate Syndication?
With commercial real estate, developers and investors often find great deals but lack the capital to make them happen. On the other side of the coin, many passive investors want a return on their investment but lack the time or expertise to find and execute a real estate deal.
Real estate syndication solves both problems. With the syndication model, a deal syndicator (also known as a sponsor), finds, underwrites, and executes a commercial real estate deal. As part of that underwriting process, the syndicator identifies the cash gap, that is, the difference between the cash required and the cash he plans on personally contributing.
With this cash gap and the deal’s projected returns identified, the sponsor pitches the deal to potential investors. In a commonly-used syndication model, the investors receive a minimum required return – paid out prior to the syndicator receiving a return on his equity investment. If the deal’s performance exceeds this minimum return, the syndicator receives a disproportionate amount of that upside through his catch-up return and promoted interest distributions. This set-up A) protects the investors, and B) incentivizes the syndicator.
For investors new to the syndication world, finding available deals can seem challenging, but it doesn’t have to be! In the next section, we’ll outline five tips to help investors find available real estate syndications.
Tips for Finding a Real Estate Syndication to Invest In
Tip 1: Search Online
In 2012, Congress passed the JOBS Act to, among other goals, spur growth in early-stage ventures by allowing the sale of securities online. Translation: deal sponsors can now raise funds from smaller investors online. With enough funds raised, these sponsors can then move forward with their real estate syndications.
As a result of this change, numerous syndication crowdfunding platforms have sprung up online. Crowdstreet and Fundrise are two of the more popular, but they’re certainly not the only ones. For new investors looking for a syndication, a simple Google search (e.g. “multifamily real estate syndications”) will provide you a variety of options.
Tip 2: Personal Relationships with Real Estate Developers
Unfortunately, this tip doesn’t apply to nearly as wide a range of potential investors as the online crowdfunding one. But, if you happen to know any real estate developers, they’re typically a great source for future syndication options.
Often, developers will take the up-front risks on a deal. For instance, they may purchase a parcel of land, commission the architectural and site plans, and have these plans approved by the local planning boards. Once the project becomes “shovel ready,” many developers then turn to a syndication model to raise the funds necessary to complete the project.
Tip 3: Local Real Estate Investment Groups
Many investors lack personal relationships with developers but are not comfortable with investing in a syndication via an online marketplace. For these individuals, local real estate investment groups can be a great place to find available syndications.
In most markets, networks of investors and other real estate professionals (e.g. brokers, lenders, contractors, etc) network via a local real estate investment group. Many of these groups are open to the public and meet at a designated location once a month. At a standard meeting, a keynote speaker will talk about some topic, and then the meeting will open up to networking. And, included in this networking, many investment groups will highlight information about available deals, to include commercial syndications.
Tip 4: Ask Local CPAs and Real Estate Attorneys
CPAs and real estate attorneys share a similar client type: high-net-worth individuals looking for places to invest their money. As such, many of these professionals have in-depth knowledge of the local real estate syndication scene, either through direct relationships with sponsors or related to work with their clients.
If you have funds you’d like to invest in a syndication, approaching local CPAs and real estate attorneys can be a great start. Many of these professionals will jump at the opportunity to connect potential investors with a syndication sponsor, as these introductions may result in another accounting or legal client.
Tip 5: Work with a Commercial Real Estate Broker
Connecting with a commercial real estate broker like High Peaks Capital can be one of the best ways to find a real estate syndication. These professionals spend all of their time finding and reviewing deals and building relationships with sponsors. If a syndication exists, a commercial real estate broker will be able to help you find it.
Furthermore, working with a broker provides an added level of due diligence for investors. Finding a syndication isn’t the same as finding a good syndication. And, for novice investors, analyzing a potential deal can be difficult. By partnering with a broker, you have an advocate who can help you navigate the ins and outs of investing in a syndication.
Real estate syndications offer passive investors an outstanding option for buying into large commercial deals. And, as the above article illustrates, a variety of techniques exist to help investors find open syndications. However, investors also must realize that investing in a real estate syndication – like any investment – poses risks. Working with a real estate broker can help you weigh the risks and rewards of a particular syndication.
If you’d like to discuss different real estate investing options for your unique situation, we’d love to chat! Drop us a note, and we’ll set up a meeting to talk about available passive real estate investment opportunities.