Why Invest in Real Estate Syndication Deals?
Real estate syndication investing can be an excellent way to generate attractive passive income. By performing some research and due diligence before becoming a limited partner in a deal, you can locate the ideal sponsor and project for your investing plans and goals.
Top-rated real estate syndication companies offer investors the opportunity to leverage shares of large rental properties into a passive monthly income. These large properties are typically multifamily rental properties, which are frequently quite lucrative investment choices.
How Real Estate Syndication Works
In a real estate syndication investment deal, a group of investors pool their money to fund a large real estate project. The project sponsor operates the syndication and manages the investment transaction. The sponsor also schedules any necessary maintenance or repair work for the investment property and arranges the eventual property sale.
As the limited partners in the deal, the investors receive income from the rental units of the investment property. They also usually gain some financial return from the eventual sale of the property, according to the investment terms.
Accredited Investors and Unaccredited (Sophisticated) Investors
As an investor in syndication property deals, you will find that the investment opportunities that are available to you may vary according to whether or not you are accredited. As an accredited investor, you are approved by the SEC for investing in unregistered property transactions. To quality as an accredited investor, you must satisfy one or both of the following requirements:
- During both of the past two years, your annual income equaled more than $200,000 (or $300,000, including your spouse’s income). In addition, you must be reasonably assured of earning the same amount during the current year.
- Your net worth is more than one million dollars, either as an individual or jointly, including your spouse’s income. This one million dollar requirement excludes the market value of your primary residence.
More avenues for participating in REI syndication investing are open to accredited investors than those who are unaccredited (sophisticated). This is due to the fact that accredited investors are viewed as being more valuable to investment projects. When working with accredited investors, the deal sponsor has less red tape to handle than when working on a deal that involves sophisticated investors.
For some syndication investments, there may be a limit on the number of sophisticated (unaccredited) investors who can participate as limited partners. In general, unaccredited investors can expect to have fewer property syndication investing projects available to them than accredited investors for large property investments through well-established syndicates.
How to Locate Your Best Real Estate Syndication Investing Opportunities
Especially if you are new to investing in real estate with a syndicate, it can be difficult to locate the best syndication company for your investing needs. After identifying syndicates and projects that are suitable for your REI plans, you should vet them with care before you invest. You can identify good syndicates and opportunities by exploring the following venues and methods:
Online REI Platforms
As an accredited or sophisticated investor, you can find appropriate syndicates for investing via online platforms. Website platforms like FundRise, CrowdStreet and RealtyMogul are good places to start. These platforms are easy to use, and they offer an attractive selection of real estate investing options.
They also require a much lower level of investor income and funding to begin investing in syndicate projects. In some instances, you can begin with an investment of $500 to $1,000 or less.
Online Forums
If you are an accredited investor, you will most likely gain more REI syndication opportunities on online forums that supply you with good industry connections. One of the most popular forums for meeting other investors looking for syndication projects is BiggerPockets.
Networking
Whether you are an accredited or unaccredited investor, networking is a recommended method for finding syndication investment sponsors. One of the best ways to find sponsors quickly is by joining professional REI communities and organization located near you. By joining these groups of like-minded investors, you may discover attractive property investing projects that are not advertised or listed online.
Contacting Syndicates
Once you locate a high-quality, respected and profitable syndicate to work with, contact them directly. This direct contact will enable you to gain information about their potential property investing opportunities for you as a limited partner.
Analyzing Real Estate Syndication Investing Opportunities
After finding a quality real estate syndication investing opportunity, it is essential to vet this potential deal carefully. Every REI syndicate has somewhat different opportunities and procedures, and each syndicate’s value to you as an investor can vary significantly due to its terms and conditions.
Important factors to consider when analyzing investing projects offered by REI syndicates include the following:
Waterfall Structure
The “gold standard” for structures in REI syndication deals is the waterfall structure. This form of financial structure determines how profits on a real estate investment are distributed to the limited partners (passive investors). You as a passive investor will receive cash distributions in alignment with a waterfall distribution plan and schedule.
This orderly stream of payments to investors has a specified design. Limited partners (passive investors) often are issued an initial eight percent payout. Afterward, additional amounts may be split as 90-10, 80-20, 70-30 or similar payment percentages between the investment project developer and the limited partners, respectively. These initial payments are termed “preferred returns.”
Waterfall structures are typically based on the internal rate of return (IRR) metric, resulting in varied payment schedules. Profits that are divided between project developers and passive investors may change somewhat when specific IRR levels are attained. This is due to the fact that it encourages the general partner (developer or sponsor) to produce greater financial returns, rewarding them for doing so.
The passive investors are also encouraged, gaining more confidence in syndication investing projects when they realize that a certain percentage of monetary return is guaranteed for them. They are pleased to learn that they will receive the “first money out” in their syndicate investing deals.
Syndication Expenses and Fees
An investment deal’s fees and expenses may be a fixed amount, a percentage or on-demand. Before signing on with a syndication investment project, be completely clear concerning what option you are agreeing to. Otherwise, you may be charged some unanticipated fees as a passive investor.
Property Type
The type of property that a syndicate is offering as an investment opportunity is also a major consideration. Multifamily housing is viewed as a leading property type for returning reliable financial proceeds for passive income. Yet some syndicates may be focused on other types of property for investments.
Equity Split
The equity split in a syndicated property investment deal is the potential of each passive investor and the sponsor to gain a portion of the profit at the time that the investment property is sold. It is common for many syndication investment projects to end at the time of the property sale. Be aware of the terms of your investment to ensure having a complete understanding of how you may profit from the sale.
Sponsor Investment
The sponsor’s investment is an important component of any syndicated real estate investment deal. As a limited partner investor, you need to know how much initiative the sponsor has to ensure a successful investment outcome. If the sponsor has little or no capital invested in a deal, of course, they have nothing to lose according to its degree of success.
Sponsor Experience
In many syndicated investing projects, the previous experience of the sponsor has a significant influence on the financial success of the deal. It also often indicates the value of engaging in future investing opportunities with this sponsor. Before joining a syndicate as an investor, consult a portfolio of the syndicate’s profitable REI projects that were managed by this sponsor.
Concluding Thoughts
Real estate investing through a syndicate can be a wise and lucrative decision. As a limited partner investor, you can gain significant amounts of passive income. Many REI syndicates issue investment payouts to the limited partners according to a regulated waterfall structure and schedule.
This enables you to benefit from receiving passive income at given times during the lifetime of your investment. You will know the percentage of profits that each limited partner will receive for these payouts. You can also anticipate receiving additional income when the investment property is eventually sold.
Whether you are an accredited investor or an unaccredited (sophisticated) investor, you can locate plenty of high-quality investments. By performing some research and due diligence, you can determine the best syndication investment companies and opportunities to align with your investing goals and needs.
You should also consult the portfolio of each potential property deal’s sponsor to determine their experience and rates of investment success. By locating respected and successful syndicates to join as a property investor and limited partner, you can enjoy an ongoing intake of passive income. You can reap the financial benefits of becoming an informed, savvy and successful real estate syndication investor.
By staying connected with leading and active REI investors’ groups and organizations in your locale, you can gain valuable information from more experienced investors. They can offer more detailed explanations and advice concerning many different aspects of real estate investing though a syndicate. This guidance can be of great benefit as you progress along your path to higher levels of syndication REI expertise and success.