If you’ve already invested in a few real estate deals, you probably already know how the process works. Individual investors typically buy a home or condo and either fix it up and sell it for a profit, or they elect to rent it out for cash flow. However, while these investing methods in real estate are excellent, they limit the amount of cash flow and profit a single investor can receive. One of the most profitable ways for investors to scale their wealth to new heights is by leveraging real estate syndication. This article will show you what you need to know about real estate syndication, plus our easy step-by-step guide for how to syndicate a real estate deal (your first)!
How to Syndicate a Real Estate Deal: What Is This Concept?
In essence, the idea of “real estate syndication” is to pool resources and expertise to invest in projects that would otherwise be too expensive or difficult for one person or company alone. An individual investor could potentially purchase a smaller multifamily complex, such as a triplex or quadruplex but at some point in time, there is a max to an individual capital, and investing a large portion of your capital in a single investment property can be extremely risky. If we take a $30MM 200 unit apartment complex in a desirable market, certainly, acquiring, managing, and profiting from such a building would be way above and beyond the means of the average American.
Instead, what if one investor teamed up with 20 other investors to contribute capital to the project. After all the investments, each would own a portion of the property and be entitled to profits from the apartment building. That would be a simple example of a real estate syndication. Now, a property that would have been previously inaccessible to a single individual is within reach!
Plus, one of the benefits of the syndication model is that every investor benefits from each other’s expertise and experience. One investor may have in-depth knowledge of underwriting and asset management. Others may have strong connections to brokers, lenders, property management experts, investors, etc. Of course, this is a simple example, but it should illustrate the point. The concept of syndication is simply pooling resources and talent together to make a deal happen that would be inaccessible or present too great of a risk to syndicate members individually.
How Is This Different from Crowdfunding?
At first glance, this looks pretty similar to the concept of crowdfunding, and that’s because it is – crowdfunding is effectively one form of real estate syndication. However, there are potentially a couple of differences.
First, crowdfunding typically refers to a low-dollar investment. Some of the leading real estate crowdfunding sites, for example, let people start with an investment as low as $10. By contrast, a real estate syndicate is typically a group of investors with more significant backing. Instead of thousands of people investing $50 in a project, there might only be five investors, each putting up $100,000.
A real estate syndication is almost always a separate legal entity. The syndication itself is typically a company created for the sole purpose of entering into a transaction. There are a few benefits to this approach. Still, the main ones are asset protection and clearly defined roles and hierarchies, meaning investors will have visibility into exactly where they are investing, and most importantly, who they are investing with.
When looking at how to syndicate a real estate deal, please know that it is conceptually similar to crowdfunding; however, you will generally have more visibility into your investment.
How to Syndicate a Real Estate Deal: The Parties Involved
The General Partners also referred to as syndicators, and the Limited Partners, or passive investors, are two parties in a real estate syndication. The Limited Partners are in charge of bringing the capital for the syndication and will have no active involvement with the asset after it is closed.
The General Partners are the leading investment group that will syndicate real estate deals. They will search for and underwrite the real estate property, present it to the Limited Partners to raise capital for the transaction, operate the property, and work with investors upon closing the deal.
So, in summary, if you are looking to syndicate your real deal, you will be responsible for putting the deal together and ensuring it runs successfully for investors. Being a real estate syndicator is a time-consuming and stressful role but can be highly lucrative if done successfully. Suppose you are looking for an investment vehicle that generates more passive returns. In that case, we recommend joining a real estate syndication as a Limited Partner to earn substantial returns with little work or stress.
Let’s get into returns syndicating real estate can provide to both General and Limited Partners.
What Returns Could Syndicating Real Estate Provide?
There are typically two objectives of any real estate deal: rental income and capital appreciation. Both of those apply for real estate syndications, too. However, the structure is typically a little more formal.
A real estate syndication can be structured in a variety of ways that will impact returns for both General and Limited Partners. I highly recommend you check out our guide on real estate syndication structures that will walk you through each structure and how they impact returns- Real Estate Syndication Structures- A Simple Guide.
To give you a high-level overview, passive investors usually receive two forms of compensation: preferred return and profit split.
The preferred return is a percentage of the building’s profits that goes to the investor first before the managers, also referred to as syndicators or general partners on the syndication. For example, if the preferred return on a deal is 8% and an investor invested $1 million, they’ll get $80,000 before the syndicator(s) can take a penny of profits.
After the syndicate pays preferred returns, the rest of the profit is divided. It is common for a real estate syndication to be split 70/30, meaning 70% of profits to the deals Limited Partners (passive investors) and 30% to General Partners (syndicators).
Real estate syndicators – the people creating the deals – typically have a different compensation structure, though. As you may have guessed, it typically involves more work and potentially higher rewards since those in charge of the syndicate are the ones that put the deal together in the first place!
General Partners will receive payment in the form of a profit split, for example, 30% as shown above, along with fees charged to Limited Partners for structuring and operating the syndication.
The most common fees paid to General Partners in a real estate syndication would include:
- Acquisition Fee
- Asset Management Fee
- Refinance Fee
For more information on real estate syndication fees, check out our guide here Real Estate Syndication Fees.
Given the above, it should be relatively obvious why both Limited and General Partners love these types of real estate deals – they unlock sizeable real estate projects that would otherwise be inaccessible and have the potential to earn quite a bit!
A Word About the SEC and the Law
Before getting into the guide of how to syndicate a real estate deal, it is worth noting that – before engaging in any of these steps – please ensure you consult with a lawyer knowledgable in this space. While forming a company is within the purview of the state government, selling shares in that company falls under securities law. Plus, you’ll want to make sure you accurately define each share class so as not to cause any potential lawsuits in the future.
As such, please consult with a lawyer to ensure that you do not accidentally have issues forming the syndicate. The guide below is not legal advice!
How to Syndicate a Real Estate Deal: Step-by-Step
With all that said, here’s your step-by-step guide that will work for deals both big and small!
1. Know the Law and Build Your Team
Even though this warning came before the step-by-step guide, it’s worth repeating in the guide itself – know the law. Do the research on the relevant laws in the syndication space before releasing your investment offering to investors. Speak with a lawyer. Better yet, speak with a couple of lawyers who are knowledgeable in the areas of taxation, securities, raising money, and so forth. Forming a syndicate is not an overnight endeavor. You need to make sure you have your company, pitch, and everything else set up correctly. If you don’t, you could open yourself and your investors up to lawsuits or even criminal charges in the future. Make sure you understand the different regulation offerings most commonly used in real estate syndications 506(c) and 506(b), the regulation that is set in place will have an impact on the types of investors (accredited or sophisticated) you can pull into a deal, as well as how you can advertise to those investors. So, please, take the time to research the relevant SEC and taxation laws. In addition to your lawyer, you need to have a full team of experts around you to syndicate a real estate deal and to ensure the syndication is successful. Depending on the market you are operating in, you need to identify the property management company, the title company, the general contractor, and your mortgage broker prior to diving into a deal.
If you need recommendations, please reach out to us at team@disrutpequity.com, and we can share some reputable professionals that specialize in real estate syndications.
Once you feel confident with the team you have behind you, it’s time to find the deal.
2. Work with Brokers and Underwrite Real Estate Properties
Once you’ve started the ball rolling on forming a separate legal entity and identifying the team you will have behind you, the next step is to start working with commercial brokers to identify assets that meet your underwriting criteria. The idea at this stage is to start getting some perspective investments in mind that you can pitch to potential investors.
3. Build Your Investor Database
You’ll want to find people who share your vision and want to invest in similar properties and markets that you’ve identified in the second step.
Some people have friends, family, and business connections that are willing to invest. Other entrepreneurs have a lot of success creating custom marketing systems through online websites, advertising, telemarketing, and more. However, one of the best ways to find investors is through online networking platforms and in-person meetups, and multifamily real estate conferences.
How you get the investors you need is up to you, but please ensure that your methods don’t violate any securities laws! For more insight into building your investor database in multifamily real estate, check out our YouTube Video here.
4. Build Your Business Plan
When you have identified a property, it’s time to curate a business plan for the asset. Please watch the video below to gain insight into building your business plan for multifamily real estate properties.
5. Raise Equity
With the legal entity (or entities) having taken shape, as a real estate syndicator, it’s your job as a syndicator to raise the capital for the investment property. To do so, you must package your business plan and the investor documents, including the PPM, Company Agreement, Subscription Agreement, and Investor Questionnaire, for your investors to invest in the syndication. Upon completing the necessary paperwork, you will provide the wiring instructions to the bank account for the real estate property.
6. Buy the Property!
Of all the steps in how to syndicate a real estate deal, this one is probably the most enjoyable. Once you have identified a property, raised capital from investors to fund the transaction, have the appropriate legal structure, and have worked with your commercial mortgage broker to line up your loan, you can now buy the property!
7. Manage the Property
Once you have acquired the property (congratulations!), the next step is the day-to-day management. A good rule of thumb is to hire a third-party property management company if your property is over 100 units. As a syndicator, it is your job to ensure the property is run profitably, so that means monthly or weekly check-ins with the property management company to ensure the team is following the business plan.
Either way, there will be some level of work involved with the day-to-day operations of your newly acquired property!
8. Work with Investors
As the leader of the real estate syndicate, you will be responsible for paying out all the funds to investors and partners in the deal. Therefore, you’ll need to ensure there’s adequate money to pay all the required quarterly and annual distributions (depending on what the terms of your syndicate are). It’s also very important that you keep your investors up to date on the project and their investment performance.
Additionally, when you go to sell the asset, you’ll need to make payments according to each investor’s share class.
Ultimately, there is real day-to-day work involved in running and managing the real estate syndicate.
For more insight into what goes into handling investor relations as a real estate syndicator, check out our video below.
Wrap Up on How to Syndicate a Real Estate Deal
Ultimately, syndicating a real estate deal is a complex process that requires a variety of experts to complete; however, it can be an incredibly lucrative career choice. Put simply; you need to know the law, select your property (or properties), find investors, buy the properties, and handle the day-to-day operations of managing the syndicate until the sale. Real estate syndication provides a fantastic way to invest in real estate projects that would otherwise be inaccessible to many individual and corporate investors. The deals people can syndicate range from the small multifamily unit down the block to the most prominent properties in well-known cities. If you want to syndicate real estate deals, keep educating yourself on each facet of the process and, most importantly, build your network with other investors and syndicators so that when you find the right deal, you are fully equipped to syndicate!