What Is A Real Estate Syndicate?
Interested in a property or real estate syndicate or being part of one? Here are some details on what a real estate syndication is, the pros, and the cons.
There are many buzz words and fads in the real estate investment world. Some of them like rental income everyone is familiar with. But there are some that may be more unfamiliar. And one of these is a real estate syndication. If you are new to the real estate investment world, chances are you have never even heard of a real estate syndicate. So, what is it, and should you be a part of one? Read on to find out!
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What is a Real Estate Syndication?
Millionacres described a real estate syndication as a partnership between several investors. Real estate syndications are also commonly known as property syndications. In a real estate syndication, a group of investors will get together and combine their skills, resources, and capital to purchase and manage a property they otherwise could not afford on their own. There will need to be two main parties – the syndicator (sponsor) and the investors.
If you are wanting to invest in a property that is out of your reach financially, then a real estate syndication could be your solution. They can allow you to combine your capital with other investors. You would use your combined capital to purchase, renovate and maintain the property, and share in any income generated from it. The return from a syndication could be through rental income, or from profits made when selling.
What are the Pros and Cons of Syndication?
Like anything in the real estate investment world, nothing is without risk. And real estate syndication is the same. It has its pros and cons, and these will be highlighted below. Source: Bigger Pockets
- Ability to purchase property that would otherwise be too expensive for an individual to own.
- Considered to be a passive investment. The sponsor does all the work, and the investors provide capital and earn an income from it.
- Tax benefits. Main tax benefits relate to depreciation and cost segregation. There are also no taxes on return of capital when refinancing.
- Calculated risk. The sponsor will generally be experienced in real estate syndicates and the market and will be able to make a better risk assessment than you as an individual would likely be able to. Risk is also spread out between all the members, so any negative consequences are not as damaging to each individual.
- Loss of control. Because you are not the sole owner of the property, you lose an element of control. Decisions need to be mutual, and you will be legally bound to the property until the property is sold and profits have been liquidated. There is no changing of your mind and simply leaving the syndicate once the property has been purchased.
- Sharing of profits. You get to share the costs with everyone in the syndication, but that also means that you must share any profits.
At the end of the day, how successful a real estate syndicate is will depend on the syndicate members themselves. You are entering a relationship with them, often long term. So, you need to ensure that there is an element of trust. That way the main benefit of the syndication which is shared cost and being able to afford a better quality property can be properly experienced.
What is the Difference Between a Real Estate Syndication and a Real Estate Investment Trust?
You may be thinking that the description of a real estate syndication sounds a lot like that of a real estate investment trust (REIT). And while they do have their similarities, they are completely different. IRGlobal explain that the most fundamental difference in the size and scope. REITs are much larger and are generally used to manage longer term holdings.
Syndicates are much less formal with fewer restrictions and guidelines. They are also easier to get into and much more straightforward to start up. There is also less control with a REIT – investors usually do not have a say in what they are investing in.
How to Participate in a Real Estate Syndicate
If you have decided that a real estate syndication sounds like something you would want to be a part of, then you will need to know how to participate in one. There are two main options – join an existing syndicate or start a new one yourself. Either way the first step is to source other investors that will make up the syndication. Mashvisor goes into more detail with the main steps involved.
- Decide on a real estate market you want to invest in, and more specifically, the type of property.
- Find investors and a sponsor. Plan and decide on how much you each want to invest. Investors could be friends, family, or even complete strangers. But the important thing is that you have a shared goal and can come to an agreement. Ensure that the sponsor you choose is experienced in syndicates as they will be doing most of the work.
- Perform an investment property analysis. You need to make sure that the property you decide on is going to be profitable in the long run. You need to consider hidden expenses and taxes that could turn a seemingly profitable investment into a costly one.
Once you can get everybody in the syndication together and agree on an investment strategy, then you can start with the actual investing.
So, if you are new to the real estate investment world, or if you are a seasoned investor who feels like you have reached the limit of where you can grow on your own, real estate syndicates might be what you have been looking for. If you are able to bring a group of investors together with a common investment goal, then you just might be able to begin a syndication. Whether you decide to be a sole investor or a sponsor, being a part of a syndication could be a great way to really set yourself up as a serious real estate investor.
Charles is the founder of infoSpike.com. His real estate investing experience started in 2004 and he is currently focused on rental property projects. He enjoys learning about real estate investing, personal finance, and marketing. Read more about Charles here.