10 Things You Must Know About Real Estate Syndication

(The Ultimate Beginner’s Guide to Making Passive Income the “Easy-Button” Way)

The Ultimate Investment Rule has to be investing in something you understand. While Multifamily Syndication is a profitable venture for large scale earners to make returns passively, at medium risks, you must understand the Real Estate Syndication World before venturing. Not to worry though, in these series, we have compiled all the basic information you should know.

“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”  – Franklin D. Roosevelt

In this first series, we look at Understanding the Partners, their duties, and the Legal terms involved in Real Estate Syndication.

1. Real Estate syndication is a form of crowdfunding.
2. Although Syndicates had long existed before the idea of crowdfunding became widespread, but they are essentially based on the same principles, that is, a Syndicator who is also known as a Sponsor who finds and acquires a real estate (physical properties), and other Investors who own a percentage of the real estate as a result of investing a certain percentage of the value. Investors are passive earners who are not usually involved in the day-to-day running or management of the acquired property.
3. Usually, the Investors provide most of the equity, in most cases, this is around 70-90% of the equity capital, while Syndicator invests around 10-30%, quite understandably. Since Investors are passive earners, Syndicators do most of the business and ‘on-site’ work. They spend their time, resources, and much of their reputation, nevertheless, you should invest in a prospect where the Syndicator has about 15-25% of the stakes, to ensure his ‘skin is in the game’.
4. Syndicates may or may not have direct access or relationships with Investors. In cases where they do not, the ‘middleman’ role is done by Joint Ventures or Equity Partners who normally have a large database of investors from which they can source.
5. For the past two decades, the Real Estate has consistently outperformed the Stock Market in backend profits and safety risks, it is safe to say that Real Estate is twice as safe; but, like any other business, there are no guarantees.
6. At the end of a successful deal, the Syndicator is compensated for the resource and time put into the project, and the Investors are also compensated with more cash in returns.
7. It is very important to always check the legal terms of a Real Estate Syndications before venturing, as this is as important as the business itself. Legally, these syndications operate as private equity or venture capital in which case you are equity partners or a member of a joint venture respectively.
8. The Agreement is usually a Limited Liability Company (LLC), or sometimes a Limited Partnership (LP). This legal entity covers both parties in the event of a downturn. The Syndicator who is the General Partner, who usually has the rights (access) to the funds, and the Sponsors, who usually have voting rights.
9. The Syndicator is usually ‘entitled’ to an Upfront compensation or profit of the deal (for all his hard work in securing the deal), the fee – a call and acquisition fee – is just about 1% of the deal, this fee is usually negotiable between both parties, it may be slightly more or less (0.5% – 5 %) on a case-by-case basis.
10. The returns of the Deal are split in percentages which we shall look at in the next series, as well as the Financial ‘nitty-gritty’ of Real Estate Syndication.

Disclaimer: The views and opinions expressed in this blog are provided for informational purposes only, and should not be interpreted as an offer to buy or sell any investment or course of action.