10 Things You Must Know About Real Estate Syndication (Part II)

(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.

In this first series, we looked at Understanding the Partners, their duties, and the Legal terms involved in Real Estate Syndication. In this Series (II) we shall look at the Financial Terms involved in Syndication, which you should be familiar with as a potential passive investor. Here are 10 things you must know.

1. Ordinarily, investors would not have ‘access’ to these projects, due to financial requirements (in millions of dollars), a chunk of time or resources. Through Syndication (a form of crowdfunding), investors can now have that access.
2. An accredited investor is considered a person who has a net worth of least $1 million in assets (excluding primary residence) or make at least $200,000 per year as an individual or $300,000 per year as a married couple, per the U.S. Securities & Exchange Commission.

“The major fortunes in America have been made in land.” – John D. Rockefeller

• Syndication deals can come in various forms or types. Usually, they come as either Specific Offering or as Blind Pool Fund. In the former, the Sponsor is specific on the asset(s) or project(s) that investors are investing in, the Sponsor goes on to raise the capital required for the acquisition and management of the deal, but the investors are acquainted with the project in question. In the latter, the investors rely on the track record and business idea/plan/proposal of the Sponsor, as the Sponsor only presents a plan of operation and management, but does not identify specific assets to be acquired.

Specific offerings are relatively common for Sponsors who are new to the game, while Blind Pool Funds are relatively common for Sponsors with a good background or consistent record of performance.

• Investors can choose to invest in a project either on the Debt Syndication side or on the Equity Syndication side. In the former, the Investor is a lender for the deal, this comes with lower risks because they are investing collectively with a pool of other investors. In the latter, the investor is a part-owner of the property meaning greater risks, and of course, greater returns, in most cases quarterly returns. In essence, returns are directly proportional to the funds invested.
• Equity Syndicates, as owners (along with other investors and Sponsors), could lose some money in the case of a market decline. Debt Syndicates have no liability risk. Many experts advise buying longer projects rather than short term deals, but be sure to understand this nitty-gritty of being an Investor.

“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

• On the Debt side, returns could be around 3-5% annually, and on the Equity side, returns could be around 7-12% annually.
• The Financial Risks of the deal is usually borne by the Investor(s) who puts in much of the capital, while the Sponsors put their reputation on the line, especially in the case of a market decline.
• The Rewards structure varies largely and there is no hard-and-fast rule for the splitting of the profits. Usually, after the deal is completed, and all the dues or loans have been paid and repaid respectively, the Sponsors take about 10-50% of the profit remainder, and the investors take about 50-90% of the profit remainder.
• Profit returns for investors are usually around 7-15% of the capital, or amount invested.
• Sponsors are in many ways, responsible for the outcome or performance of the deal. Always check the financial details of a deal to make sure the Sponsor will be getting relatively the same percentage of the proceeds as he puts in, to ensure his ‘skin is in the game’. Sometimes, Sponsors get performance-based proceeds, as this could serve as a form of motivation.

In the concluding series of this piece, we shall look at 10 things to note about the Structure 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.