What is Syndication?

If you have ever explored investing in real estate outside of REITS, single family homes, or even explored more passive approaches, then real estate syndication might be an option for you. With people becoming more familiar with platforms like crowdfunding, real estate syndication is now attracting people all over the globe. More than 100,000 people have already invested in the business and numbers are probably going to escalate further. In this article, we’ll explain exactly what syndication means and other terms related to it.

What do you mean by syndication?

A syndication involves investors who invest money to buy or build property. It provides an opportunity for a person to earn high profits by making investments in the commercial real estate business. There are two types of syndications:

What is a syndication?

In simple words, it is a deal between a sponsor and the passive investors. A sponsor on the deal is the person with relevant experience in the field who finds a suitable project for the investor and finalizes the deal. The investor can be an individual or a group. If you are the investor, your only job is to analyze the project and conclude whether to invest or not.

As a passive investor, it provides passive income as your only job is to wait for the returns and let your money work for you. However, the responsibility of the entire project is on the shoulders of the sponsor.

Benefits of investing in Real Estate Syndication

It offers large returns over most other forms of investments. If compared to other platforms of investment like stocks and high-stake investment projects, here you don’t have to worry as much about your investment as it is safer and less volatile. Some of the benefits of investing in Real Estate Syndication  are:

• Investment and return: Along with money, you have other intellectual resources to contribute to the project.  You invest according to the active market price and anticipated results calculated based of the projected business plan. The most important factor that contributes is wisely evaluating the project.
• Experience doesn’t matter: Even if you don’t have any experience, it is not a problem because you can start investing in an individual real estate syndication at any time.  
• A reliable earning: It gives an anticipated month to month, quarterly or yearly income from the projected returns. Hence it gives you the freedom to concentrate on something else – like your family, your everyday employment or your retirement years.

Real Estate Syndication Profits

Rental income and property appreciation are the two fundamental ways the sponsors and investors bring in cash from syndications. Rental pay from a coordinated property is circulated to the passive investors from the sponsor on a month to month, quarterly or even a yearly premise as indicated by preset terms. A property’s estimation normally increases in value after some time, so financial specialists can get higher leases and gain bigger benefits buy increasing net operating income when the property is sold. Because of the coronavirus pandemic, although every sector is experiencing loss in one way or another, yet rent can be collected from tenants. The sponsor receives his or her share at the beginning of the deal by collecting an acquisition fees for putting the deal together.

How does it work?

Below describes the workings of real estate syndications fees and ways passive investors are paid:

• The sponsor will find evaluate market conditions, analyze the financials through conservative underwriting and survey the property before getting it under agreement and creating a syndication where he will pool the passive investor’s capital. There will be a little (1%-5%) procurement expense known as the acquisition fee, mentioned earlier, that the sponsor will receive for pinpointing the property and finalizing the negotiation.
• There will be a favored incentive back to passive investors with the goal that they get paid before the sponsor receives any returns from asset producing income. Ordinarily called the preferred return will go from 6%-12%. This implies, if the favored return is 8%, the financial specialists must get an 8% return before the sponsor gets paid from value or income.
• Additionally, the sponsor will get a little (1-3%) asset management fee for his obligations operating the asset on a consistent basis.
• The genuine incentive of passive investors from sponsors in syndications is through the value and income cooperation split. Usually the split is broken down as an 70/30 split. 70% to the passive investors and 30% to the sponsors. After the preferred return has been met, this is the second part of the waterfall structure known as the equity split. After the favored return is fulfilled, the rest of the income and additions from the income will be part of the arranged rate. As a rule, sponsor will get somewhere in the range of 30% of the returns after the favored return is met. The size of the split will rely upon the reputation of the sponsor and their passive investors criteria. Experienced sponsors can claim up to a 50/50 or even 60/40 split in favor of the sponsor due to their track record and providing returns to their passive investors.

Getting started

There are some crucial points you must abide by before investing in multifamily real estate syndication:

1. Choose an asset category
2. Acquire prerequisite knowledge
3. Vetting the company/sponsor
4. Select a business model
5. Obtain training on syndication
6. Create your database
7. Study deals and offers carefully
8. Arrange a property
9. Hire an attorney
10. Organize lenders, investors

Risks involved in a syndication

Like any investment there is risk. You could lose all your capital in any investment even syndications. The biggest risk is inexperienced syndicators, poor business plans, insufficient cash reserves and poor decision making. One of the major concerns is that you must know the experience of the sponsor.

For a few people, the length of the syndicate deal (5-10 years) can be a drawback according to market conditions and project strategy. The timeline of the deal can be influenced by external factors and unseen circumstances.

Now, what is a multifamily syndication?

Multifamily syndication involves the purchase of property as an asset which would be difficult to buy for an individual. Syndicators are permitted to share the profit and risks in this type of syndication. Previously, syndications were limited for the public but now mostly anyone can participate in it.

Why invest in multifamily syndication?

Multifamily syndication provides an opportunity for passive investors who aren’t looking to be the landlord or have the time to commit to the day to day operations of multifamily investing. Other benefits for passive investors related to multifamily syndication are:

• Cash: It provides passive income and you don’t have to manage the property. Passive income is great as you don’t have to put any effort, all the work will be done by the sponsors and you just invested in the business plan and asset.
• Tax: Multifamily investors are permitted to discount 1/27 of the estimation of the structure every year as a cost. Moreover, you can play out a cost isolation investigation, known as a cost-segregation study, which brings about a deterioration of 90% of the high rise’s incentive for more than seven years. Consult with your personal accountant about real estate investing or contact your CPA to discuss how this investment fits with your tax situation.
• Occupancy: The bigger the property, the lesser the chance that it will negatively affect your pockets. Huge multifamily units have a low pace of occupancy, making it easy to renovate and lease for market rate rent income with any empty units. With a single family home, you would be stuck if a property remained empty for a more drawn out period—leaving you to foot the bills.
• Time: Multifamily syndications can be substantially less consuming than different ventures. In this case you’re limited partner, property management, deal research, and loans done by the general partners (GP’s) aka the sponsors—leaving you with significantly more time and yet receiving the rewards of real estate investing.

Things to care about

Don’t simply toss your cash at anybody. You must know with whom you are working and get referrals from individual (trusted) friends and family or even other investors who have invested with those sponsors. You’ll have the option to locate the great GPs in a matter of moments. Ensure you read through everything. Research it and in case you’re uncertain, have a lawyer review any offering if it makes you comfortable. Understanding the syndication model is beneficial for passive investors especially first-time investors. Counseling an expert will help give you significantly more trust in the syndication landscape. By being able to contribute passively, multifamily syndication can be an incredible method to fabricate your real estate portfolio. It can likewise assist you with building your trust in multifamily investing. Regardless of whether you’re a novice or a seasoned investor, the advantages of multifamily syndication will put you on the path to financial goals and achievements.

Money for multifamily syndication

The two kinds of loans for multifamily syndications are a plan of recourse and non-recourse loans. The contrast between these two loans is who is dependable in case of dispossession. The most mainstream decision is the non-recourse loan—which guarantees that the borrowers are not responsible for the sum acquired. Although it is greatly favorable for sponsors, they are liable for signing on the terms and the passive investors do not have to sign any debt obligations at closing. Recourse loans go the other way and hold the sponsors reliable in which the lender can go after other assets that were not used as collateral.

Agency commercial loans can be longer-term. Loan terms are 5-10 years. Toward the finish of the terms, the sponsor should decide if it’s best to pay the loan in full, renegotiate and refinance with the improved net operating income or sell. Furthermore, because these advances are government-sponsored, not all property qualifies.

Bridge loans come in handle if the banks or agency debt won’t take on the asset. The cost and terms are higher and more expensive but if this can “bridge” you as you implement the business plan to get you to bank or agency terms, it might be worth your time.

Security in multifamily syndication

It becomes possibly the most important factor when a pool of passive investors are investing their cash in a typical venture and they hope to make a return with their investment through the endeavors of a multifamily syndication. That is security. “A venture of cash, in a typical undertaking with a desire for benefits through the aftereffects of another person.” The 1933 Security Act expresses that each security must be enrolled with the Protections and Trade Commission, otherwise called the SEC. This is to secure the speculator and the investees. Each security must be enrolled except if it is excluded from enlistment. This is otherwise called pre-emption. In addition to the fact that it is excluded from enrolment with the SEC, yet it’s pre-empted from the state’s applying rules, which are significantly more convoluted than the SECs.

How to form a multifamily syndication?

A person needs to have all the information about the business to participate in it. Below are the few steps to enter into multi-family syndication:

1. Market: Find a market that fits your investment. For example, if you like emerging markets with high job growth then you’re not going to go invest in an asset in rural America. Find the market that meets your criteria.
2. Underwrite the deal: If you are the type of person who fixates on spreadsheets this could be for you. You have now become an asset for their group. If you like pouring over financial documents and inserting them into a excel spreadsheet specifically designed and modeled for your investment strategy this gives you an idea of how the asset is currently performing and how you seek to improve the asset because of your proven and known strategies.
3.  Find an off-market deal: Before you go out and begin finding off-market deals you must know where and how to find them. Usually relationships with brokers that send you exclusive opportunities before they hit the market or deals specifically designed for you and your investment criteria.
4. Raise the capital: Assuming you found the asset, put it under contract and are drawing up the synication documents now is the time to start informing your passive investors.  When raising capital, the SEC commands that individuals are needed to be separated from the general sponsor (GP) side of the arrangement known as limited partners. Pending the offering, passive investors can be sophisticated or accredited or both.
5. Secure financing: Being able to source the best lending partner and leveraging the best terms of the loans is another aspect of the operations. Having a great relationship with different agencies and lending brokers will help secure the right fit terms for your business plan. Sometimes projects call for bridge loans that help you get you over to agency debt.
6. Property management: Having relationships in place already with third party management companies help you understand if the business plan is realistic in your target market or not. If you are stretching numbers, the property management team you hire will presumably fail. Don’t coordinate an unrealistic project to your property management team without inquiring with them about the market prior to your underwriting. This will safe you grief and your money.

Final words

Multi-family real estate syndications offer great returns on investments. Once a investor transitions to mutlfamily investing they transition into multifamily syndication investing. As an investor you eventually gravitate to being a more passive investor in these sectors because it allows them to free themselves of the landlord duties. For passive investors able to save $30,000 a year or have substantial liquitidy (say over $200,000), being a landlord is more work than it is investing.

Overall, syndication consist of two pools of investors. The active investor who is the general partner better known as the sponsor of the deal. They find, analyze, survey, negotiate and formulate the correct business plan for the project because they have the experience and the assets to show for it.

Then you have the limited partners, which consist of working professionals who are seeking to invest their excess capital, self directed IRA’s, infinite banking insurance policies, excess cash or any other means they choose to invest with. Often times these working professionals are performing a service to the everyday general public in the form of a business owner, C-Suite member, salesman/saleswoman, board members, professional athletes, physicians and other high net worth or high income earners.

If you would are looking to learn more about investing passively in multifamily syndications start by reviewing our strategy page before completing the invest now form. See if this strategy is right for you.

Happy investing!

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.