Real estate syndication is not a REIT – it is a way of investing in specific, tangible real estate through a crowdfunding model. A group of investors pools their money in a large real estate investment they couldn’t afford to acquire individually. Management of the investment is the responsibility of the real estate syndication company. This allows investors to profit from passive real estate income without the hassle of managing the property or tenants. The investors benefit from a predictable cash flow and are not subject to stock market volatility.
The Benefits of Real Estate Syndication
Real estate syndications differ from real estate investment trusts (REITs) in one, primary way: With syndications, the sponsor and the investors are all investing in specific properties together, making money from rental income as well as property appreciation; with investment trusts, the investors are actually investing in the trust itself, purchasing shares from the trust and making money in the form of dividends as long as the company’s properties appreciate in value.
Investors who invest in real estate syndications don’t have to worry about the hassles that come with day-to-day property management, raising funds for the syndication, scouting out new properties, and closing deals. These are the responsibilities of the sponsor and the sponsor alone. In exchange, the investors contribute most of the financial equity, usually upwards of 80%, yet as limited liability investors able to invest in multiple properties.
Real Estate Syndication Legal Structure
Simply put, real estate syndication structures are organized as limited liability corporations or limited partnerships. The syndication’s sponsor is the general, managing partner and the participating investors are passive, limited partners.
The investment property is owned by the LLC. The participating investors are part-owners of the LLC and, as a result, of the investment property as well, eliminating any responsibility for property debt on behalf of the participating investors.
Not all syndications are the same, but the norm is usually a 70/30 cut: The sponsor owns 30% of the property, the investors own 70%. Each syndication deal is different, but properties are generally held for an average of three to seven years. Your ownership stake as well as the number of months and/or years for which the sponsor plans to hold the property should be clearly stated in the offering documents.