Co-Founder and Managing Partner of Disrupt Equity. Learn more about investment opportunities by visiting our website.
If you’re interested in real estate investing but not willing or able to manage it all yourself, real estate syndication is an opportunity worth looking into. Real estate syndications can help investors achieve the benefits of owning an investment property (cash flow, appreciation, tax breaks) without the work or stress of being a landlord themselves.
At Disrupt Equity, this is what we help our clients invest in, so I’ve put together a guide on how to start investing in real estate syndications.
How Does Real Estate Syndication Work?
Let’s get down to the basics of real estate syndications. A real estate syndication is when a group of investors pools together their capital to jointly purchase a large real estate property. Apartments, mobile home parks, land, self-storage units and other real estate assets are some of the investment opportunities available through real estate syndications.
Who’s Involved In Real Estate Syndications?
There are two key players in any real estate syndication investment: the syndicator(s) and the passive investors.
The Real Estate Syndicator
Real estate syndicators, also referred to as general partners (GPs), are responsible for structuring and operating the real estate syndication. Primary duties of the general partner(s) would consist of:
• Underwriting the deal.
• Completing thorough due diligence on the property.
• Arranging the financing.
• Negotiating with the seller.
• Building a business plan.
• Finding investors.
• Raising capital for the transaction.
• Working with the property management team.
• Asset management.
• Handling investor relations.
As you can see, a real estate syndicator handles everything from finding the property, arranging the transaction and operating the asset upon closing. The syndicator’s role is to execute the business plan and deliver strong returns to the passive investors in the real estate syndication.
The Passive Real Estate Investor
The passive investor’s role in the real estate syndication is to provide a portion of the capital needed to acquire the property. In exchange, passive investors receive ownership shares of the property.
By owning a piece of the real estate property, passive investors receive monthly (or quarterly) passive income distributions from the asset, as well as a return on their investment upon selling it — all while achieving equity pay down, appreciation and real estate tax benefits.
The Benefits Of Real Estate Syndications
There are various benefits of opting for a real estate syndication investment. Below are the ones I find most compelling.
• Passive Income: Investors can earn monthly or quarterly passive income distributions from their investments.
• Hassle-Free: Investors can invest in real estate without the hassles of managing tenants or toilets.
• Tax Benefits: By owning a piece of the real estate, tax benefits are passed down to investors through their K-1 tax filings.
• Appreciation: Like any piece of real estate, the value of the property should gradually increase over time, increasing the return on investment (ROI).
• Control: Unlike real estate investment trusts (REITs) or crowdfunding platforms, investors can choose which specific properties they want to invest in.
• Diversification: Investors can spread their capital across multiple real estate syndications.
The Challenges Of Real Estate Syndications
There are many perks when it comes to investing in real estate syndications. However, as with any investment, nothing is risk-free. When it comes to investing in syndications, the most challenging and risky decision an investor will make is who they choose to invest with.
As an investor, you must ensure that you are working with an experienced and trustworthy real estate syndicator before jumping into an investment. When seeking a real estate syndication company, it’s important to thoroughly vet that company before moving forward.
Eligibility Criteria For Investing In Real Estate Syndications
Before investing in real estate syndications, there are specific eligibility requirements that investors must meet. To be eligible for a real estate syndication, you must either be an accredited or sophisticated investor.
To be classified as an accredited investor, you must have an annual income of at least $200,000, or $300,000 with a spouse, to meet the basic financial threshold for investment. Alternatively, a net worth that exceeds $1,000,000 also classifies an investor as accredited. Depending on the real estate syndication offering set forth by the U.S. Securities and Exchange Commission (SEC), certain real estate syndications may only be offered to accredited investors, such as a 506(c) offering.
However, many real estate syndications are also available to sophisticated investors. Sophisticated investors must have in-depth knowledge and experience, making them eligible to become passive investors because they can accurately evaluate the merits and demerits of a prospective investment before giving the green signal to close the deal.
How To Invest In Real Estate Syndication Deals
So, how do you set out on the search for the perfect real estate syndication deal? To find just the right deal, there are a few things that you could do.
First of all, make sure you actively network with other investors, preferably those interested in a similar asset class as you are. Building relationships with like-minded investors can help you find recommendations for reputable real estate syndication companies that are trustworthy and have a solid track record in the industry. Attending events organized on Meetup.com, interacting in Facebook groups and going to real estate conferences are great ways to meet other investors, expand your knowledge and ultimately find your first deal.
As mentioned above, a real estate syndicator will do most of the heavy lifting, from finding the deal, structuring the real estate syndication and executing the business plan. As a passive investor, your primary role is to identify the real estate syndicator(s) that you can trust to partner with and make sure the syndicator’s credentials are bona fide.