Real estate syndication is a game-changer for investors, offering the opportunity to pool resources and invest in properties that would otherwise be out of reach. In this guide, we'll delve into the basics of real estate syndication, explore its legal structure, discuss the potential profits, and highlight the best platforms for investors.
Real Estate Syndication Basics
Real estate syndication revolves around a partnership between sponsors and investors. Sponsors undertake the management and operational responsibilities, including property scouting, fundraising, and day-to-day operations. Investors, on the other hand, provide the majority of the financial equity.
To ensure alignment of interests, sponsors typically invest 5-20% of the required equity capital, with investors contributing the remaining 80-95%. It's crucial for sponsors to have a substantial stake in the deal, demonstrating their commitment and confidence. A track record of successful performance and a strong management team are also key factors to consider when choosing a sponsor.
Due diligence is paramount when investing in real estate syndication deals. Platforms like CrowdStreet and RealtyMogul offer opportunities for individuals to participate, but thorough research on sponsors and building a diversified portfolio are essential.
Real Estate Syndication Legal Structure
Syndications are usually structured as Limited Liability Companies (LLCs) or Limited Partnerships (LPs). Sponsors serve as the General Partner or Manager, while investors act as limited partners or passive members.
Key documents like the LLC Operating Agreement or LP Partnership Agreement outline the rights and responsibilities of sponsors and investors, covering areas such as distributions, voting rights, and management fees. Similar to other private funds, these legal entities protect both sponsors and limited partners in case of any unforeseen circumstances.
Real Estate Syndication Profits
Real estate syndication offers two primary avenues for generating profits: property appreciation and rental income. Investors benefit from rental income, which is distributed periodically according to predetermined terms. Over time, property values tend to appreciate, resulting in higher rents and increased profits when the property is sold.
Before sponsors share in the profits, all investors receive a "preferred return," typically around 5-10% annually of the initial investment. Additionally, sponsors may receive an upfront acquisition fee for sourcing and acquiring the property, while investors receive a portion of the remaining profits based on the agreed-upon split structure.
A Real Estate Syndication Example
To better understand the potential returns, let's consider an example. Suppose you invest $50,000 in a deal with a 10% preferred return. You could receive $5,000 annually once the property is generating sufficient income for payouts.
After everyone receives their preferred return, the remaining profits are distributed based on the profit split structure. For instance, in a 70/30 split, investors would receive 70% of the profits, and the sponsor would receive 30%.
Real Estate Syndication Platforms and Crowdfunding
Thanks to the JOBS Act, real estate crowdfunding has opened doors for individuals to invest in syndications previously accessible only to the wealthy and well-connected. Platforms like Fundrise and CrowdStreet analyze and vet deals, provide comprehensive research, and facilitate smooth transactions.
Real estate crowdfunding offers accessibility, lower investment minimums, and abundant information online. It allows investors to contribute as little as $1,000 and achieve better diversification.
The Best Real Estate Syndication Platforms
When it comes to real estate investing platforms, two stand out:
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Fundrise: Founded in 2012, Fundrise offers solutions for both accredited and non-accredited investors. With a focus on eREITs (electronic Real Estate Investment Trusts), Fundrise allows investors to diversify across various regions and real estate types. They offer funds that invest in the Sunbelt region, attracting investors looking for passive income and exposure to real estate.
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CrowdStreet: Since 2014, CrowdStreet has catered primarily to accredited investors. It specializes in investing in 18-hour cities, regions with attractive valuations, strong job growth, and higher cap rates. CrowdStreet differentiates itself by allowing investors to directly invest with pre-screened sponsors. However, investors must conduct their due diligence to select the best sponsor for their investment needs.
Both Fundrise and CrowdStreet provide excellent opportunities for real estate syndication, catering to diverse investor preferences and risk profiles.
Real Estate Syndication: The Future of Investing
Real estate syndication democratizes access to lucrative real estate opportunities. With lower barriers to entry, investors can capitalize on the potential of different markets across the United States. The trend of big companies investing in the heartland, coupled with the work-from-home revolution, signals a promising future for real estate syndication.
To seize these opportunities, it's crucial to invest with the best syndication platforms, conduct thorough due diligence, and build a well-diversified portfolio. Real estate syndication is an excellent way to invest in property actively, generate passive income, and expand your investment portfolio.
About the Author
Sam, the author of this article, launched Financial Samurai in 2009 as a response to the financial crisis. With extensive experience at Goldman Sachs and Credit Suisse, he's a seasoned investor with properties in San Francisco, Lake Tahoe, and Honolulu. Sam has personally invested $810,000 in real estate syndication, leveraging the potential of diverse markets across America.
