Exiting a Real Estate Syndication from either a refinance or property sale - how does this work?
Real estate syndication has become a popular method of consolidating resources from different investors to fund real estate projects. Additionally, investing in a real estate syndication can be a lucrative opportunity for investors to earn passive income. Typically, real estate syndications have a five to seven year term before exit, and the two most common ways to exit the investment are a refinance or property sale. This article will explore the two methods and how they work.
Understanding Real Estate Syndication
Real estate syndication is a method of pooling resources from multiple investors to purchase a property or fund a real estate project. The investors become limited partners (LPs) and share the profits and losses of the investment. The syndicate is managed by a general partner (GP) who oversees the day-to-day operations of the project.
Exiting a Real Estate Syndication
Exiting a real estate syndication can be done through a refinance or sale of the property.
Refinance
A refinance is a method of obtaining a new loan to pay off the existing loan on the property. The new loan has different terms and conditions, which can result in a lower interest rate and monthly payment. Refinancing can also provide access to the equity in the property - referred to as a “cash out refinance” - which can be used to pay off investors.
Property Sale
A property sale involves selling the property to a third party. The sale can generate a profit, which can be distributed to the investors. The proceeds of the sale can be divided among the general partners (GPs) as well as the investors (LPs) according to the terms of their agreement.
The Refinance Process
If the general partner decides to refinance, the following steps are involved:
Evaluating the Investment
The general partner evaluates the investment to determine if refinancing is a viable option. They consider factors such as the current interest rate, the value of the property, and the debt-to-equity ratio.
Determining the Value of the Property
The value of the property is determined by conducting a real estate appraisal. The appraisal considers the location, size, and condition of the property. The appraisal report provides an estimate of the fair market value of the property.
Securing a Loan
The general partner secures a loan from a lender. The loan is used to pay off the existing loan on the property and provide access to the equity in the property. The terms and conditions of the loan are negotiated between the general partner and the lender.
Paying Off Investors
Once the loan is secured, the general partner may provide distributions to the investors. The investors receive their initial investment plus any returns on the investment. The general partner also receives a share of the proceeds.
The Property Sale Process
If the general partners exit the syndicate through a property sale, the following steps are involved:
Evaluating the Investment
The general partner evaluates the investment to determine if selling the property is a viable option. They consider factors such as the current real estate market, the value of the property, and the potential profit from the sale.
Preparing the Property for Sale
The property is prepared for sale by making any necessary repairs or renovations. The general partner also ensures that the property is properly staged and marketed to potential buyers.
Marketing the Property
The property is marketed to potential buyers through various channels such as online listings, open houses, and real estate agents. The general partner works with a real estate broker to find a suitable buyer and negotiate the sale.
Closing the Sale
Once a buyer is found, the general partner works with the buyer and their team to finalize the sale. The sale proceeds are divided among the investors according to the terms of their agreement. The general partner also receives a share of the proceeds, according to the operating agreement.
Tax Implications
Exiting a real estate syndicate through a refinance or property sale has tax implications. Investors may be subject to capital gains tax, depreciation recapture tax, and other taxes. It is important to consult with a tax professional to understand the tax implications and plan accordingly.
Risks and Considerations
Exiting a real estate syndicate through a refinance or property sale has risks and considerations. The real estate market can be volatile, and the value of the property may decrease over time. Additionally, there may be penalties or fees associated with exiting the syndicate before the agreed-upon term. It is important to carefully consider these risks and consult with a financial professional before making any decisions.
FAQs
What is a real estate syndication?
A real estate syndication is a way for investors to pool their money together to invest in larger real estate investments that they otherwise may not be able to afford on their own.
How do investors make money in a real estate syndicate?
Investors make money in a real estate syndicate through the profits generated by the investment property. This can be through rental income, appreciation of the property, refinance or through the sale of the property.
What is the difference between a refinance and property sale?
A refinance involves obtaining a new loan to pay off the existing loan on the property. The purpose of a refinance is typically to obtain a lower interest rate or better loan terms. A property sale, on the other hand, involves selling the property to another party for a profit.
What are the tax implications of exiting a real estate syndicate?
Exiting a real estate syndicate through a refinance or property sale has tax implications. Investors may be subject to capital gains tax, depreciation recapture tax, and other taxes. It is important to consult with a tax professional to understand the tax implications and plan accordingly.
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At Madison Investing, we connect investors with real estate syndications across many different asset classes such as multi-family, self-storage, ATM and more. If you’re an accredited investor interested in diversifying your portfolio and taking steps toward financial freedom, request an invitation to join our investment club to explore your financial goals and the possibility of investing with us.
