I just invested $100k in a real estate syndication. What happens now?
Real estate syndication is a way for accredited investors to pool their money together to invest in large real estate properties that are typically out of reach for individual investors to fund on their own. When you invest in a real estate syndication, you become a limited partner (LP) in the project and receive a share of the profits. But what exactly happens after you invest in a syndication? Let’s walk through real estate syndication basics and the steps you can expect after you invest.
Real Estate Syndication Basics
Real estate syndication is a partnership between multiple investors who pool their money together to invest in a real estate property. The property can be a new development or an existing property. The goal of the syndication is to generate profits for the investors through appreciation, rental income, or both.
The syndication is typically structured as a LLC (Limited Liability Company), with the investors serving as limited partners (LP) and the syndicator (the person or company who does all the work - including finding and managing the deal) ) serving as the general partner (GP). The general partner is responsible for all of the “active” elements of the deal like finding the deal, raising investor funds, managing the property, executing the business plan and distributing the profits to the limited partners.
When you invest in a real estate syndication, you become a limited partner (LP). This means that you have limited liability and take a “passive” role in the deal, meaning you are not responsible for the day-to-day management of the property. You also have a limited say in the decisions made by the general partner. However, you do receive a share of the profits based on the percentage of ownership you hold in the syndication.
Real Estate Syndication Steps
Now that you have a basic understanding of how a real estate syndication is structured, let's take a look at the steps you can expect after you find a syndication you want to invest in.
Step 1: Submit proof of Accreditation
Depending on the syndicator and type of deal, you may be required to submit proof of accreditation. You can provide proof of accreditation to the syndicator in a few ways:
Individuals basing their qualification on annual income or net worth will likely need to submit tax returns, W-2 forms, and other documents that indicate wages to CPAs, tax attorneys, advisors or any other qualified professional to a acquire a letter of proof of accreditation
Accredited investors can acquire proof through online vendors, such as VerifyInvestor.com, by submitting similar documents
Individuals who acquire accreditation status through certain professional certifications, designations, credentials or because they are SEC and state-registered investment advisors can provide copies of these certifications, designations, credentials or their registration as proof of accreditation status
Step 2: Review and Sign the PPM (Private Placement Memorandum)
Once you have decided to invest in a real estate syndication, you will receive a legal agreement from the syndicator called a Private Placement Memorandum - or “PPM.” This document outlines the entirety of the investment - including an overview of the management team, the risks and merits of investment, what is required from investors, the fees earned by the syndicator, a description of the property and the financial terms of the investment - often referred to as the “waterfall” or “split.”
Before signing the agreement, it is important to read it carefully and ask any questions you may have. You may also want to consult with legal and financial professionals in your network to ensure that you fully understand the terms.
Step 3: Fund Your Investment
After signing the subscription agreement, you will need to transfer the funds to the syndicator. This is typically done through a bank wire. The syndicator will provide you with instructions on how to fund your investment.
Step 4: Wait for the Closing
Once all of the investors have signed the subscription agreement and transferred their funds, the syndicator will work with all parties necessary (i.e seller, broker, lender, etc.) to close the deal.
Step 5: Receive Regular Updates
As a limited partner in the syndication, you will receive regular updates from the syndicator. These updates may include financial statements, property management reports, and updates on the progress of the project.
Step 6: Receive Distributions
The ultimate goal of the real estate syndication is to generate profits for the investors. As a limited partner, you will receive a share of the profits based on the percentage of ownership you hold in the syndication. These profits may come in the form of regular distributions and/or a
lump sum at the end of the investment period/capital event.
Is Real Estate Syndication Worth It?
Now that you have an understanding of real estate syndication basics and what you can expect after investing in one, you may be wondering - is it worth it to invest in a real estate syndication?
The answer to this question depends on several factors, including your investment goals, risk tolerance, and the specific syndication you are considering.
Real estate syndications can offer investors several benefits, including direct ownership in the underlying property, cash flow, tax benefits and the potential for higher returns than traditional investments such as stocks and bonds.
However, as with all investments, real estate syndications also come with risks. The value of the property can fluctuate based on market conditions, and there is no guarantee that the syndication will generate the expected returns. Additionally, real estate syndications are illiquid, meaning that the investment is typically held until the sponsor team is ready to exit the deal.
Before investing in a real estate syndication, it is important to carefully consider your investment goals and risk tolerance. You should also do your due diligence on the syndicator and the specific project to ensure that they have a track record of success and are aligned with your investment objectives.
Real Estate Syndication FAQ
What is the minimum investment amount for a real estate syndication?
The minimum investment amount can vary depending on the syndicator and the specific project. Some syndications may have minimum investments as low as $25,000, while others may require minimum investments of $100,000 or more.
How long is the investment period for a real estate syndication?
The investment period can vary depending on the specific project, but it is typically between 5-7 years. During this time, the syndicator will manage the property and work to generate profits for the investors. At the end of the investment period, the property may be sold and the profits distributed to the investors.
Can I invest in a real estate syndication with my retirement funds, such as through an IRA, 401(k)?
Yes, it is possible to invest in a real estate syndication with a self-directed IRA or 401(k). However, there are certain rules and regulations that must be followed, so it is important to consult with a financial or tax professional before investing.
How do I find real estate syndication opportunities?
There are several ways to find real estate syndication opportunities, including networking with other investors, attending real estate conferences and events, or through a syndication marketplace.
As a reminder, while real estate can be a lucrative investment vehicle, there are always risks involved, including loss of principal. Before investing, it is important to carefully consider your investment goals and risk tolerance and to do your due diligence on the syndicator and the specific project.
Ready to put your money to work?
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.