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What is a Real Estate Syndication?

Watch below as our CEO, Spencer Hilligoss walks through what a syndication is.

(see transcript below FAQs)


FAQs


What is real estate syndication?


A real estate syndication is a way for multiple investors to pool their resources together to invest in a larger real estate property than they could purchase on their own. Also, investors can participate passively in the real estate syndication as Limited Partners (LP), while the work to buy and manage the property is handled by the General Partners (GP).


How does real estate syndication work?


In real estate syndication, a sponsor or general partner (GP) identifies a real estate project, raises capital from investors (LP’s), and manages the project on behalf of the investors.


Can you provide a passive real estate syndication example to illustrate how it works?


A real estate syndication example could help clarify how the process works:

  1. Formation of the Syndicate: A real estate sponsor or syndicator with experience in development identifies a promising commercial property. They decide to form a syndication to purchase and develop the property.

  2. Building the Team: The sponsor, acting as the General Partner (GP), assembles a team of attorneys, accountants, property managers, and brokers, specialized in syndications.

  3. Structuring the Deal: The GP structures the syndication through an LLC, outlining the terms, including the minimum investment of $50,000 and projected returns of 12%.

  4. Raising Capital: The GP markets the opportunity to a network of accredited investors, raising a total of $5 million from 100 Limited Partners (LPs).

  5. Acquiring the Property: With the capital raised, the GP finalizes the purchase of the commercial property for development.

  6. Managing the Property: The property is developed and managed according to the investment strategy, with regular updates provided to investors.

  7. Distributing Profits: Profits from rental income and eventual sale of the property are distributed to investors based on their share of the investment.

  8. Exit Strategy: After a holding period of 7 years, the property is sold at a profit, and the final returns are distributed to the LPs, concluding the syndication.

This example illustrates the various stages involved in a real estate syndication and the roles played by the General Partner and Limited Partners. It's important to note that each syndication is unique, and the specifics can vary based on the deal's structure, the property type, market conditions, and the syndicator's preferences. Working with experienced professionals can help ensure a successful outcome.


How do you start a real estate syndication?


Starting a real estate syndication can be a complex process, but the following steps can help you get started if you want to step into the role of a General Partner or syndicator:


Develop an Investment Strategy: Determine the type of real estate investment you want to focus on, such as residential or commercial properties, and identify the markets you want to invest in.


Build a Team: Assemble a team of experienced professionals, including attorneys, accountants, brokers, property managers, etc. who can help you navigate the legal and financial aspects of the syndication.


Identify and Evaluate Properties: Identify potential properties that fit your investment strategy, conduct due diligence on each property to evaluate its financial performance and potential risks, and determine the potential returns for investors.


Structure the Syndication: Hire a lawyer who specializes in syndications and determine the legal structure of the syndication, such as a limited liability company (LLC). Decide on the terms of the offering, including the minimum investment amount, the number of units or shares being offered, and the projected returns.


Raise Capital: Market the offering to potential investors, such as high-net-worth individuals or institutional investors, and raise the necessary capital to acquire the property.


Close the Deal: Once you have raised the necessary capital, close the deal by finalizing the purchase agreement, signing the necessary legal documents, and transferring funds.


Manage the Property: After the acquisition, manage the property to maximize its value and returns, and provide regular updates and distributions to investors.


Starting a real estate syndication can be a complex process, so it's important to work with experienced professionals who can guide you through each step of the process.


How do real estate syndicators choose properties and markets for investment?


Real estate syndicators play a critical role in identifying and evaluating potential properties for investment. Their selection process usually involves a thorough analysis and multiple steps:

  1. Market Analysis: Syndicators often start by assessing the macroeconomic trends and conditions of various markets. They look at factors like population growth, job growth, supply and demand dynamics, and overall economic health to identify promising locations for investment.

  2. Submarket Selection: Within a broader market, syndicators may focus on specific submarkets or neighborhoods that demonstrate strong potential for growth or stability. They may analyze local trends, employment centers, access to transportation, and other neighborhood-specific characteristics.

  3. Property Identification: Once the market and submarket have been selected, syndicators actively search for properties that align with their investment strategy. This could include new developments, value-add opportunities, stabilized properties, or distressed assets.

  4. Due Diligence: After identifying a potential property, syndicators conduct thorough due diligence to assess the physical condition of the property, review financial statements, verify legal compliance, and analyze other critical factors. This phase is essential to understand the risks and rewards associated with the property.

  5. Financial Analysis: Syndicators also perform a detailed financial analysis to forecast potential returns and understand how the investment aligns with the expectations of their investors (Limited Partners). This includes cash flow projections, expected capital expenditures, rent growth assumptions, and more.

  6. Alignment with Investment Goals: Finally, the best real estate syndicators ensure that the chosen properties align with the specific goals, risk tolerance, and investment horizon of the syndication. This alignment ensures that the syndicator's and investors' interests are congruent.

  7. Ongoing Monitoring: Post-acquisition, syndicators continue to monitor the property's performance, market trends, and other relevant factors to make informed management decisions.

Choosing the right properties and markets is a complex process that requires expertise, experience, and a deep understanding of real estate dynamics. Real estate syndicators leverage their knowledge, analytical skills, and industry connections to make these critical decisions, aiming to provide attractive returns for their investors while managing the associated risks. By selecting properties that fit the syndication's investment strategy, syndicators can create opportunities for both growth and income, adding value to the overall investment.Who can invest in real estate syndications?


Who can invest in real estate syndications?


Generally, accredited investors (individuals with a net worth of $1 million or more or annual income of $200,000 or more) can invest in real estate syndications. Recent updates made to this rule by the SEC in 2020 now allow individuals that have obtained certain professional certifications or designations like financial professionals that hold a FINRA Series 7, 62, or 65.


What is the minimum investment amount for a real estate syndication?


The minimum investment for a real estate syndication can vary widely depending on the specific syndication and the syndicator's preferences. Generally, the minimum investment amount can range from $25,000 to $1,000,000 or more. However, some syndications may have a lower minimum investment amount, such as $10,000 or less, while others may require a higher minimum investment amount, such as $500,000 or more.


What are the benefits of investing in a real estate syndication?


Investing in real estate syndications allows investors to participate in larger real estate deals than they otherwise could on their own, access experienced management. Because of the scalability and tax benefits, the investor can potentially earn higher returns than if they were to invest in single family homes or other traditional investment options.


Is it worth it to invest in real estate syndications?


Whether or not real estate syndication is worth it depends on a variety of factors, including the individual investor's financial goals, risk tolerance, and the specific syndication opportunity. For investors who are seeking to diversify their investment portfolio and are willing to take on the risks associated with real estate investments, syndication can provide a means to invest in larger, more complex properties that might otherwise be out of reach. Syndication can also offer the potential for higher returns than more traditional investments, such as stocks or bonds, particularly when investing in value-add or development projects.


However, investing in real estate syndications also comes with risks, such as the possibility of loss of capital or reduced returns due to factors such as changes in market conditions, unexpected expenses, or property management issues. Additionally, syndication investments typically require a long-term investment horizon, as the returns are generated over several years, and as such is considered an illiquid investment.


Overall, real estate syndication can be a worthwhile investment for investors who have done their due diligence and have a sound understanding of the risks and potential rewards. As with any investment, potential investors should consult with qualified professionals to determine if real estate syndication is a suitable investment for their individual needs and circumstances.


What types of real estate projects are suitable for syndication?


Real estate syndications can be used for a variety of projects, including multifamily residential properties, commercial office buildings, retail centers, self storage facilities, and more.


What is the typical investment structure for real estate syndications?


The typical investment structure for real estate syndications involves a combination of equity and debt financing.


How are profits distributed in a real estate syndication?


Profits are typically distributed to investors based on the percentage of their investment in the syndication. Generally, profits can be distributed based on cash flow from the operating business (ex. Rental income from an apartment building) and/or from the sale of the asset.


What are the risks associated with investing in real estate syndications?


As with most investments, real estate syndications carry risks, including the risk of loss of capital, fluctuations in real estate values, and changes in the economic environment.


How long do real estate syndications typically last?


The length of a real estate syndication depends on the project, but they can range from 5 years to 7 years, or to a decade or longer.


How can I find real estate syndication opportunities?


Often the best real estate syndication opportunities come from networking with those in the industry. Because these general partners are good at what they do, their ability to raise capital doesn’t require them to advertise. Due to the private placement nature of real estate syndications, word-of-mouth is often a great way to find real estate syndications. You may see some less established syndications placed on marketplaces or sometimes via financial advisors. It is important to thoroughly research any potential investment opportunity before committing funds.


Who should be on the team for real estate syndication?


Real estate syndication involves pooling capital from multiple investors to invest in a real estate project. Building a strong team is crucial for the success of a real estate syndication. Here are some key roles that should be filled on the team:


  • Sponsor/ General Partner: The sponsor is the person or entity that initiates the real estate syndication and is responsible for overseeing the project. The sponsor should have a proven track record of successful real estate investments and a thorough understanding of the local market.

  • Attorney: An attorney specializing in real estate can provide legal guidance and help ensure that all legal requirements are met.

  • Accountant/CPA: An accountant can provide financial guidance and help with tax planning and compliance.

  • Broker: A broker can assist with finding and evaluating potential properties for investment or could be responsible for recruiting investors (also known as Limited Partners)

  • Property Manager: A property manager can oversee the day-to-day operations of the property, such as leasing, maintenance, and rent collection.

  • Lender: A lender can provide financing for the project.

  • Investor Relations: An investor relations specialist can handle communication and reporting to investors.


It's important to note that the specific roles and team members may vary depending on the size, market, and scope of the real estate syndication. It's also important to select team members who have the necessary expertise and experience to help ensure a successful outcome.


What defines the best real estate syndications?


The best real estate syndications are defined by several key factors that investors should consider before committing their capital. These factors include, but are not limited to:


  • Experienced Syndicator (sponsor/General Partner): The success of a real estate syndication largely depends on the experience and operational expertise of the general partner (GP) or sponsor. Look for a syndicator who has a proven track record of successfully managing and executing real estate deals.

  • Investment Strategy: The investment strategy of the syndication should align with your investment goals and risk tolerance. For example, if you're looking for stable, long-term income, you might want to consider a syndication that invests in income-producing properties like apartments or commercial real estate. If you're looking for higher returns, you might want to consider a syndication that invests in value-add properties or development projects.

  • Transparency: A good syndicator should provide clear and transparent communication regarding the investment process, risks, fees, and projected returns. Look for a syndicator who provides regular updates and reports to investors..

  • Diversification: Diversification is important in any investment portfolio, including real estate syndications. Look for a syndicator who invests in different types of properties in different locations to reduce the risk of concentrated exposure.

  • Alignment of Interests: The syndicator's interests should be aligned with those of the investors. Look for a syndicator who has skin in the game, meaning they have invested their own money in the deal, and who charges reasonable fees.

  • Legal and Regulatory Compliance: The syndication should be structured in compliance with relevant laws and regulations. Look for a syndicator who has a solid understanding of securities laws and who works with experienced legal and accounting professionals.

By considering these factors, you can identify the best real estate syndications that align with your investment goals and offer attractive risk-adjusted returns.


Video Transcript


This is Madison Investing's Wealth Windup series. We take the most frequently asked questions that we receive from investors and we break them down for you.


At Madison Investing, we help busy people like you build passive income streams and real wealth to live life on your terms. Today's Wealth Windup is "What is a real estate Syndication?" To nail this topic, let's break it into three concepts starting with the basics.

  • Concept # 1: Investors can actually pool their capital and invest as a group

  • Concept # 2: Real Estate Investing - Now it's a broad term and it encompasses many strategies but we use the concept as a point of comparison to segue into the primary topic, and the primary topic...

  • Concept # 3: Passive Investing in a commercial real estate syndication.

Now before we jump into this first concept a few quick words the amazing benefits of real estate investing remain out of the average investors reach largely because of a lack of familiarity. Let's change that today and get familiar with some of the basics. There's so many smart and hardworking people that stay within their comfort zones of mutual funds, 401ks and stock investing. And why did they do this? Well typically it's because the Wall Street marketing machine guides them there. And it works really hard to keep them there, and their capital spinning within that machine. Now each of those investment types have their place and we believe in building a balanced portfolio that includes a healthy allocation of real estate.


Concept # 1: Pooling capital to invest as a group.

Let's start with a simple setup. Person A has one dollar. Person B has an amazing thing that person a once the price is right and the buyer has enough capital. The result is a successful transaction with two happy people. They go on their merry way.

New setup person is still only has one dollar. Person B still has that Snickers bar but now it's actually worth two dollars. Person A already knows that the deal won't work because they don't have enough cash to buy the thing, but Person A... well they have a strong network, they have connections. So Person A calls it their friend who has an extra one dollar to invest they are willing to join them in the deal and buy the Snickers bar. Let's call them a team because they are so "Team A" has two dollars. Person B still has that thing worth two dollars. Team A has enough to buy the Snickers bar now, but now they know also that this team strategy comes at a cost. But team A is smart. They know that getting 50% of something that they want is better than 0%.

They know that half of something valuable is better than nothing at all.

So they pull the trigger and they move forward with the deal. Team A celebrates with their new acquisition in Person B is satisfied with their two dollars in income. And just like that, you now have a fundamental understanding of how a syndication works that a really basic level. And all it took was three minutes of your day. Now you're watching this clip to learn about real estate, not candy bars. So let's apply the syndication concept to something more material.


Concept # 2: Real Estate Investing

At Madison Investing, we help investors build wealth and passive income streams by investing in commercial real estate syndications. That's why this Wealth Windup is actually focused on that. So, why are you looking at this picture of a single family home? Well, we've included this section to acknowledge that the most common association people make when they hear the phrase real estate investing is a single family rental. Let's use that example to associate the simplicity of a down payment when you buy a single family home, with the equity raise on a commercial deal. That term will make more sense in a moment.

So here's the new setup: bigger numbers than our Snickers example. This investor has capital to invest. Something between $25k to $100k.

They're not sure how they want to deploy the capital, but are open minded and they've heard good things about real estate. The most common type of real estate investing that the investor has heard of are single family rentals. In this investors local market housing prices are pretty expensive but they can wrap their mind around the concept of buying single family rentals more easily than jumping into a syndication and they decide to move forward with that strategy instead. Now the average purchase price for a single family home in their market is around one million dollars. A down payment for that type of property exceeds the investor's budget. Bummer the investor is priced out. Now, what if there were actually two investors both working successful professionals. They can pool their capital to purchase the rental property. So in this case that's what they do. And just like that they are proud new owners of a rental property and all that the new property comes along with - the trials and tribulations of rental ownership. Rental property ownership, in all of its glory. Now, by now you understand the concept of syndication and you've seen even one simple application of it toward buying a single family rental. So now onto the main event and what you came for: passively investing in a commercial real estate syndication.


So at this point you already know this investor. They have capital to invest - something around $25k to $100k. This investor has heard a little bit about real estate and syndications from a friend. They heard about what they're all about and that they can produce a lot of returns and great benefits but they have no understanding of how they actually produce it. They'd heard that this thing called the Real Estate Syndication can produce a monthly income for the investor or a quarterly income, and then after about five years of receiving these these payouts they receive a big payout at the end. So along the way they've paid no taxes on the income they received and the only work that they actually did was wire the capital and e-sign the agreement upfront. They heard that you can invest in big deal - properties with hundreds of units. Things like apartment communities, self-storage facilities and mobile home parks. They learned that these big deals are actually less risky than buying a single family rental, since one vacancy in a single family rental means they receive zero rent but one vacancy out of 400 apartment units means that the property is still receiving rent from 399 other tenants.


And they also heard that they can invest passively in these deals meaning that they wouldn't deal with maintenance issues, angry tenants and neighborhood headaches. Those things would be entirely someone else's problem to deal with. And since they can invest passively they can invest in deals far outside their own market where the returns are stronger and still reap all the benefits of investing in these bigger deals. We'll cover that long list of benefits in another video. So in this case, the investor is eyeballing a 400 unit apartment community in Texas. The price tag on this property is $40M. Now in commercial real estate the down payment is referred to as "equity." The amount needed to close on this particular project is $17M. The investor has done a great job saving up capital but there's a sizable gap between their one $100k dollars and the equity needed to acquire this property. The good news is that there are hundreds and thousands of like minded investors facing the same dilemma. So what happens when the investor joins forces with hundreds of others each ready to invest somewhere between $25K and $100k in capital. Now, each understands the remarkable and superior benefits of investing in commercial real estate projects instead of residential rentals.


Their strength in numbers opens up a ton of new possibilities, so they pool their capital totaling $17M in equity.


But although they have capital to purchase the property there's still a problem: they lack the expertise and they lack the right relationships to acquire and manage this property. That's where the General Partnership comes in. This "operator" sometimes known as the "Deal Sponsor" has executed this type of purchase dozens of times and worked with hundreds, maybe even thousands of passive investors also known as "Limited Partners" or LPs. In a project like this, Limited Partners (or LPs) and General partners (GPs) form a unique business identity just for this one special occasion of purchasing and improving this property. The operator does all the work. The passive investors provide the capital. That's the deal. Buying, improving and managing a 400 unit apartment community takes a lot of work and a lot of expertise. The operator knows this, and they call in their teams. The construction team has done improvement projects like this dozens of times across thousands of units. The property manager actively manages dozens of similar properties ensuring an amazing living experience and a sense of community for thousands of happy tenants. This is the team that actively manages the entire project from before close all through the life of the project whether it's a five year, seven year, 10 year or other... up until the time that it's sold.


It's also helpful to mention that at the time of this recording for 100% of the projects that we had Madison investing have partnered on the Operators have actually invested at least $100k of their own funds. They have put "skin in the game" in every project. At Madison investing, that's actually one of the criteria for us partnering on a deal. So just like that, you've gone from "syndication newbie" to "knowledgeable investor" and you've taken off the Wall Street blinders and understand how it works when you invest passively in a commercial real estate syndication. If you want to learn more about how it works behind the scenes and found this Wealth Windup helpful, just stay tuned for another segment where we break down things like: how it works before closing on the property and through the life of the project. For now the best way to keep learning is by joining our investor mailing list. Get started by completing the form on our website. Add your NAME, EMAIL and check boxes and you'll be on your way to financial freedom in no time.



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