Syndications pool money from many investors to develop (or buy) larger properties they most likely could not afford to do on their own. This guide explains how real estate syndications work, their benefits, and what to expect.
Real estate syndication investment is a savvy investment strategy that pools capital from multiple investors to fund a real estate project. Pooling resources allows investors to pursue larger, more profitable properties, with liability and returns defined by each member’s commitment.
Think of it as a team effort where everyone contributes their unique strengths, be it capital, resources, or industry connections, to achieve a common goal. You can grow your real estate portfolio, without having to be a landlord!
Real estate syndications are essentially group investments. In commercial real estate, it is common for real estate investments to be structured this way.
A real estate investment syndicate, or syndication, involves pooling funds from a group of investors—typically between 2 and 10 people, but sometimes hundreds—to develop (or purchase) a property together. This allows individuals to invest in larger assets, like apartment buildings, rather than smaller properties like single-family homes.
By investing passively through a syndication (also known as real estate crowdfunding), you avoid the hassles of being an active real estate investor.
For example, if you bought a single family investment property, you would be responsible for finding & screening tenants, managing contractors, and dealing with the tenant when a water heater goes out. You would own 100% of the investment and also have to do 100% of the work.
However, when you invest passively in a real estate syndication, you will own a smaller percentage in a larger deal. More importantly, you won’t be responsible for doing any of the busy work since you are a passive investor in the project.
This type of investment opens doors to real estate markets and opportunities that would normally be out of reach for individual investors. For instance, someone who can’t afford a commercial property on their own can participate by investing a smaller amount through a syndication.
Syndications are typically led by experienced developers (sponsors) who oversee the business plan from start to finish. With syndications, you earn all the benefits of real estate investing—cash flow, appreciation, equity, and tax advantages—without the responsibilities of being a landlord.
Additionally, these group investments can offer strong risk-adjusted returns and diversify your portfolio beyond the stock market. Investors generally receive cash flow during the hold period (around 4%-6% on average), along with a portion of the profits when the property is sold.
The syndication process can be broken down into three main phases: origination, construction, and liquidation. The origination phase involves the developer finding a potential site and obtaining all required permits. During the construction phase, the developer manages the entire construction process. Finally, in the liquidation phase, the property is sold, and profits are distributed among the passive investors.
For example, Goodin Development uses the real estate syndication structure for our ground up development projects. Engaged in real estate syndications with its development projects, Goodin Development exemplifies how these partnerships can successfully bring together various investors to fund and manage substantial real estate deals.
Every real estate syndication deal involves two main participants: the General Partners (GPs) and the Limited Partners (LPs). The GPs, also known as the developer or sponsor, are the masterminds behind the project. They find the project site, work with the city to obtain permits, secure financing, manage contractors, and oversee the property management company. The developer brings their knowledge and expertise to the table to ensure the project is successful for the limited partners.
Limited Partners, on the other hand, are primarily capital providers. They invest their funds into the syndication, but do not have to participate in the day to day oversight of the project. This structure allows busy families to reap all the benefits of real estate investing, without the hassle. Passive investors are critical to the success of these ventures, as they provide the necessary funds to bring the projects to life.
Goodin Development utilizes the real estate syndication strategy to complete our projects. We raise capital from busy professionals to do our projects and give them a real chunk of equity in the project. The limited partners are a real partner in our real estate investments.
The General Partner (GP), often the developer, is the active partner managing the entire project from start to finish. This includes arranging financing, signing on the bank loan, leasing up the project, and overseeing the sale process. The GP essentially handles all the heavy lifting, ensuring the project’s success and profitability.
Limited Partners (LPs) take a completely hands-off approach once the project closes. Their primary role is to provide the capital required for the project. The LPs’ only upfront task is to verify the developer, the market, and the business plan. After this initial due diligence, they can focus on their careers and spend more time with their families, knowing that the GP is handling the day-to-day management of the project.
This symbiotic relationship involves the GP leveraging their expertise while the LPs provide the necessary funds. Together, they can tackle ambitious real estate projects that would be challenging to complete individually.
Investing in real estate syndications offers numerous advantages that make it an attractive option for busy professionals. Here are a few top reasons:
A significant benefit is access to high-quality, institutional-grade properties typically out of reach for individual investors. This access allows investors to diversify their portfolios with premium real estate assets, shielding them from market volatility.
Real estate syndications also offer significant tax benefits. Investors can utilize depreciation deductions to lower their taxable income, which is a benefit not typically available with other forms of real estate investments, such as Real Estate Investment Trusts (REITs). These tax advantages can significantly enhance the overall return on investment.
The passive income potential is another appealing aspect of real estate syndications. Investors earn rental income from their rental property and a share of the profits without needing to manage the property actively. This hands-off approach allows investors to enjoy the financial benefits of real estate without the headaches of property management. For example, Goodin Development splits profits with passive investors, providing a lucrative and hassle-free investment opportunity.
While real estate syndications offer numerous benefits, they are not without risks. Here are a few of the main risks you can consider:
When you invest in a rental property on your own, you get to make all the decisions (this can be a good or bad thing). When you invest in a real estate syndication, you are putting your full trust into the developer team that manages the asset on your behalf.
This can be a great way to begin as a passive investor without having to do all the work yourself. But it also means that you need to vet your sponsors carefully before investing. However, the sponsor team (developer) is responsible for managing the project from start to finish, so it’s important that they have experience and a proven track record.
Heavy reliance on the syndication sponsor’s competency and performance is big risk factor. The investment’s success largely depends on the sponsor’s ability to manage the project effectively. Therefore, the sponsor’s credibility and track record are crucial considerations for potential investors. Conflicts of interest can also arise from syndication fees, which might incentivize sponsors to prioritize short-term gains over long-term asset management.
Market fluctuations and economic uncertainties can impact the investment’s performance. Additionally, unexpected property expenses and changes in regulations may also play a role. Investors must conduct thorough due diligence, reviewing all documents and understanding the potential risks involved.
Of course, evaluating the real estate deal is super important, however, when you are a passive investor in a real estate deal, the company managing the project should be the most important factor to evaluate.
A key component of a real estate syndication deal is the profit split between the General Partners (GPs) and the Limited Partners (LPs). These deals commonly include a preferred return, usually between 6% and 8%, meaning the limited partners receive a set return before the general partners receive a penny. The preferred return benefits LPs by ensuring there is an alignment of interests and that the general partners are incentivized to perform.
Once the preferred return is met, the remaining profits are typically split between the LPs and the GP, often in a 70/30 ratio. This means that 70% of the profits go to the LPs, while the remaining 30% goes to the GP. This profit split incentivizes the GP to perform well since their earnings are directly tied to the project’s success.
For example, if a real estate syndication generates a 10% return, the LPs would first receive their preferred return of up to 8%. The remaining 2% would then be split according to the agreed ratio, ensuring that all parties are fairly compensated for their contributions.
Related Blog: Understanding Key Return Metrics in Multifamily Development
Once you come across a potential investment opportunity, it’s important to perform your own due diligence by reviewing the syndicate summary, attending the investor webinar, and exploring external sources to determine if the investment aligns with your goals.
The syndication deal summary provides an overview of the key aspects of the project, including:
The investor webinar, hosted by the sponsor team, dives deeper into the details of the development. This is an opportunity for you to ask questions and assess the experience and strategy of the general partner and sponsor team.
After reviewing the summary and attending the webinar, you should have a better understanding of whether the deal fits your investment criteria.
Next comes due diligence. This involves gathering more information about the project and the sponsor team to help you make an informed decision. You should review the development budget, sponsor and acquisition fees, third-party market analysis, and perform your own research on the location, local population growth, job trends, and other factors influencing demand.
If you decide to move forward, the next steps include reviewing and signing the private placement memorandum (PPM), verifying your accreditation status, and transferring funds to complete your investment.
Related Blog: 5 Things Every Passive Investor Should Do Before Investing in a Real Estate Syndication
Selecting the right partner for your real estate investments is crucial, and Goodin Development is an ideal choice. With an experienced team and a proven track record, Goodin Development has consistently delivered successful projects. Their conservative underwriting approach ensures that investments are made with a thorough understanding of potential risks and returns.
Goodin Development prides itself on keeping investors informed throughout the process. Transparency and communication are central to their strategy, helping investors feel confident and secure. Goodin Development has also never needed to perform a capital call, demonstrating financial stability and effective project management.
By partnering with Goodin Development, investors can leverage the expertise and reliability of a seasoned developer, making their real estate syndication investments more secure and potentially more profitable.
Investing in real estate syndications with Goodin Development is a straightforward process. The first step is to join our Investor Club. Once you sign up, you will receive an email confirmation from us. Favorite our emails to prevent them from ending up in your spam folder.
Ready to take the plunge into multifamily syndications? Here’s your complete overview of the process:
Following these steps allows you to seamlessly integrate real estate syndications into your investment strategy.
Real estate syndications offer a unique and powerful way to invest in high-quality properties, providing numerous benefits such as tax advantages, passive income, and portfolio diversification. By understanding the structure, key players, and potential risks involved, investors can make informed decisions that align with their financial goals.
Partnering with experienced developers like Goodin Development can further enhance the investment experience, ensuring transparency, stability, and profitability. Whether you are a seasoned investor or new to real estate investing, real estate syndications present an exciting opportunity to grow your wealth and achieve your financial objectives.
Real estate syndication is basically a way for a group of investors to pool their money together to invest in a real estate project. Each person’s share of profit and liability depends on how much they’ve invested.
The key players in a real estate syndication are the General Partners (GPs), who handle the management, and the Limited Partners (LPs), who supply the capital. Each has a crucial role in the success of the investment.
Investing in real estate syndications gives you access to top-notch properties, tax perks, and a chance to earn passive income while diversifying your portfolio. It’s a smart way to grow your wealth with less hands-on work!
Real estate syndications can be risky due to their illiquidity, reliance on the sponsor’s performance, market ups and downs, and possible conflicts of interest. It’s crucial to do your homework before jumping in!
You can invest in real estate syndications with Goodin Development by joining our Investor Club for updates on new opportunities and scheduling a call with Justin for personalized advice. It’s a great way to get involved!
