Real estate syndication is gaining popularity as more people try to diversify their financial portfolios. Continue reading if you want to learn more about real estate syndication or if you’re thinking about becoming involved. Below, we’ll go over everything you should know!
So, what exactly is syndication in real estate?
We are all aware that real estate investing requires money. To succeed, you must also possess the necessary knowledge, negotiating skills, expertise, and contacts. It might be quite uncommon for one person to possess all of these resources. For a lot of private investors, real estate syndication provides solutions to these issues.
Real estate syndication is an approach to passive investing that involves combining resources. In multifamily syndication, a number of investors combine their funds to buy a single commercial real estate asset. A syndicator, sometimes referred to as the sponsor or operator, organizes the transaction, handles the funding, and makes all essential choices.
Individual investors contribute money to the project and are compensated in accordance with the agreement. Individual investors won’t have to worry about managing cashflow, hiring staff, or any of the more intricate aspects of the project on a daily basis. Instead, the sponsor is in charge of all project-related activity, and individual investors get a passive return on their investment.
Individual investors need less funds to take part in a large-scale project because it is supported by a lot of investors. Individual investors don’t need to have industry expertise, experience, or a network because the project sponsor will manage it. Instead, it’s crucial to identify a sponsor they can trust to oversee the project properly.
What is real estate syndication? An overview of history
The concept of investing in real estate alongside others is not new, despite the fact that it hasn’t always been simple. Real estate syndicates and the concept of crowdsourcing a real estate purchase are currently popular. Securities solicitation was forbidden under the Securities Act of 1933. This included restricting the promotion of joint ventures to putting money into commercial real estate purchases. Due to this, real estate transactions were opaque or were only conducted by a small number of private partners who had to provide substantial sums of money.
The 2012 Jumpstart Our Business Startups (JOBS) Act permitted the promotion of real estate and investment options to potential buyers. This modification made it simpler to look for partners in commercial real estate transactions and gave regular investors more opportunities to invest. Suddenly, more people had access to real estate syndication as a viable option for those unable to raise the necessary capital on their own.
How does real estate syndication work?
Each real estate syndication firm will have its own business philosophy and criteria. Nevertheless, the fundamental elements are:
1. Acquisition
The process for acquiring multifamily real estate resembles the process of acquiring single family real estate. It requires market and submarket analysis, sourcing deals on the open market, securing financing, and due diligence. However, with the scale and overall stakes being much higher, the process is a lot more thorough. Purchasing one bad unit can be tough. Purchasing 100 bad units can be a nightmare, especially if other people’s money is involved. This can be disastrous for a syndicator.
Some key differences in the acquisition process for multifamily real estate are:
- Deal Sourcing: There is no central MLS for multifamily deals. Deals are typically presented by brokerages that represent sellers. It is essential for any syndicator worth their salt to develop relationships with brokers in their target markets.
- Securing Financing: Commercial loans must be guaranteed by the borrower, meaning the general partnership has the net worth and liquidity necessary to cover the debt. On large scale deals, this may mean a combined net worth of millions of dollars. Often, syndicators starting out will bring in a Key Principle or Loan Guarantor to help them qualify for financing.
- Underwriting/Market Analysis: Underwriting is the process of analyzing a deal to determine risk and project performance. This process is much more intricate in multifamily deals because of scale. Imagine being off on rent projections by just $20 on a 100-unit property. The result would be a $2000 difference in revenue per month or $24,000 annually. In a market with a 5% cap rate, that means a $480,000 difference in property value (for simplicity’s sake, PM fees, vacancy, etc. weren’t included in the calculation). At Mane Street, we invest an extensive amount of time in deal and market analysis to make sure we’re only acquiring quality assets.
2. Capital Raising
Though the actual raise for a syndication takes place once a property is under contract, the process starts well before a deal is identified. Deal sponsors must constantly build and maintain relationships with potential limited partners so they have access to capital going into an investment opportunity. This entails a great deal of marketing and networking. Once a property is identified, the GP can then market the specific deal to their prospective investors and raise the capital. It’s important to note that syndications are regulated by the U.S. Securities and Exchange Commission (SEC) and there are rules that must be followed when raising capital.
3. Asset Management
Once a deal is closed, the operators are responsible for executing the business plan to meet or exceed the targeted returns. The day-to-day responsibilities of the property will typically be handled by a third-party property management partner unless the deal sponsor has an in-house property management arm. The operators are also responsible for reporting property updates and performance to the limited partners; and making cashflow distributions on a periodic basis. The sponsor has a fiduciary obligation to protect the capital of their investors. Passive investors earn a consistent passive income from collecting rent, and depending on the conditions of the contract, they can also receive a portion of the profit when the property is sold.
Final word on what is real estate syndication
Multifamily syndications are an excellent way for busy professionals to reap the rewards of investing in commercial properties without having to deal with all the hassle. If you are looking for more information on real estate syndication and/or would like to be notified of deals we have available, consider signing up for our email newsletter by submitting your email in the footer.
