Understanding Syndication: Bringing New Investors Into The Deal
Syndication is a popular option if you’re new to investing in real estate or want to enter the marketplace with minimal capital investment. Syndication allows investors to realize a profitable return on investment while minimizing risk and liability. In today’s evolving real estate market, syndication provides a unique opportunity for low-risk investment and passive returns.
What Is Real Estate Syndication?
Syndication in real estate is a method of investing that pools the resources of multiple investors to allow the collective to purchase higher-value properties. Syndication enables investors with limited funds to enter the market. It’s also an ideal way for new investors to launch their real estate portfolio without the large financial commitment of an independent investment.
What Are the Basics of Real Estate Syndication?
In a syndication deal, your role is either as a sponsor or investor. The sponsor (also known as a general partner) is the most active participant in the investment. An investment can have one or multiple sponsors, and they are responsible for scouting properties, securing the transaction, managing the property, and distributing revenue to investors. Investors (also known as limited partners) put up the majority of the funds to acquire the property, but have a more passive role in the real estate acquisition and property management.
How Does the Syndicate Generate Financial Returns?
Sponsor investment typically ranges from 5% to 20% of the total value of the property. One or multiple investors will make up the difference. Once the initial investment has been made, the sponsor makes money through property management fees, rental cash flow, and appreciation of the property. In some syndicates, the sponsor also receives a “finder’s fee” for initiating the transaction. Investors in the syndicate typically see returns through monthly rental cash flow and overall capital appreciation.
How Are Real Estate Syndicates Structured?
Real estate syndicates are typically structured with one sponsor or general partnership and multiple investors or limited partners. Since the sponsor is responsible for coordinating the transaction, managing the property, and paying dividends to the investors, it’s essential that the sponsor is experienced in real estate investing and has a proven track record. Common real estate syndicate structures include:
- Straight Split. A simple compensation arrangement based on the ownership percentages of each party. For example, if the sponsor funded 50% of the capital and the collective of investors funded the remaining 50%, each investor would see cash flow and capital gains returns based on their individual ownership percentage.
- Preferred Return. This method of compensation pays out investors a predetermined amount before the sponsor receives their portion of the revenue. Common preferred returns range from 5-9%. Once the investor threshold has been met, the remaining compensation typically reverts to a straight split method.
- Distribution Waterfall. This is an advanced compensation structure that pays out predetermined percentages only after the other entities have recouped their initial investment. For example, in a “catch-up tranche” structure, the sponsor would receive 100% of their capital investment back before the investors receive their share. In a preferred return waterfall, the concept is reversed—investors receive compensation for their capital investment before the sponsor realizes their returns.
What Is the Accredited Investor Clause?
In British Columbia, there are minimum net worth requirements for investors. To join a legitimate syndicate, investors need a minimum annual salary of $200,000 and an overall net worth of at least $1M.
Do You Want to Learn More About Real Estate Syndication?
Syndication is a unique way for new investors to enter the real estate investment marketplace. From single-family homes to multifamily rental properties, I understand the complexities of real estate investment and sponsorship. As an experienced real estate advisor in Victoria, Cowichan Valley, and the South Island’s Westshore communities, I help clients capitalize on their investment opportunities. Contact me to learn more.