If every real estate investor had to wait for enough money to finish an entire construction project, there wouldn’t be nearly as many buildings. So, what’s the alternative? The answer is real estate syndication.
A real estate syndication is an investment partnership that pools its resources into a single investment.
A syndicator — the brains of the syndication project — pools resources from multiple parties until they have enough funds to start the project. However, pooling funds is just a first step on their journey. They’re also responsible for seeing the project through.
This means they must source and manage the investment opportunity and ensure each investor gets their fair share of the profit.
To make the long story short, syndication allows even those who don’t have enough capital to purchase or construct a massive property to participate in the real estate market.
How to invest in real estate syndication
There’s a lucrative opportunity here for those who know what they’re doing. Here are some tips on getting started in the real estate syndication industry, either as a syndicator or an individual investor.
Understand the appeal
The first thing you need to do is understand the industry’s appeal. As an investor, this will help you determine what you’re getting from an investment. As a syndicator, it will help you develop more convincing arguments and unique sales propositions.
Significantly reduced risks
Risk management in syndication is much higher since the costs are split to multiple investors, and there’s someone with experience/knowledge of the industry.
A whole new world of potential investments
Normally, as an investor, you would only be able to focus on the properties you can afford. For the majority of people, this means completely ignoring major residential and commercial real estate properties. This would be a massive missed opportunity in an era where shared office spaces and retail spaces are a fast-growing market. Real estate syndication deals may need a minimum investment amount, but it is a far cry from trying to buy into the industry on your own.
Opportunities for passive income
This gives people who want to create a passive income stream a chance to get into real estate. They no longer have to compromise their savings or take out massive loans. Real estate syndication investments also have proven tax benefits, and additional cash flow can help with their financial goals.
A preview on how real estate syndication works
Because you’re giving people a chance to partake in a real estate project, you’re also offering your audience an invaluable experience. This way, they can see what it’s like to be an investor without independently funding an entire project. In other words, it’s a great learning opportunity.
A foot in the door to real estate investing
Through syndication, many investors are making their first step in real estate investing. This means they’ll meet many specialists, from inspectors and officials to contractors and even other investors. In other words, it’s a great networking opportunity for potential investors. Successful investments can also look good on their real estate portfolio.
An easy exit
One more thing that doesn’t get much attention is that you have a simple exit. Investors and syndicators can agree on their preferred exit strategy in case things don’t pan out the way they planned.
You need to review all this as an investor or format it into a great USP as a syndicator.
Starting on the right foot
Like anything else, you need to develop your investment strategy before getting into real estate syndication. The first thing you need to do as an investor is figure out the logistics. First, you’re interested in who you’re working with and what your money is going toward.
The first step would be to find the right real estate broker. You want someone who has worked with syndications before and someone that you feel good about.
Now, there are a few ways to maximize your profit. Usually, you get the most value if you’re the first to join the market. However, this won’t always be possible.
Another way is to look for distressed properties. You can use a moment of crisis, recession, or a poor local financial situation to start on the right foot. In his book Rich Dad Poor Dad, Robert Kiyosaki claims that rich people have a different relationship toward money. It does not concern their current net worth but ties into their financial literacy.
For instance, there are places suffering from economic issues. Most offer debt relief programs, and many properties are getting disclosed. This is an opportunity for an investor to find an undervalued property to invest in (via syndication and with the help of the right real estate agent). This way, you and others could make your first steps in becoming a real estate investors.
If you are in debt, you could use this debt relief money, consolidate your loan and decide to become an investor. It’s a lot easier to stay solvent when you have guaranteed cash flow and a passive source of income. Real estate syndication allows anyone to participate, so why not turn a new leaf? The most important part about getting in a dire financial situation lies in figuring out how you ended there and ensuring it never happens again.
Choose the right type of property
Now, you cannot get real estate syndication for a family home or a single apartment. What would be the point of this? Syndications are reserved for massive real estate properties, which generate a serious profit (one that makes sense splitting). So, what are some property types that syndications are targeting?
The best thing about this is that there’s always a great demand for office spaces. This means the vacancy is low, and you can rest assured knowing that your share of the rent will come in (almost) every month.
Retail centers are massive complexes, making money on subletting space and parking lots. These investments are usually stable and reliable, which is what makes them so unique.
Multi-family properties may mean several things, ranging from apartment buildings and fourplexes to townhouses. Overall, even with a horrible financial situation, the demand for rental housing is high, especially in urban areas.
Mobile home parks
While many people dream about living in their mobile homes, from time to time, they’ll still have to settle. Still, a mobile home needs more space than a car (for those living in their cars), so they’ll need a plot of land optimized for this purpose. Some mobile home parks are so well-made that they have their parks, playgrounds, or pools.
The term hotel can mean many things. The key thing to remember is that the vacancy is determined by location and status. So, research the venue and go through your options.
Industrial buildings are usually the most expensive. They’re massive and made to withstand difficult industrial procedures. While incredibly lucrative, they’re also hard to find.
Picking the right property type will probably be harder than you expect. Take your time.
Prepare for much work
One of the biggest misconceptions about passive income is that you have literally nothing to do. Nothing is further from the truth, and clicking “buy” on your phone to get your monthly passive income rarely works. If this interests you, you should probably look for companies that pay dividends.
Anyone who has experience in property management knows that it takes time and resolve. Hiring a property manager or enlisting the services of a property management company is the safest action if you have more than one property.
With real estate syndication, this is not something that you’ll have to worry about. However, syndication comes with its own set of issues and problems.
First of all, there are not as many opportunities. While this sounds strange compared to the number of properties on the market (for conventional buyers), the number will seem limited.
Second, you need to check out each real estate property before deciding to invest. This is the only way to know what you’re buying and the only way to retain some control. Ideally, you would visit the property in person. If not, you want to see the place via a virtual conference. Either way, you have to check it out.
Third, you need to boost your networking skills through the roof. In this field, it’s all about networking. After all, you want to join your local real estate group, meaning you must establish contacts and make a good first impression.
Fourth, you need to review the overall market before jumping in. Having a large gap between supply and demand may cause the market to “overheat”, making it difficult for investors to join real estate syndicates. Not only that, excessive demands may cause inflated prices and a steep reduction in profits, since investors may be compelled to accept reduced yield expectations.
The most important thing you need to understand is that you’ll review hundreds of deals before you commit for the first time. We’re talking about hours and hours of work and meticulous research. All this is provided that you want to make data-based decisions and not just gamble with your investment money.
Start your own syndicate
Starting your own syndicate means finding potential investors and taking the reigns of the project. This is incredibly ambitious, a huge responsibility, and it will require a huge investment on your part. If you make it, however, it will be more than worth it.
The first step would be to come up with a great property. You need something to present to the potential buyers. This is where the USP part that we discussed early on works great.
Next, you need to find the right people for the investment. While you’re not restricted to where you can look for them, most people start with a familiar group like their own family or a circle of friends. This strategy, however, is not always the smartest. Working with friends and family members can make things near-impossible to manage. It may also deteriorate the relationship and worse.
So, if not amongst your personal acquaintances, there are other areas where you could look for potential investors. For instance, you could go to the local real estate investment club. Remember that the level of networking and persuasion required here might be somewhat higher. After all, these people are savvier in real estate investment. If they ask a question you cannot immediately answer, it will portray you worse. In other words, be extra prepared when going there.
You can also look through Facebook groups dedicated to potential real estate investors. You have a huge audience here, but the vetting process might be difficult.
Lastly, there are many platforms dedicated to this. Study this, read some reviews, and give it all a go. What’s the worst that can happen?
Prepare all the documentation
Paperwork is one of the most important things when starting your syndication business. First, you need to assemble a legal structure. Generally, you want to pick either LLC or a partnership. Due to the nature of the industry and the risks involved, sole proprietorship is completely out of the question. You’ll probably need an operating agreement if you run as a limited partnership.
Usually, you want to start with an investor questionnaire. Here, you need to learn as much as you can about these investors. You want to get their personal information and hear their opinions on subjects like risk tolerance, investment experience, etc. This should be your starting point if you want to adjust your approach to these investors.
Next, you need to make syndication documents. While nothing revolutionary, there’s no rigid syndication structure. This means you’ll have to make your documents, including papers like PPC (private placement memorandums), operating agreements, etc.
You also want to sign a subscription agreement. This is a document signed between a contractor and each investor. Here, all the terms of the arrangement are outlined, and it usually consists of things like warranties and subscription terms. If they want to name someone else as a representative, they must do it at this stage.
Most importantly, you need a property management agreement. Is a syndicator going to assume the responsibility of a property manager? In many scenarios, this is the case. After all, they already have a good relationship with all the owners and know the property (and all its legal requirements) inside and out. Still, they may be there just for the purchase part. In this scenario, it might be for the best if they find a suitable property manager.
You need to do your own due diligence to ensure that you are protected no matter what happens.
Make an online presence
If you’re running syndication or plan to start a site, you want to make a site.
The first thing that this will do is grant you some credibility. Here you are, asking people to invest their money in your real estate syndication, and you don’t even have a site. It doesn’t sound great, does it?
Once you’re done, you want to make a few social media platforms. Facebook is mandatory, and there are already a lot of pages there for real estate syndications. Twitter is a great way to build an audience and connect with other accredited investors and property management companies.
Instagram is also amazing for the real estate industry. You’ll have a much easier time showcasing these properties through its short graphic format. TikTok is also gaining ground as a viable platform for real estate promotion. You want a strong LinkedIn profile, as well, to help establish your credentials and make connections with people in the industry.
Next, you want to improve your visibility. If you’re not reluctant to invest a bit in your digital marketing, we strongly suggest spending some money on SEO to boost your visibility. It’s in your best interest that, when looking for syndication, local investors find you first.
Making a blog is one of the best ways to gain some authority. Here, you can talk about syndication and real estate. These two fields have many interesting topics and are bound to increase traffic. More importantly, they’ll show potential investors that you actually know what you’re talking about.
Your landing pages are also incredibly important. They’re your first impression on potential investors, so you need to introduce yourself and lead with the right CTA. You want them to invest, so don’t hesitate to ask for it. Still, spend the first minute introducing yourself and explaining why this benefits them. Give them the basics; there’s time to convey the rest if they’re interested.
Plan for the long run
Chances are, this is just a foot in the door for you. Your ambitions must go beyond this first project if you’re getting into real estate syndication. If you’re an investor, the only reason why you’re not buying a whole property is probably because you can’t afford it (at the moment). At one point, you probably hope you’ll be able to afford it. We’ve already stated that many syndicators and investors use syndication to gain experience and contacts.
So, it’s essential that you plan for the long run.
In the previous sections, we discussed the documents you’ll need. If you have a legal team on your side, this will go a lot smoother. So, this is one of the first collaborations you need to accomplish. As an investor, you want all these papers to be examined by a lawyer well-versed in real estate property. Ideally, it will be the same lawyer as the last time (the one you trust).
You also want to nurture a great relationship achieved in this business instance. As a syndicator, you want to stay in touch with the investors because they might also invest in your next idea. After all, convincing them to invest is a lot easier now that they trust you. As an investor, you’re eagerly awaiting their next idea (provided the first was lucrative enough).
The initial cost is the biggest bottleneck in the real estate industry, which is why real estate syndications might be the solution many people seek. This means that both investors and syndicators stand to gain from this arrangement.
Still, this is much work. Even as an investor, you cannot blindly invest in any viable idea or asset. You need to do your fair share of research, figure out where the money is coming from, and how it all fits together. Real estate investing requires a lot of preparatory work, effort, and negotiation.
At the end of the day, it’s business like any other and an asset like any other. Therefore, you must approach the situation like any other business/asset. This way, you’ll get the best possible outcomes.