The words “real estate investment” call to mind buying and flipping a fixer-upper or renting out a property. But for investors who don’t have extensive experience or expertise in playing the real estate market or managing tenants, there’s another option for building wealth: investing in real estate syndication.
A real estate syndication enables multiple investors to pool together resources to finance — and earn profits from — a single real estate investment. Real estate syndications come in different shapes and sizes with varying buy-in levels that can benefit experienced or ambitious real estate investors.
But what exactly is a real estate syndication, and how can investors use them to earn income? Here’s a breakdown of what it involves, how it can be used to generate wealth, and the pros and cons of investing in a real estate syndication.
What is real estate syndication?
A real estate syndication is a group of investors who pool together their resources to invest in a real estate venture. This could go toward purchasing a commercial real estate property or developing land for residential property sales.
Syndications also tend to operate on a larger scale than individual real estate investors. For example, while an individual might easily buy a home and rent it out to tenants, a real estate syndication could buy an apartment complex or a hotel with more residents and guests. The more properties are available for rent or sale, the more potential there is for income.
A real estate syndicate consists of two types of players: the sponsor and the investors. The sponsor is an individual or organization that manages the investment details. They’ll identify prospective properties, create plans for generating income, and oversee the day-to-day operations that come with real estate investments. Investors are limited partners who fund the project in exchange for a portion of the income.
How do real estate syndications make money?
Real estate syndication allows investors to reap the rewards of real estate investment without having to oversee the details. Investors earn passive income from their property without managing tenants or maintaining a property for themselves.
In most syndications, investors earn money after a property is sold. After the sponsor takes their 30%-40% cut of the profits, the remaining income is divided among investors based on the terms of their agreement, which is usually the percentage of capital they invested.
Say a property costs $1 million to buy and update. Ten investors contribute $100,000 each to make the purchase and repairs. The property goes on to sell for $2 million. At a 30% rate, the sponsor will receive $600,000 for their efforts in steering the project. The remaining capital is split between the ten investors, which is $140,000 each. That means an investor earns $40,000 from their investment without dealing with day-to-day details.
What returns do real estate syndications offer?
Although the previous example exaggerates an investor’s expected return, real estate syndications can yield great profits. Syndication deals typically see 8% to 12% or higher in returns. At this rate, a $100,000 investment would mean earnings of $8,000, $12,000, or even more with minimal effort.
A 401(k) typically yields between 5% to 8%, and high-yield savings accounts are lower at 4.5%. By investing in a real estate syndication, an investor can potentially increase their wealth more than other forms of building passive income.
It’s important to remember that all investments come with risks and aren’t guaranteed a return. While real estate is considered a more stable investment than the stock market, there’s always a potential for a project to fold or lose money. As with any financial decision, investors should do their research and only invest what they can afford.
Pro 1: Earn income passively
Investing in real estate syndication is 100% passive. In most real estate ventures, an investor is responsible for every step — from shopping for the ideal property to overseeing renovations to the final sale or rental of the property. They might get help from a real estate agent or property manager in exchange for a cut of the profits, but otherwise, they’re responsible for handling every detail.
In a real estate syndication, an investor is only responsible for paying their portion of investment capital. After that, they may be required to attend the occasional meeting or read quarterly reports for the investment. But otherwise, they’re making money while someone watches the market to set property rental and sale rates. Most, if not all, of the decisions, operations, and interactions with tenants and buyers are handled by the syndicate’s sponsor.
Passive income leaves investors with more time. This freedom is ideal for investors with full-time jobs, family commitments, or other obligations that would otherwise prevent them from real estate investing.
Pro 2: Scaling up
While most real estate investors start small by renting out a room or a single-family home, participating in a real estate syndication allows an investor to think bigger. Investors can pursue large-scale projects by pooling resources, assets, and expertise with others. And larger-scale properties equal bigger profit potential.
Think of it this way: When an investor owns a single property, they have fewer opportunities for renters and buyers. If a property is vacant for any period of time, the investor is making no money and may end up losing it while making mortgage payments.
With a larger property that serves more buyers and sellers, investors continue to earn money even while part of a property is vacant.
Pro 3: Investors aren’t personally liable for debt
When someone invests in a property independently, they are personally liable for the debt and taxes associated with the purchase, renovation, and sale. An investor spreads the risk without personal liability by collaborating with others in a real estate syndication.
Most syndications operate under an LLC or LP, so the organization is on the hook for taxes and debt. If the worst happens and a project fails, investors will only be out of the cash they invested. As long as an investor doesn’t contribute more than they can afford to lose, they won’t have to worry about losing their personal home or property for any debts incurred.
Investors can also take advantage of tax benefits from investing in real estate. They can report any losses they incur for a tax break. Savvy investors can also delay paying taxes on income from their profits by rolling them over into other real estate investments with a 1031 exchange.
Pro 4: Plenty of funding options available
Investors have various options for paying their share in a real estate syndication. Their options can range from cash to retirement accounts and life insurance payouts. Most sponsors are willing to accept any of these forms of payment without issue.
An investor can also roll over profits earned on previous real estate transactions with a 1031 exchange. That means if a real estate investor is looking to get out of flipping houses or managing rental properties, they can use the profits from the sale of those properties to pay for their shares in the syndication and delay paying taxes on that income.
Be sure to check with the syndication sponsor to find out what payment they are willing to accept before making any commitments or signing contracts.
Pro 5: Opportunity to collaborate with top players
Investing in syndication is a great way for a less experienced real estate investor to cut their teeth in the market. Syndication sponsors are experts in their field, meaning investors work with the best and brightest in the real estate industry. By participating in syndication, an investor can network with leaders in the real estate industry, which can lead to future beneficial partnerships.
Investors can learn much about the real estate market through investor calls and quarterly reports. As investors gain more knowledge and experience through their partnership, they will become more comfortable with real estate. With more expertise, an investor can seek additional opportunities for real estate investments to continuously build their wealth. It’s like being paid for a master’s class in real estate investment!
In addition, syndication investors aren’t limited to local partnerships. They can invest in properties worldwide without ever setting foot on an airplane. This global mindset can open up an investor’s network and get them into markets they might never otherwise join.
Con 1: Lack of control
Although earning income from real estate without actively playing the market or managing property is one of the greatest appeals of investing in real estate syndication, that lack of control can also be frustrating. A syndicate investor puts their financial future — and often all of the key decisions — in someone else’s hands.
That requires a lot of trust in the syndicate’s sponsor from the start. Before handing over any money, it’s important to thoroughly research any potential investment — and the people leading the project. Don’t ignore any red flags that come up. Remember, getting references for the key movers and shakers involved in any syndicate is always a good idea.
Investors who want to be involved in making decisions and receive daily updates on market values might find it difficult to participate in real estate syndications. Sitting back while someone else takes the lead may be challenging for someone used to calling the shots. Investors should find out how much, if any, input they’ll have, the project’s terms, and how often they can expect to receive updates.
It’s better to pass on a project that doesn’t match an investor’s needs or expectations than to try pulling out after it’s underway.
Con 2: Lack of asset fluidity
Real estate syndicates are not ideal for investors looking to make a quick profit or turn over assets quickly. Syndication projects often take five to ten years to complete, and the profits often take equal time to pay out.
That also means an investor’s money won’t be easily accessible. Unlike stocks and bonds that can be sold almost immediately, real estate isn’t fluid. Investors who need flexibility in their assets — or even the ability to turn it into cash overnight — won’t find it in a real estate syndication. Depending on the syndication’s terms, they may have to wait weeks, months, or even years to receive any money.
At the same time, real estate’s illiquidity has benefits. While the stock market can be volatile, real estate is much more stable. Although risks are involved in every kind of investment, real estate is more likely to earn a return over time. It’s also highly unlikely to suffer a steep decline in value, giving investors more time to act and prevent losses.
Con 3: Minimum requirements to participate
Anyone can buy a stock or bond or put money in a 401(k), but investing in a real estate syndicate isn’t a free-for-all opportunity. Most syndicates require investors to meet a set standard of requirements before they are allowed to participate.
To join a real estate syndicate, interested parties are usually required to be accredited investors. That means they must meet a minimum income and asset threshold typically dependent on the property type and market. The minimum income and asset requirements are often so high that they miss syndicate investment opportunities.
Other passive income opportunities are available for investors interested in building their assets and income to one day become accredited investors. Real estate investment trusts (REITs) and crowdfunding projects are good entry points to make money and learn more about the real estate market without spending much money upfront or doing more hands-on work.
A trusted local real estate agent or investment broker can offer tips and suggestions for opportunities that suit beginning real estate investors.
Frequently Asked Questions About Real Estate Syndications
Are real estate syndications good investments?
Real estate syndications are a good way for a person to diversify their real estate portfolio and increase wealth without putting in much effort. Through syndication, investors also have limited liability and lower risk than taking on a major real estate project independently.
Who owns the property in a real estate syndication?
In most real estate syndications, the property is owned by a limited partnership or limited liability company created specifically for the investment. Each investor becomes a proportional partner, sharing ownership of the partnership without assuming full liability.
How risky are real estate syndications?
As with all investments, some risks are involved with real estate syndications. For whatever reason, a deal can fall through after money has been invested, or the market can take a downturn, and the property doesn’t yield as much income as forecasted. However, real estate tends to be more steady than other investments, such as trading stocks or cryptocurrency.
How much money do I need to invest in a real estate syndication?
The amount of capital needed for participation in a real estate syndication will vary based on the specific project, but most real estate syndications require a $50,000 minimum investment.
Can I build wealth through real estate syndications?
With an average return rate of 8% to 12%, real estate syndication allows investors to build their wealth more quickly than other forms of passive income, such as savings accounts or bonds.
Where can an investor find syndication opportunities?
Investors can find real estate syndication opportunities through online investment platforms and connections with real estate professionals and syndication sponsors. Remember that most syndications require investors to be accredited, which may limit participation in some projects.