Pooling resources for a common goal is a common investment strategy across all sectors in the investment industry. In real estate, it’s referred to as property syndication, and you can either contribute money, skills, or other valuable resources to the investment syndication.
The chances of losing from syndication are pretty low compared to someone running a real estate business independently. However, that doesn’t make it impossible to lose since there are common mistakes that can ruin syndication if you don’t avoid them mindfully.
This article will teach you what it means and how to practice it for outstanding real estate syndication returns. Also, you’ll learn about some mistakes and best practices to guide you throughout the investment journey.
Real estate syndication is a simple term on the surface, but you’ll need a deeper understanding of the term to get into it without losing money. Since this article is an exhaustive guide, starting by introducing what real estate investment syndication means should be a great idea.
This syndication is simply a partnership of many investors with the common interest to invest their money, skills, or resources in real estate properties. With capital and skills pooled by many experienced individuals, it’s hard to fold up due to a lack of resources.
The typical participant in syndication is wealthy enough to finance a real estate investment. Also, someone who has experience studying the market and coming up with the best properties for long-term investment is an excellent fit for a partnership.
In some cases, companies or firms manage the syndication, only allowing investors to add capital to the entire setup. Working with a firm is generally favored over individual partners since their experience and expertise usually work in the investor’s offer.
Real estate syndication can come in many forms, but apartment syndication is the most popular. In that system, the syndicators rent out an apartment to tenants to share the rent and other entitlements quarterly or yearly.
The following section will explain the examples of real estate syndication returns and reasons to worry about them.
Examples of Real Estate Syndication Returns
The profits can come in many different ways, depending on the syndicators’ strategy. Here, we’ll be looking at the three most popular ways to generate income when syndicating real estate properties.
1. Cash-On-Cash Returns
Cash on cash returns refers to the amount of money left after taking care of mortgages, vacancy costs and other expenses. The cash-on-cash return (also called the cash flow) is the primary source of the passive income you earn when participating in property syndication.
Syndicators distribute these returns to investors monthly or quarterly as the investment terms stipulate. The cash on cash returns percentage is up to the agreement between you and the syndicators, and however, it usually averages around eight percent yearly.
2. Profit Upon Sale
Another way to get returns during a real estate syndication is by sharing the aftersale profits. If your strategy revolves around selling the property eventually and sharing the resources after the sale, this will likely be your primary source of passive income in the syndication.
The amount of income the property generates directly influences its overall market value. A solid tenant base, updated units, and market rates play essential roles in the property’s eventual worth during sale. Estimated profit upon sale is usually around 40 to 60 percent, depending on the property type and appreciation rate.
Profit upon sale returns doesn’t affect the cash on cash returns. It’d be best to partner with a good syndicator who understands the average real estate return on investment and will factor this when sourcing for a potential investment property.
3. Preferred Return
Syndicators will pay their passive investors a preferred return before they can earn any performance benefits. This preferred return is a benchmark payment given to all investors in the syndication group and can be anything from five to nine percent of the invested capital. Syndicators will make this payment to investors before taking their part in the returns.
Equity in real estate syndication is usually divided into “70/30” or “80/20.” Passive investors take the most prominent part, while the rest of the money goes to the syndicators that perform the hard work without really contributing to the capital.
How to Get Started With Real Estate Syndication
Real estate syndication may seem like a pretty straightforward idea at first. However, you’ll understand that there’s more to the concept by looking deeper. You may not need to worry about the complex aspects as an investor because your syndicator should get you covered.
There are three main stages in a real estate syndication investment; origination, operation, and liquidation. Most of the activities in these phases fall on the syndicator from sourcing for properties and deals, operating the investment, and paying investors through liquidity.
The minimum investment may be different depending on your syndicator. However, it’d be best to have a minimum of $20K to kick-start your real investment. Starting with little lets you see the possible risks and profits before diving in with full force if the initial experience generates positive real estate syndication returns.
This article would be incomplete without discussing real estate syndication tax benefits. There are numerous tax deductions, reduced tax rates and deferring income taxes you can benefit from investing in syndications.
Real estate syndication might be your best bet if you’re trying to make headway into the real estate industry without enough time to learn how to source for excellent deals yourself. As long as you can provide a respectable capital, you’ll find a syndication group to help you invest it, with something close to an earning guarantee.
With that said, it’s important to note that the type of syndication firm you choose can either make or break the entire syndication. It’s essential to carefully select the type of firm you work with to enhance your chances of making enormous profits. Checking online and offline reviews can increase your chances of getting an excellent real estate syndication firm.