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Are you interested in real estate investing but unsure of the responsibilities that come with it? Investing in real estate can provide you with a steady income, but it’s a lot of work for one person to manage. If you’re not up for the challenge of being a landlord and the headaches that it carries, then real estate syndication is an opportunity you should consider.
What is real estate syndication? Also known as property syndication, real estate syndication is where you team up with other investors to take on attractive real estate projects. This allows allows individual real estate investors, as well as real estate investment firms, to purchase properties they couldn’t afford on their own.
If being a passive real estate investor sounds more appealing than owning and operating real estate directly, read on to learn everything you need to know about real estate syndication.
How Does Real Estate Syndication Work?
The most common type of real estate syndication is one in which a real estate investment firm solicits outside investors to partner with them to acquire large real estate asset(s). While real estate syndication is most commonly offered by companies, it can also be done a single person or group of people.
With real estate syndication, there are two terms you need to know. The first term is syndicator (or sponsor). The syndicator scopes out a property, pitches it to the investors, and collects the capital to fund the project. The second term is investors. Investors contribute the capital, meaning the money needed to close the deal.
Each real estate syndication group may look a different in terms of how they manage their operations, but the fundamentals are usually quite similar.
Typically, both syndicators and investors get to own equity stakes in the properties that are acquired. This means that all parties involved get to benefit from the perks of real estate, including:
- cash flow
- long-term price appreciation
- debt paydown by tenants
- some or all of the tax advantages
General Partners vs. Limited Partners
As mentioned above, real estate syndication involves a syndicator (also called a “sponsor”) and investors. The syndicator is also known as a General Partner (or GP for short).
There are also investors, who are often called Limited Partners (or LPs for short). So, what’s the difference between the two?
General partners are the leaders of the group, and therefore, the most involved. Being the syndicator means you are responsible for acquiring and managing the property, handling negotiations, fixing issues, and taking care of the paperwork (think reporting and accounting).
In contrast, limited partners operate are behind the scenes of the project. They provide the capital to the real estate syndicators so they can purchase property.
With the investors taking a less active role, they normally pay the syndicator a fee for their knowledge and project management skills. An investor’s financial downside is also limited to the amount of money they invest—meaning, they are not able to be pursued in court if there are additional debts or liabilities owed.
Who Can Invest in Real Estate Syndications?
Unfortunately, not just anyone can invest in real estate syndications. Because of federal securities laws, only people who are accredited investors can participate in certain types of investments, such as real estate syndications.
To qualify as an accredited investor, you need your annual income to be greater than $200,000 per year if you are single or greater than $300,000 per year as a couple if you are married.
Alternatively, you can qualify as an accredited investor by having a net worth of more than $1 million, excluding the equity you have in your primary residence.
What Are the Benefits of Real Estate Syndications?
With any real estate opportunity, there are pros and cons to consider before making a decision.
A few of the pros of real estate syndication are the following:
- It’s an excellent way to earn a passive income
- You don’t have to handle stressful landlord responsibilities
- Investing in real estate offers tax benefits
- It provides a great opportunity to diversify your portfolio
- You have the ability to invest in (or take on) bigger projects
- You’re able to learn from more seasoned investors
- Investor (usually) aren’t subject to the legal risks associated with owning real estate directly
Drawbacks to real estate syndication include:
- Investors don’t get to make active management decisions
- Investors can’t use 1031 “like-kind” exchanges to defer taxes
- Your investment is often illiquid until the property is sold
- Investors owe fees to the syndicator
What is Real Estate Syndication, Exactly?
If you’re convinced that reaping the benefits of owning real estate without the headaches or hassles of direct ownership appeals to you, then click here to view a master list of real estate syndicators.
Hopefully you’re now clear on what real estate indication is and why you might take this investment approach. Do you know of any other real estate syndicators that I didn’t include in the list above? If so, share them in comments and I’ll add them to this article.
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*Disclaimer: I am a Board Member of Patriot Holdings, mentioned above. Nothing on this site should be construed as financial advice. Before making any financial decisions, you should consult with professional adviser, such as a financial planner or CPA.