Real estate syndication is not a well-known sort of investment, but it has arisen as an intriguing prospect for investors who want to profit from real estate’s high return potential but do not want to become direct property owners. In this post, we’ll look at real estate syndication, its advantages and disadvantages, and what investors should know before deciding if it’s suitable for them.
What is real estate syndication?
Real estate syndication involves a group of investors pooling their resources to purchase commercial real estate or construct a new structure. Most people, for example, could not decide to fund and build a major hotel on their own, but a syndicate of a few dozen investors could be able to do so. In practice, real estate syndication often connects developers and educated real estate experts with investors looking to put their money to work.
Real estate syndication has evolved tremendously throughout the years. For most of modern history, real estate syndicates had to either obtain cash through private solicitations or register the offering with the SEC in order to raise funds from the general public. The JOBS Act of 2012, however, loosened the requirements, allowing real estate syndication possibilities to receive cash from anybody who fulfills the definition of an “accredited investor.” Individuals are normally required to have an annual income of more than $200,000 for at least two consecutive years ($300,000 for couples) or a net worth of $1 million (excluding a primary residence).
Real estate syndication deals are now frequently crowdfunded by accredited investors as a result of this new legislation. The term “real estate crowdfunding” refers to a popular type of real estate syndication.
Who is involved in real estate syndication?
Real estate syndication involves two key parties: the sponsor and the investors.
The sponsor, sometimes known as the general partner, is the person or corporation that finds, plans, and manages the investment. The sponsor purchases the real estate asset, engages contractors and other workers, oversees progress, and makes capital decisions for the project. The sponsor is also responsible for directing any money or profits from the transaction to the appropriate parties.
Limited partners are investors in a syndicated real estate deal who play a passive role in the investment. In a nutshell, investors often contribute the majority of the funds required for the transaction. In most situations, the sponsor will contribute their own funds and secure loans to fund a significant percentage of the capital, with the remainder coming from authorized investors.
The crowdfunding platform is frequently involved in current real estate syndication. Because it is now easier than ever to solicit public investment, many sponsors prefer to offer their investment possibilities on crowdfunding platforms (CrowdStreet is a famous example). The platform serves as a go-between for sponsors and investors, charging a fee for raising cash and dealing with regulatory obligations.
The benefits and drawbacks of investing in syndicated real estate investments
Because there is no such thing as a perfect investment for everyone, here are some of the benefits and drawbacks of investing in syndicated real estate agreements.
The Advantages of Real Estate Syndication
High return potential: This is possibly the most compelling incentive to participate in syndicated real estate transactions. There is a lot of money to be made from profitable commercial real estate investments. CrowdStreet keeps track of all realized (sold) properties that have been funded using its platform. The average of 115 realized investments delivered a 17.7% internal rate of return (IRR) for investors, an outstanding annualized return history.
Access to unique real estate investments: As previously said, most people cannot afford to build a hotel. Even if you could afford it, would you have any idea what to do? Real estate syndication allows investors with little or no experience in real estate development or management to engage in new investment opportunities.
Portfolio diversification: This can be especially beneficial in volatile markets and difficult economic times. Because single-asset real estate returns are not significantly associated with stock market returns and their values do not change on a daily basis like stocks, investing in real estate syndication can add a great element of diversification to an investment strategy.
The disadvantages of real estate syndication
Syndicated real estate investments may be the least liquid option to invest in real estate. You can simply sell your shares in a real estate investment trust, or REIT, whenever you wish. If you own an investment property, it may take a few weeks or months to sell, but you have the option. A syndicated real estate transaction is often illiquid throughout the holding period.
Performance is connected to a single asset. One benefit of investing in REITs is that the business owns a variety of assets. It wouldn’t make much of a difference if one of them did poorly. Your money is often tied to one asset in syndicated arrangements, and if it does not perform as expected, it can result in substantial losses.
Not all transactions are successful. The 17.7% annualized average return on one prominent platform was noted in the pros section as evidence that syndicated real estate investments can yield exceptional returns. However, a variety of results are possible. In fact, five of the 115 realized transactions earned annualized returns of more than 50%; six of the agreements lost all of the money invested. To be sure, the risk/reward ratio can still make sense, but this is especially important to consider if you’re investing in a single syndicated real estate deal.
Inconsistent income: While many syndicated real estate ventures provide some passive investment income, there are certain drawbacks. For one thing, income normally does not begin immediately, especially if the project is a development or restoration. Furthermore, there is no guarantee that you will earn any money at all. If you do, it may differ significantly from year to year. Syndicated real estate investments are not typically a good choice for income-seeking investors.
Normally, you must be an accredited investor to invest in single-asset real estate syndication projects through a crowdfunding portal. An exception is when a sponsor raises cash privately, although private syndication possibilities might be difficult to uncover and have not been verified by any respectable third party.
What is the best way to invest in real estate syndication opportunities?
There is no single answer to this question, but for most investors, the simplest option is to use a real estate crowdfunding platform like CrowdStreet or Realty Mogul. Most single-asset syndication transactions (as opposed to investment vehicles that buy multiple properties) are only available to authorized investors. Individuals must meet one of two conditions, as previously stated:
Annual income of at least $200,000 ($300,000 for a couple) over the previous two years, with a reasonable prospect of the same this year.
One million dollars in net worth, excluding the value of your primary residence.
Although it is not a foolproof technique for screening investors, the accredited investor requirement is intended to limit “riskier” investments to persons who either have the financial knowledge to assess the risk/reward dynamics or can afford to lose money if the investment fails.
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Real estate syndication can be a fantastic investment possibility for accredited investors who want to diversify their portfolio into real estate assets but do not want the work that comes with directly owning properties. However, just like any other investment, real estate syndication has advantages and disadvantages, so it’s critical to understand what you’re getting into before signing any checks.
Real Estate Syndication Frequently Asked Question
What exactly is real estate syndication?
A real estate syndication, or real estate investor partnership, is a practical approach for several investors to pool their resources to fund a single venture. These collaborations can also lead to larger investment opportunities, such as multifamily residences or commercial office complexes.
Is it worthwhile to invest in real estate syndicates?
It is a cost-effective strategy to gain exposure to the real estate market. Smaller sums of money can be invested in real estate syndication, making it easier to manage. Because real estate earnings are often consistent, syndication can be an excellent long-term investment.
What is the most effective real estate syndication?
Fundrise, CrowdStreet, EquityMultiple, YieldStreet, and RealtyMogul are the top five real estate syndication businesses to consider for your next investment. Before participating in any real estate syndication venture, investors should do their homework.