What is a Real Estate Syndication?
Updated: Jan 6
What is a Syndication?
We often have new investors come to us with a variety of questions, but one of the first questions we get is, “What is a Real Estate Syndication?”. It’s a great question and one I get frequently as many people have never heard of this opportunity.
A real estate syndication is a pooling of an investor’s assets to invest as a group. For example, instead of buying a rental property yourself, you pool together your money with other investors to buy a larger property, like an apartment building, self-storage facility, or mobile home park. These types of opportunities allow you to invest alongside proven operators who have a successful track record.
Syndications will have two major players involved:
1) Limited Partners – this is you, as the investor. You provide the capital to buy the asset and in return, you will expect a return of the distributions from the cash flow of the property as well as a split of the profits at sale. Your liability is limited to the extent of your share of the ownership. Limited partners are passive; therefore, you simply invest the capital and don’t have to worry about managing the property, finding the deal, operating the property, or executing a business plan.
2) General Partner – often called the Syndicator/Sponsor, this is the person or group of people who do all the work. The GP has the knowledge, expertise, time, and experience to make this a successful investment. They are the managing partner and active in the day-to-day operations of the business.
As an LP, you will enjoy the benefits of investing in real estate, without all the headaches. As a passive investor in a real estate syndication, you don’t have to do any of the work. You just invest your money and then start getting cash flow checks every month/quarter.
How are Syndications structured?
While this can vary between deal, operator, etc. what we see most often is an 8% preferred return and a 70/30 split. This means, you as a limited partner will receive an 8% return on your money and anything above that will be split 70/30 with 70% to you as the limited partner and 30% to the GP. You want to make sure the GP you align with has your best interests in mind. The GP doesn’t make money until you make at least the 8% preferred return. Therefore, the GP is incentivized to make sure this investment performs so they can make money as well.
Let’s run through a quick example. Say you invest $100,000 into an apartment community in Dallas, TX. The syndication is structured as noted above, with an 8% preferred return to investors and a 70/30 split. It’s a 5 year business plan where the GP will increase rents by renovating units, cleaning up the exterior of the property, and finding ways to decrease expenses. This is a typical value-add deal, with the goal to increase the NOI.
Assuming the investment is performing as expected, each year you should expect to receive $8,000 in distributions from the cash flow. This will likely come as $2,000 per quarter or $667 per month.
Many of the deals we are seeing have a projected equity multiple of 2x over 5 years. This means your money should double over 5 years.
Sticking with this same example, where our preferred return is 8% and we are able to hit that every year, that means you would get about $8,000 per year for 5 years. In other words, you would receive about $40,000 in cash flow distributions over the 5 years we hold the asset.
Then, when the asset is sold, you would get your original $100,000 investment back plus another $60,000 in profit from the sale.
Therefore, you’ve received $40,000 in cash flow distributions over the 5 years, then $60,000 at sale, plus your original $100,000 investment back. This gives you $200,000 total, which is the 2x equity multiple we often strive for.
I hope this brief article helped you understand what a syndication is, and how truly passive of an investment it can be for you. As always, please reach out directly with questions.