Is it just me?
Or have have crowdfunding platforms like Kickstarter exploded onto the scene in recent years? It seems like you can back any sort of project these days (heck, you can even raise startup equity or crowdfund loans now!)
Still, it’s brilliant.
Crowdfunding has allowed projects to materialize. By harnessing the power of collective finances, project owners can receive enough funds to get their ideas off the ground. Small time investors can diversify their investment portfolio and get a piece of the action even with a tiny investment.
Real estate syndication is just another variant in the crowdfunding space. Essentially, investors pool their financial resources to invest in real estate together.
How it works
A syndicator will bring the investors together, and pitch them ideas. Then they’ll acquire and manage properties in the portfolio. By teaming up, each investor (and even the syndicator) can take on opportunities that may have been out of reach for them individually.
Wait, doesn’t that sound like any other fund?
Yes, like an investment firm, you have a General Partner (GP) that manages the investments, and Limited Partners (LPs) that provide the equity. Historically real estate syndication followed the same structure.
How a Real Estate Syndication is Structured
A real estate syndication is legally formed through a special purpose entity such as a Limited Liability Corporation (LLC) or Limited Partnership (LP).
There are usually two parties to a real estate syndication:
- The Sponsor (also known as a Syndicator or GP): This is a person who is skilled in finding, acquiring and managing real estate. They’ll be compensated for their labor of course, and will usually co-invest with the LPs in the investments.
- The Investors (also known as Limited Partners or LPs): These are investors who commit capital to the fund and will receive their share of the rental income and capital appreciation.
How much does each party invest?
The investors put up most of the funds, usually 80% or more. The sponsor puts in the remainder, so up to 20%. This “co-investment” by the Sponsor helps to align their interests with the investors. With some “skin in the game”, they’re more likely to choose investments wisely and manage the properties efficiently.
How is each party compensated?
As with any investment, the Sponsor and Investor want to see returns! After the property receives operating income, the profits are distributed in the following manner (I’ve ordered the compensation based on which gets paid out first):
|1||Management Fee||Sponsor (GP)||The Sponsor is compensated as a % of total assets they manage. This can up to 2% of assets under management.|
|2||Preferred Return||Investor (LP)||After Management Fee is deducted from income, a preferred return is distributed to the investors. This is a “hurdle rate” that the Sponsor must meet before the remaining profit is shared.|
|3||Profit Share||Sponsor and Investor||After the preferred return is distributed, the remaining funds are split between the Sponsor and Investors according to a pre-agreed rate. It can range from 50/50 to 70/30 etc, with the Investors usually taking more (cuz they usually invest more)|
In addition, the Sponsor usually receives an acquisition fee for their role in finding, negotiating and structuring the purchase.
The Benefits of Real Estate Syndication
There are numerous benefits to real estate syndication that I’ve already alluded to:
For the Sponsor – if you have real estate investment skill and management experience, this could allow you to be paid a feel for exercising your skills. Not only that, you’ll be able to diversify your funds over multiple opportunities because other investors will be co-investing. This means you’ll be putting less into each investment.
For the Investor – you’ll be able to get exposure to the real estate market without having to do any of the serious legwork that comes with buying and running properties Of course, you’ll need to be able to discern if a Sponsor can identify and manage a good investment. Like the Sponsor, you’ll get to diversify your funds across numerous investments, which takes care of the concentration risk real estate investing is notorious for.
Where does Crowdfunding come into all of this?
Back in the day, real estate syndication was a private affair. The sponsor would find big fish investors who had money to invest. They’d probably get to know them through networking and contacts. As such, real estate syndication was open to a select few.
These days, a real estate syndication can be done through crowdfunding platforms, and you know how easy those are to get on. By reaching out to more investors, each investor can afford to invest less. This creates even bigger diversification benefits.
Conclusion: Should you get into Real Estate Syndication?
Well, if you’ve already gained a strong and professional foundation in real estate investing, and you think that you could be trusted with investors’ money, then you should get into real estate syndication as a Sponsor.
You really get to leverage off your skills, and utilize those skills more. By being able to go for more opportunities, you can really maximize your skillset instead of having to wait months or years to exercise them.
If you’re looking to create exposure to the real estate market and don’t necessarily have the skills to find and operate a property yourself, then you should get into real estate syndication as an Investor.
If you’re looking to expand your real estate portfolio with greater diversification, then you could get into real estate syndication as either a Sponsor or Investor. Both roles provide you with diversification benefits!
I hope this article was useful in explain what Real Estate Syndication is, and that you’ll now have enough of an understanding to decide whether it’s for you!
Now, let me know in the comments – is real estate syndication something that you want to be a part of? Perhaps you’re already doing it! Share your experience with us in the comments below!