Real estate syndication, or property syndication, is a partnership between multiple investors. These investors pool their intellectual and financial resources to invest in properties bigger than they could manage or afford as individuals. Typically, ‘syndicator’ and ‘investor’ are the two roles in commercial real estate syndication. The syndicators, or sponsors, are the people that manage the real estate syndication and act as the general partners for the contract. On the flip side, the investors, also known as limited partners, are the people that provide the capital to buy properties. Since investors primarily play passive roles in real estate syndication, they will be the source of money.
With proper knowledge and good judgment, investing in real estate syndication is an excellent way to generate passive income. But as with other investment avenues, it is necessary to do your due diligence and ask questions. That said, check this site if you have interest in scheduling a free consultation with an experienced lawyer to guide you throughout the entire process of real estate syndication.
In addition, consider the items listed below before investing in real estate syndication. This helps you make informed investment decisions and manage your expectations.
1. Sponsor’s Track Record
As an investor, put your mind at peace knowing that the real estate syndication’s sponsor has a solid track record, good reputation, and other skills and expertise needed to handle the project throughout the entire process. Since there are experienced and inexperienced sponsors, it’s crucial to evaluate their capacity. You do this by asking key questions to ensure you work with the most qualified sponsor team with a proven track record. Therefore, when looking at a sponsor’s track record, ask them about their experience in the local market. This should be the primary question in mind. It is also wise to ask them about the business challenges they face, previous development projects that didn’t work out as expected, and how capable they are when evaluating risks.
2. Investment Risks
When evaluating a particular real estate syndication opportunity, it is necessary to read and understand the Private Placement Memorandum (PPM). The sponsor provides this to you, so you are aware of the investment objectives and risks. Notably, if you enter the world of real estate investing, one of the risks you must consider is the market risk. Since all markets are volatile, the economy is unpredictable. But as an investor, note that it is the sponsor’s responsibility to manage those risks. Therefore, the best thing to do is work with the best-qualified sponsor. An experienced sponsor is able to explain to you how they adjust their strategy to control, avoid, or mitigate those risks.
3. Investment Duration
As a potential investor, note that real estate syndication is a long-term investment strategy. So, if you were to invest in real estate syndication, and the projected hold time is five years, expect not to see that money again the next month or year until someone buys the real estate property. For that reason, it is better to only use the money you do not need when investing in real estate syndication. Also, before investing, make sure you are comfortable keeping your investment for around five. Moreover, regarding the minimum investment amount for each real estate syndication, most private real estate syndications start at a minimum investment of USD$50,000.
4. Projected Returns
Since the projected holding period of real estate syndication is five years, investors receive about 6% to 8% cash-on-cash return per year. So, if you invested USD$100,000, the projected cash-on-cash return is around USD$7,000 to USD$8,000 per year, or roughly USD$1,750 to USD$2,000 per quarter. Moreover, after that five-year term, factoring in the asset’s appreciation and improvements to the property during the holding period, a real estate syndication’s projected profit upon sale is 40% to 60%. Hence, your investment of USD$100,000 brings in USD$40,000 to USD$60,000 profits from the sale of the asset in year five.
5. Sponsor Fees
Some sponsors charge sponsor fees for the money and time invested in finding and evaluating the deal, getting funding, and arranging the syndication. Sponsors also charge development fees for managing the renovation or construction process, property management fees for conducting routine repairs and maintenance, asset management fees for the time and costs of keeping the property operating, refinancing fees for the work needed to refinance the property, and disposition fees for arranging the sale.
Accordingly, before jumping into a real estate syndication deal, it is essential to examine the multifamily syndication offering documents to ensure the sponsor’s fees are reasonable and in line with the market standards.
Conclusion
Overall, investing in real estate syndication is an excellent strategy, especially if you do not want to deal with the hassles of being a landlord. Since this does not require you to go out and check individual properties, investing in real estate syndication is also an ideal way to diversify and develop your real estate portfolio. But before doing so, consider the essential things listed above to ensure you make informed investment decisions.
