7 minute read
Ever walk down the bustling streets of New York City, look up at the Empire State Building, and wonder who owns that? Surprise, it could’ve been you (or at least a piece of it)! The iconic building was sold to a syndicate back in 1961 for $65 million. BOOM! There’s your first taste of the power of real estate syndication.
Hop into the TimesMachine for the original 1961 article: Empire State Sold; Price Is 65 Million; Empire State Building Bought By Syndicate for $65,000,000.
Of course, knowing that the Empire State Building was purchased through syndication doesn’t necessarily help you understand how syndication works. It does, however, show you that it isn’t a new concept. Real Estate syndication is a tried and true method for growing wealth that has existed for decades. So why haven’t you heard of it? Better yet, why have you not been invited to the party?
Because for a long time, like many wealth building opportunities, it was available only to the wealthy and well-connected. U.S. Securities and Exchange Commission (SEC) regulations have only recently moved away from restricting any public advertisement, to allowing it for specific opportunities. This shift in regulations is what allows me to share investment opportunities like this with you!
What is real estate syndication?
A real estate syndication is where people pool money together to purchase a larger real estate property than any one individual or entity would be able to afford alone. Think of it like a potluck: if only one person brings a dish, we are all leaving hungry. But when everyone comes together and contributes, all of a sudden you’ve got a real party.
As the saying goes, “if you want to go fast, go alone; if you want to go far, go together.”
The “Who” Of Real Estate Syndication
There are two groups in any syndication: the syndicator and the investor. Also referred to as the general partner (GP) and limited partner (LP).
The syndicator is the active partner responsible for: finding the property, underwriting, obtaining financing, due diligence, raising capital from investors, creating and executing the business plan, asset management, working with property management, communicating with investor, and arranging the sale of the property.
If you read all that and thought, “that sounds like a lot of work!” you would be correct. The goal of any good syndicator is to maximize investor’s returns on their investment by executing the business plan.
The investor is the passive partner, responsible for bringing money into the deal. This investment translates into direct ownership of the property, similar to owning shares of a company but special benefits. Investors receive passive cash flow through monthly or quarterly distributions (depending on the deal structure) and equity when the property sells. The only work for the investor happens upfront before entering the syndication. It is critical to vet the syndicators to ensure they have a solid track record, and that they are the right fit for you and your investment goals.
The Benefits Of Real Estate Syndication
Real estate syndications offer many benefits that traditional investment opportunities do not:
Diversification is the best way to mitigate risk exposure. Investors can diversify their portfolios with properties across asset types, markets, and syndicators.
Passive Income is received in the form of monthly or quarterly distributions, and as equity on the eventual sale of the property.
Hands-off when it comes to the asset, management, and operational headaches of the property. All the benefits of large-scale commercial property without the time and energy investment needed.
Tax Advantages through asset depreciation are passed on to investors. For the average investor, this means the taxes on your distributions will be zero or negative. When the property sells, the large sum you receive will be taxed as capital gains which is less than standard income taxes. Syndicators may also offer a 1031 exchange to defer the taxes liability by rolling the investment into another property.
Forced Appreciation is one of the fastest ways to build equity. Unlike single family homes, commercial properties like multifamily are valued based on Net Operating Income (NOI) rather than comparables. That means the property’s overall value increases by adding value through capital improvements and reducing operational costs. Think renovating the kitchen and xeriscaping to cut back on water usage.
Stability comes from consistent performance. Compared to the three largest asset classes (real estate, stocks, and bonds), real estate has historically had the fewest down years. You also own a physical asset, that even in a downturn, will always be worth something and generate income.
Hedge against inflation with hard assets like a physical property. Rents tend to rise with inflation which increases the NOI of the property and the overall value when we sell.
Amortization is a fancy word for paying down the loan balance monthly, through regular mortgage payments, which creates equity on the backend. In the case of commercial properties, the tenants pay the mortgage, which means more money back to investors as the debt is paid down.
The Risks Of Real Estate Syndications
Of course, there are no investments entirely devoid of risk. Though real estate syndication offers many incredible benefits to growing your wealth — as with any investment, there are always risks involved. The goal is to mitigate those risks AND leverage the potential upsides, by choosing the right market and, even more importantly, the right syndicator.
As seen in 2008, on a large scale, economic and market changes can impact your investment. Many times these changes are out of anyone’s control. What is controllable is strategically selecting markets with strong, consistent economic indicators like population and job growth. Two main benefits of larger commercial properties are their ability to withstand common market shifts and major corrections with the ability to buy and hold. These properties are resilient as they continue to actively generate cash flow during the hold period, further mitigating risk.
As an investor myself, the biggest risk I see is to ensure you choose an experienced and trustworthy syndicator with a proven track record. It is essential to vet any syndicators before deciding to invest. Finding the right partners who can mitigate risks and protect your investment. A good syndicator who knows how to execute and manage problems as they arise, because they will arise, will be the difference between an anxiety-filled roller coaster ride or smooth sailing into the sunset with a mai tai.
How To Invest In Real Estate Syndication
Before investing, you must establish that you meet the eligibility criteria for investing in a real estate syndication. To be eligible, you must be a sophisticated investor or accredited investor.
A sophisticated investor understands what real estate syndication is, how it works and can assess for themselves what makes a good or bad investment. They also need to “know” the syndicator, meaning you have an established relationship prior to ever being asked to invest. Only then can a sophisticated investor be able to invest in a 506(b) offering which cannot be advertised to the public. Another form of gate-keeping that has been done to both protect and limit it’s opportunity for the average person.
An accredited investor is someone who:
Earned income in excess of $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years and is reasonably expected to earn the same for the current year, OR
Has a net worth of over $1 million, alone or with a spouse or spousal equivalent (excluding the value of the person’s primary residence).
This opens up the opportunity for an accredited investor to invest not only in a 506(b) offering but a 506(c) offering.
Whether you currently meet the requirements to invest in a real estate syndication or not, you can start the most important part as a passive investor: finding the syndicators.
The internet has made networking to find like-minded investors and reputable syndicators much easier. Leverage social media (LinkedIn, Facebook, Twitter, etc.) or in-person meetup groups (Meetup, Eventbrite, etc.) to find these people and grow your knowledge. Once you find a syndicator you are interested in investing with, sign-up for their deal flow list and newsletters to stay up to date on their latest real estate syndication offers. These newsletters often contain a goldmine of valuable information to help you meet the criteria above if you do not already.
Are you still wondering why you have not been invited to the party?
Take this as your invitation to the syndication party.
Disclaimer: The information provided in this article is for educational purposes only and does not constitute financial or investment advice. Always consult with a financial or investment professional before making any investment decisions.