When it comes to investing in real estate, there can be a lot of noise out there around what is and isn’t a good, solid investment opportunity. In the traditional sense, investing in real estate is as simple as buying property in the hopes that it will A) increase in value so that it can be resold at a profit; B) be purchased at a reduced rate due to its current state, then, after investing capital into maintenance and upgrading, later be resold at a profit; C) be made available as a rental property to generate passive income from renters; or D) be developed into multi-unit buildings that can then be individually sold or rented, again, for profit.
However, in the last few years, other opportunities have begun emerging (coinciding with large-scale increases in the cost of single-family and multi-family homes) for intrepid entrepreneurs to explore, one of which we’ll discuss below: real estate syndication.
WHAT IS REAL ESTATE SYNDICATION?
Real estate syndication is a little bit like crowdfunding. It’s centred around the idea that a group of investors, or a syndicate, come together and pool their resources in order to make a real estate purchase. For anyone out there who’s ever thought that the only way they’d get into the property market was if all their friends got together and bought a house that they’d all have to live in for a few years—this isn’t quite the same thing. The properties acquired through syndication are usually larger-scale developments with the potential to yield a large-scale return on investment, either through passive rental income or by development and sale, things like multi-unit apartment buildings, condominium developments, mobile home parks, large self-storage facilities, and other properties of that nature. The intention is that through the percentage-ownership of the project as a whole, the investors will see a similar percentage of the profits.
These projects are usually split into two different types of investors, syndicators and passive investors.
The syndicators, or general partners, are responsible for underwriting the project, organizing the planning stages, raising capital, finding investors, and dealing with the day-to-day property management necessities associated with the project. For development-based syndications, this can also mean coming up with a development strategy and timeline for the building, organizing architects, contractors, and securing early-stage financing for the project. Because of the degree of expertise and the high cost associated with the role, syndicators are generally high-net-worth individuals or groups, or development companies specializing in real estate syndication.
Passive investors, on the other hand, are exactly that. They hold none of the responsibilities for the completion of the project, nor do they hold any of the high-level liabilities associated with the project (outside of the potential loss of their investment, that is). Passive investors are people who are looking for an investment in the real estate market, and often one which has a lower initial cost than a full real estate purchase of their own. Their primary responsibility is to provide capital to the project, which depending on the project can either be used to cover the initial property acquisition, building and development fees, or general maintenance and upkeep. In exchange for their investment into the project, passive investors receive a percentage share of ownership, from which they receive passive income as the project generates revenue either through rent or sales.
Essentially, each real estate syndication is built around these two types of investors, both of whom are looking to generate income through the project.
WHAT ARE THE PROS AND CONS?
For passive investors in particular, which make up the majority of syndicate investors, the benefits of real estate syndications definitely outweigh many of the risks. Syndications are still investments, and like any investment, they carry risk, but because of the number of investors involved, and the amount of financial backing required to make the project viable in the first place, they’re reasonably secure in their investment. For investors who are comfortable making long-term investments, real estate syndication can offer an attractive option for people looking to diversify their portfolios.
- Investment in a physical asset
- Generates regular passive income
- More resistant to inflation than stocks
- Leverageable as an asset
- Difficult to liquidate
- Takes longer to mature
- High initial transaction cost
- Return on investment dependent on local markets
One of the primary draws for investors is the notion of owning a percentage share of a physical asset. Unlike stocks or cryptocurrencies, which are essentially ephemeral, as a shareholder in a real estate syndication, the thing in which you have invested physically exists as a structure. It is, quite literally, a brick-and-mortar investment. While this can mean that its value is determined in large part by the state of the local real estate market, it also means that it’s rare that it will depreciate significantly in value during periods of economic flux, unlike stocks, which can plummet double-digits in value almost overnight. People will always need places to live, and it’s that persistent demand that keeps the value of these investments stable.
Ultimately, whether or not a real estate syndication is a good decision depends on the individual investor, their risk tolerance, their portfolio, and whether or not they think that they’re in a position to wait for the maturation of a longer-term investment.
HOW DO I INVEST IN A REAL ESTATE SYNDICATION?
If you feel like investing in a real estate syndication is the right move for you, there are a few simple steps that you can follow in order to get involved in them. Ultimately, it’s very similar to making any kind of large-scale investment.
1: Decide Whether or Not Syndication Fits for You
This is the first, and by far the most important step in the process. No one wants to get left out in the cold after making an investment, or realize after the fact that they weren’t getting what they thought they would out of it. When you’re dealing with investments on the scale of real estate syndications—often in the tens of thousands of dollars—it’s important that you understand exactly what you’re getting yourself into, and that means talking to a professional.
Financial advisors and financial planners can have insights into not only your personal portfolios, but also market trends that you might not have considered, and can make recommendations around them that can help you identify risks associated with certain projects. Ultimately, whether or not to invest in a syndication is up to you, but as with any major financial decision, it’s best done with a full understanding of your personal circumstances and the impression of an impartial third party, ideally a professional.
2: Review Opportunities
Once you’ve decided that syndications are the right move for you, it’s time to start identifying which projects best fit your investment criteria. There are all sorts of options out there, but websites like Fundrise and CrowdStreet both host projects that are seeking investment. There are other ways of finding investment opportunities of course—there may be local developers who operate 506(b) or 506(c) projects that are seeking investors, or you may be contacted through a marketing agency or investor relations representative on behalf of a project or projects. These projects are looking for investors, so they’re not that hard to track down.
The big thing for this step is to narrow down a shortlist of both projects and developers, and to prioritize working with companies who have a proven track record of successful development, and a reputation for being above-board and honest with investors. Opportunities like syndications are still high-risk investments, and there are bad actors and other dubious individuals and groups that can look to profit off of sourced investment with either no intention of completing the project, or a high likelihood of simply cancelling it when things start to become complicated, as developments often do. The best thing you can do to safeguard your investment is to do your due diligence on the opportunities that interest you, confer with professionals, and do your best to ensure that you’re not putting yourself in a position to be taken advantage of by unscrupulous individuals.
3: Soft Reserve Your Place
Once you’ve identified your ideal investment opportunity, things start moving a little bit more quickly. Doing the majority of your research and legwork ahead of time can save you plenty of headaches, but it also carries a slight risk on its own. Real estate investments are often first-come, first-served, which means that too much time spent on the fence between whether or not to invest can mean missing out on your opportunity. There are often limited spots available in syndications to passive investors so that everyone’s return on investment isn’t diluted by an overabundance of investors.
Thankfully, many real estate syndications offer a “soft reserve,” which essentially saves your spot in line while allowing you time to review the investment materials that the deal sponsor provides. While you’ve already done a lot of homework by this point, and it can be tempting to want to act immediately now that the deal is in your hand, it’s important to still exercise an abundance of caution. This is your last real exit before your capital gets tied up in the project, and disentangling yourself becomes a real headache.
4: Review the Private Placement Memorandum
Once you’re ready to commit to the syndication, the next step is signing the PPM, or Private Placement Memorandum. The document will contain a subscription agreement and an operating agreement, which will lay out in legalese the full details of the investment.
READ IT. READ ALL OF IT.
Once you’re certain that you’re signing up for what you thought you were, and you feel comfortable that the project suits your needs, you can feel free to pull the trigger and sign the document. It will also have fun questions like how you’d like to receive your payouts!
5: Make Your Investment
Now, things are real. The PPM should have wire transfer information available in it, and like any investment payment, it should not be made out to an individual. This is another reason why it’s important to review documents like these with a professional, who may be able to notice when things seem out of place.
Once you’ve wired your money, the transfer will take a few days, and then congratulations! You’re an investor in a real estate syndicate. Now you play the waiting game.
WHEN DO I START SEEING A RETURN ON MY INVESTMENT?
Well, isn’t that the million-dollar question? The key thing to remember about real estate syndications is that they are long-term investments. Most of these are new developments, in multi-level, multi-unit buildings, and those can take years to plan, permit, build, and sell or rent. And that’s assuming that everything goes perfectly smoothly, which as anyone who’s ever been involved in real estate can tell you, almost never happens.
Communication between the deal sponsors and investors is key, and sponsors know this. As a passive investor, you’ll receive regular updates on the development process, so that you’re not left in the dark. Ultimately though, when you start seeing a return on investment will vary somewhat depending on the nature of the project. The bottom line is, don’t expect this to be a quick turnaround—even as a passive investor, you’re connected to this project for the long haul.