Real Estate Syndication – An Introduction • Benzinga

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Want to learn more about how to passively invest in real estate through real estate syndication? Keep reading to learn the basics of this investment strategy and how to get started.

Suppose your real estate investment portfolio solely consists of single-family homes. In that case, you might have considered, at one point, an investment opportunity in a multifamily real estate deal or a commercial real estate transaction. However, if you want to invest in larger, better properties with a positive cash flow but lack the capital or experience, you should consider a real estate syndication deal.

What is Real Estate Syndication

We’re all well aware that real estate investing requires money. To be successful, you must also possess the necessary knowledge, negotiating power, experience, and connections. It is unusual for a single person to have all of these assets, which makes it easier for an individual investor to benefit from a real estate syndication deal, which resolves these issues. 

Thus, a real estate syndicate could be an excellent solution if your network is exhausted, but you still want to expand your real estate portfolio and aim for a rental income with positive cash flow. 

In a commercial real estate syndication deal, a group of investors creates a real estate fund to finance a large-scale real estate project through an overarching sponsor or sophisticated investor, a process also known as equity participation. Then, after looking up the investment’s private placement memorandum (a document given to prospective investors that details an investment and discloses information about it), the individual investor contributes money to the real estate project and receives payment according to the terms of the agreement.

As a result, investors will not have to worry about day-to-day project planning, cash flow management, employees, staffing, property management, exit strategy or any of the project’s more complicated aspects. 

Instead, the sophisticated investor handles all of the project’s actual work, while passive investors will earn a return on their investment. In a nutshell, syndication makes commercial real estate, multifamily real estate, and other types of properties more accessible to individual investors. 

Asset syndication can take many forms. Essentially anything can be syndicated, forming, for instance, multifamily syndication, apartment, office building syndication, retail and strip center syndication, etc. However, real estate syndications who are operators of the asset class or investment typically focus on just one niche.

Real Estate Syndication Structure

If you utilize a limited liability company (LLC) as the deal sponsor of the syndication investment, it will be manager-managed with a ‘manager’ and ‘members’ as passive investors. Optionally, you could use a Limited Partnership with a general partner (GP) of the management class and limited partners (LPs) as the passive investor class.

The real estate sponsor will need an agreement between management and income property investors to govern how the company will operate. Based on the investment property type, be it a single-family home or a multifamily property, that company agreement will define management and investor rights and duties and how each participant will receive their part.

Manager

The manager usually uses a separate LLC because the real estate syndication structure and company may suffer if something happens to them. The manager doesn’t retain any ownership or voting rights in the syndication structure; however, they receive money for their active role with a syndication fee, usually including an acquisition compensation, asset management fee, refinance payment, or disposition fee.

Members

A real estate syndication structure also has multiple classes of members, such as cash-paying investors and non-cash-paying investors. They are also known as Class A and Class B, respectively.

How Profits are Split

Sponsors are the originators of the equity syndication. The sponsors are typically the managing member if the investing entity is a limited liability company or the General Partner if the investing entity is a Limited Partnership. The managers or general partners are responsible for the operating agreement, transfer pricing, splitting the residual profit, etc.

The manager must provide technically rigorous and practical transfer pricing services (a tax and accounting practice that allows transactions in a venture with a partnership). A specialized company can also handle the process and develop a solution to how profits are split. 

A typical straight profit split method in this type of real estate partnership may be a 70/30 split, which means that 70% of profits would go to the syndication’s passive investors and 30% to the general partner. So, for example, if a real estate syndication generates $200,000 in profits, the sponsor will receive 30%, or $60,000, and the remaining $140,000 will be divided among the passive investors according to the amount of equity each owns. 

Where to Find Real Estate Syndication Opportunities

Most real estate syndication deals are only introduced to a small network of investors or through word of mouth. This can make it difficult to find opportunities if you don’t already have a strong network. 

The JOBS Act’s unprecedented access to accredited and non-accredited investors has resulted in the proliferation of online real estate crowdfunding platforms. These platforms allow real estate syndication partners to gain exposure to a wide audience of potential investors. They also allow investors to gain access to deals they otherwise may never have heard of. 

Below are a handful of Benzinga’s top picks for real estate crowdfunding platforms that specialize in various types of investments. 

Minimum Investment

$10,000

Get started

securely through EquityMultiple’s
website

Minimum Investment

$10,000

1 Minute Review

EquityMultiple makes real estate investing simple, accessible and transparent.

CrowdStreet

Minimum Investment

$25,000

Get started

securely through CrowdStreet’s
website

Minimum Investment

$25,000

1 Minute Review

CrowdStreet is a commercial real estate investing platform where people can invest directly in commercial projects. Unlike a brokerage firm, CrowdStreet isn’t a middleman. Instead, the platform acts as a marketplace where investors can pick and choose the best deals for their time horizon and strategy.

Available investments range from family living spaces to office buildings to storage facilities and investors can sign up for a free membership. Your investment options are limited to what’s live on the Marketplace and you’ll need capital to build a diverse real estate portfolio. Only accredited investors can access deals through CrowdStreet.

Best For

  • Investors looking for diversification away from stocks
  • Real estate investors interested in new opportunities
  • Accredited investors with lots of capital at their disposal

Pros

  • Unique opportunities available
  • Makes real estate accessible and understandable
  • Investors can devote capital to both debt and equity offerings
  • Offers quality education materials and answers to FAQs

Cons

  • Real estate is highly illiquid
  • Most properties require a minimum $25,000 investment
  • You’re limited to what’s on the CrowdStreet Marketplace

Realty Mogul

Minimum Investment

$5,000

Fees

Vary based on investment type

get started

securely through Realty Mogul’s
website

Minimum Investment

$5,000

Fees

Vary based on investment type

1 Minute Review

This unique online platform enables investors to handle the entire commercial real estate investing process right from their RealtyMogul dashboard. With rigorously vetted property listings, expertly managed REITs, and a commitment to providing top-notch service and support to its members, RealtyMogul makes commercial real estate accessible to everyday investors.

Best For

  • Newer accredited investors who want access to pre-vetted properties
  • Non-accredited investors seeking consistent cash flow from well-managed REITs
  • Experienced real estate investors who want access to deal-specific information that allows them to perform their own due diligence more easily.

Pros

  • Do everything from finding the investment property through to signing the legal documents and monitoring your portfolio, all in one platform.
  • All properties are pre-vetted through RealtyMogul’s transparent and rigorous due diligence process.
  • Investment minimums as low as $5,000
  • Keep track of investments with regular updates posted directly to your dashboard
  • Automated investing

Cons

  • Individual property marketplace is only open to accredited investors
  • Does not offer portfolio management

Acre Trader

Minimum Investment

$15k – $25k

Fees

0.75% and 1% per year based on asset value

Get started

securely through Acre Trader’s
website

Minimum Investment

$15k – $25k

Fees

0.75% and 1% per year based on asset value

1 Minute Review

AcreTrader is an investing platform that makes it easy to buy shares of U.S. farmland and earn passive income, starting in just minutes online. The platform features actual parcels of farmland where investors can choose offerings to participate in based on their investment preferences.

Farm types range from Midwest Row Crop Farms to California Almond Orchards, but you don’t need to be an agriculture expert to get started. They have a very thorough underwriting process to vet the offerings, and present information in an easy-to-understand offering page on their website where you can get started with as little as $10k and 10 minutes.

Best For

  • Investors looking for diversification away from stocks and other traditional assets
  • Real estate investors interested in new opportunities
  • Accredited investors with multi-year investment horizons

Pros

  • Real, uncorrelated asset class with a history of consistently strong returns
  • Highly qualified team with best-in-class underwriting practices
  • The platform has some of the lowest fees that you’ll find in real estate investing

Cons

  • Investment minimums are typically $10,000+
  • Only open to accredited investors at this time

1 Minute Review

Groundfloor is open to non-accredited investors and private individuals looking for active real estate alternative investment. Groundfloor has great volume with more than 10 investments. 

Individuals with small portfolios will also like the low $10 minimum and 0 investor fees. However, most of the loans are given to house flippers, and there is a risk of borrowers defaulting on their loans. 

Best For

  • Non-accredited investors: It is a good option for non-accredited investors who want to invest in an individual capacity.
  • Private investors with small portfolios: Groundfloor charges a relatively small premium of $10, which private investors with small portfolios find attractive.
  • Active-investors: Groundfloor is also ideal for investors who want to actively maintain and control their real estate portfolio.

Pros

  • Charges the lowest minimums in the industry
  • 0 investor fees
  • Open to non-accredited investors

Cons

  • Offers no bankruptcy protection
  • High rate of an uncured default
  • Many loans are for judicial-only states

Arrived Homes

Fees

1% asset management fee

Get Started

securely through Arrived Homes’s
website

Fees

1% asset management fee

1 Minute Review

Arrived Homes is the latest player in the real estate investment industry. Differing from many of their counterparts, Arrived provides investment opportunities in the single-family homes, with a minimum investment of just $100.

FarmTogether

Minimum Investment

$10,000

Fees

1% of your total investment + 1% per year in asset management fees

Get started

securely through FarmTogether’s
website

Minimum Investment

$10,000

Fees

1% of your total investment + 1% per year in asset management fees

1 Minute Review

FarmTogether is a crowdfunding investment platform that allows you to pool money with other investors for agricultural opportunities. FarmTogether does have strict requirements for who can and cannot invest on the platform. 

FarmTogether’s platform is new and offers limited educational offerings. It doesn’t currently offer a mobile app, and it requires higher-than-average account minimums. However, as a newer platform, FarmTogether has potential that shouldn’t be ignored,  especially if you’re a higher-value investor looking for novel ways to invest directly in farmland real estate. 

Best For

  • Investors who want to invest in farmland real estate
  • Long-term investors who don’t mind investing in illiquid assets
  • Investors with a net worth of at least $1 million

Pros

  • Can invest directly in agricultural real estate
  • Can combine your investments with other investors for larger returns
  • Offers an easy-to-use platform that’s simple enough for total beginners

Cons

  • Higher-than-average minimum investments when compared to standard brokerage platforms
  • No mobile app currently available
  • Educational offerings are limited

Real Estate Syndication Frequently Asked Questions

Is Real Estate Syndication Profitable?

Real estate syndication can be extremely profitable when investing in the right deals. It’s important to conduct thorough due diligence on the project as well as the sponsor to ensure the offering’s financial projections are realistic and the project is likely to hit its target returns. 

How Much Money Do I Need to Invest in a Real Estate Syndication?

The minimum investment required to invest in a real estate syndication varies depending on the sponsor, the project or the platform used to raise money. However, the minimum investment typically ranges from $25,000 to $100,000. 

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