Real Estate Syndication- Why syndication is the best way to invest in Real Estate?
Updated: Apr 15, 2019
What is real estate syndication method?
In real estate syndication method, a group of investors is formed to make an investment. In this way, you are able to do larger investments that are more profitable. It is much more profitable to buy an apartment building and lease the units than to buy a house and rent it. There is a person or group of people who are the administrators. They are the ones who form or find a business opportunity. This group is called managing partners or general partners. There are also investors who only participate with money, which they call limited or capitalist partners. Limited or general partners receive shares according to their participation.
The real estate syndication is a model in which everyone wins. Groups of houses, apartment buildings or commercial buildings are built or purchased, the total cost of which is too high for an individual, but not for the group. The economy of scale greatly improves profits. Limited partners get very good returns on their investment and do not have to worry about management at all. There is a professional administration in charge of either construction or leasing. Limited partners receive their capital and a preferential return before the managing partners can withdraw their profit. And the managing partners earn more when more profits are provided to the capitalist partners.
There are many forms to organize the syndication, a common way is that after the private partners receive their capital and preferential return the rest of the profits are shared 70-30 or 80-20 between the capitalist partners and administrators.
Among the most common syndication are the development ones and value-added investments. In a development syndication the land is bought, the property planned and built. It can be done with any type of property, apartment building, groups of houses, storage boxes, office buildings, commercial buildings, etc. Capital and profits are only recovered at the end of the cycle when the property is sold. According to the magnitude of the project, investors have to wait between one to three years to obtain their return.
In the value-added real estate syndication, an existing property is bought, perhaps a rundown property, and it’s interior and exterior are improved to obtain a better income. The advantage is that you buy a property that already has a positive cash flow and investors can start to receive an income almost immediately.
Of course, you can also develop a property and then exploit it or lease it for a period of time before selling it.
Advantages of real estate syndication
1. Syndication have the advantage that they are "passive" investments, the limited or capitalist investor contributes his part to society and then receives his profits without worrying about the administration.
2. Another advantage is that both business formation, construction and daily administration are done by people and companies with experience and professionally managed.