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What Is a Real Estate Syndication Deal?
Real estate syndication is a partnership between a group of investors who pool their resources to buy larger assets than they could as individuals. There are typically two roles in commercial real estate syndication: syndicator and investor. The syndicator, or general partner, acts as the manager of the syndication deal—scouting and securing property investments, and managing investment properties—and typically takes a management fee or acquisition fee for their role. The investors provide most, if not all of the money for the real estate investment, and take on a more passive role in the deal.
How Is a Real Estate Syndication Deal Structured?
In a syndication deal, the investors and syndicators often form a limited liability company or a limited partnership, with the syndicator as the managing member, and the investors as limited partners.
Each party in the investment owns a certain percentage of the property; sometimes ownership is split equally among all the partners, and other times the syndicator takes a larger percentage of equity. Cash flow from the building—rents, eventual building sales—are shared amongst the partners, according to what percentage of the building they own.
Some deal structures will come with preferred returns to investors, meaning that the deal will have to hit a minimum return before the syndicator makes money. This ensures a level of safety for the investors and provides some stakes to encourage the syndicator to come through.
Advantages of a Syndication Deal
A real estate syndication deal can be beneficial for any of the parties who are involved, whether you’re the syndicator or the investor. Some advantages of a real estate syndication deal include:
- Larger assets: When a group of investors pools their resources, they can buy larger properties—like an apartment building or an office building—than they could individually.
- Cost-effective for the syndicator: As the syndicator of a syndication deal, you’ll be able to benefit from a real estate investment without investing any of your own money.
- Passive returns for investors: As a passive investor, working with a syndicator means passive income from real estate, without the time investment of managing a building.
4 Tips for Entering a Real Estate Syndication Deal
If you're considering a syndication deal as your next investment opportunity, follow these tips:
- Choose the best role for you. Decide whether you're better off as a passive investor or a syndicator based on your skills, your assets and net worth, your risk level, and your experience.
- Connect with trustworthy partners. Ensuring that you can trust your partners is especially for investors connecting with a syndicator, as the syndicator is in charge of working to manage the building. Do your due diligence to find a syndicator with a proven track record as a property manager.
- Make sure the contract protects you. When signing agreements with a syndicator, look out for things like preferred returns clauses that ensure greater safety for you as an investor.
- Always consider your risk. Whether you're an investor or syndicator, exercise caution when making investment decisions. Real estate syndication deals ensure a larger safety net, but there is still a level of risk.
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