When it comes to investing, there are times when you may reach the point where you’re too far beyond your financial capabilities. If this is you, the answer to your problem may lie in real estate syndication.
What Is Real Estate Syndication?
Real estate syndication is also referred to as property syndication. It is a type of partnership that involves multiple investors pooling their resources to purchase a property or multiple properties.
Generally, two roles are being played in the syndication: the investor and the syndicator. Your abilities, skills, available capital and wherewithal will determine what position you are best suited for.
Carefully Choose Your Role
The typical fee for a syndicator is around 2% or lower. However, it can vary depending on the deal complexity and other factors. Ideally, if you’re good at identifying and managing properties, you should consider becoming a syndicator. This type of partnership involves pooling your resources to acquire a property and then managing the investment.
The other members of the partnership typically provide the money to buy or renovate the property. The investors usually receive a monthly or quarterly income as the deal proceeds. Each investor gets a piece of the deal, while the sponsor gets a higher return than 10% of the profits.
There Are Multiple Ways to Split Profits
Imagine that you’re a real estate investor who secured a $1 million loan for an apartment building. Five investors then agreed to split the deal’s profits evenly. You agree to pay the group a 1% acquisition fee. The investors also receive a 5% preferred return. You split the remaining $30,000 into $6,000 each.
The investors’ annual return on the money is 7.4%. The sponsor, on the other hand, has made $16,000. Assuming you and the sponsor agree to split the management fee based on the rent, you would have a management fee of 2% or more.
The group agrees to pay you a 10% management fee on the gross income you generate. This amount is equivalent to the $6,000 you’ve earned as a return. If the property requires a lot of work to get rid of or needs repairs, you should take a larger share of the profits.
Choose a Structure
Syndications usually have two different types of structures. The sponsor is usually the managing member, while the investors are referred to as limited partners. Before you sign a syndication agreement, seek the advice of a real estate attorney to draft a contract that’s fair to everyone involved. Before you sign on as a syndicator, make sure that everyone has equal voting rights and is on the same page at all times.
You have a lot of responsibilities as a sponsor. While it may seem like an excellent opportunity to work with a group of investors, you also have to be responsible for the deal’s financial aspects.
The primary purpose of a sponsor is to solve the problems that the investors might face due to their lack of knowledge about real estate. This is why the investors pay you a premium for their participation.
As a sponsor, you have to be prepared to take on risks as they come along. You can also help your investors with their exit strategy when it’s time to sell the property. The world’s wealthiest individuals make their fortune through various means, but real estate is one of the most lucrative.