How Real Estate Syndication Works (With Example)

Real estate syndication is a partnership in which many investors come together to invest in a real estate deal that would be cost-prohibitive to do individually. The partners pool their capital and resources to buy and manage a property.

In real estate syndication deals, there is a sponsor (syndicator, operator, or general partner) and an investor (limited partner). An investor simply invests money, whereas the sponsor has more responsibilities. A sponsor is responsible for finding a property to buy and for managing the property.  A sponsor may put in a small amount of capital (eg. 5%). Sometimes, sponsors don’t put in any capital at all – their contribution to the deal is the time and effort they put in the property.

Once the property is identified and bought, the sponsors manage the property collecting rent and doing renovations, if necessary. The investors get a check every quarter (or every month).

How Syndicated Real Estate Deals Work

Return

Investors and sponsors make money in two ways – rental income and property appreciation.

The investors get a preferred return of 7-10%. A preferred return is a return the investor gets before the sponsors get their portion of the agreed-upon profits. For example, the terms could state that sponsors get 70%/30% after investors earn their preferred return.

Fees

The sponsor gets an acquisition fee for finding and closing on the property. It is typically around 1% of the transaction value of the deal. Sponsors also get a property management fee of 5% to 9%.

Term

Some syndicated deals are 2-3 years while others are 7-10 years. It depends on the time the deal – some properties are easy to fix and flip, whereas others take a lot more time.

A Look At The Math

Let’s say 4 investors pool $500,000 each to buy a $2 million property. The sponsor does not contribute any capital to the deal. He or she brings expertise and will contribute time to find and manage the property. The 5 investors (4 investors who contribute capital + sponsor) own 20% each of the property.

The sponsor scouts and find a property to purchase. Let’s say the sponsor gets a 1% acquisition fee ($20,000 – 1% of $2 million)

The sponsor manages the property. Annual operating income after expenses is $150,000.

Each investor who put up capital for the deal gets a 6% preferred return or $24.,000.  The 4 investors are paid a combined $96,000.  The remaining 54,000 is split equally between the 5 investors (4 investors who contributed cash + sponsor).  That is $10,800 for each investor. Total return to capital contributing investors is ~7% ($34,800 divided by $500,000)

Sale of the property

When a property is sold, the investors get 80% of the profits (as they own 80% of the property) and the sponsor gets 20% of the profits. The profit split occurs only after the investors get their preferred return.

Bottom Line

Real estate is a great way to build wealth. Many affluent people have a portion of their money invested in real estate. Investing in syndicated deals is a good way to invest in real estate without having to manage the day to day affairs of the property. Many syndicated deals offer a preferred return, which gives you an idea of the minimum return you can expect from your investment.

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