Article published on December 15, 2022.
Real estate syndication is a great path to investing in the real estate industry.
It is not a well-known type of investment, but it is an interesting opportunity for investors looking for a profitable venture. There are various aspects that are driving the real estate market growth: high potential for investor returns, increased demand for personal household space, increasing population, and high demand for commercial real estate spaces. Investors opt for lucrative ventures, such as real estate syndication, because of its significant returns.
What is Real Estate Syndication?
Real estate syndication is an approach of pooling capital from a group of accredited investors to build a new property or purchase commercial real estate. These investors should have a common goal, which is to acquire real estate. The main aim of syndication is to allow individuals to invest in significant projects or properties that they could not afford on their own.
Typically, real estate syndication is the pairing of real estate professionals and developers with investors looking forward to capitalizing in this industry. This investment opportunity is regulated by the state securities agencies or the federal securities and exchange commission.
Phases of Real Estate Syndication
There are three primary phases of real estate syndication: the organization phase, the operation phase, and the liquidation phase.
1. The origination phase
The origination phase is where the sponsor undertakes due diligence duties to prepare for the real estate project. Some of these duties are planning, satisfying registration and disclosure obligations, marketing the deal, and acquiring the property. These aspects are crucial in the real estate syndication process, as discussed below:
Planning for a real estate syndicate is the most important part of the entire process. Therefore, the sponsor should come up with a feasible plan. This can be done by analyzing the local real estate market. In addition, you can network with realtors to find viable property options that suit the wants of your syndicate team. There is an array of things that sponsors should consider while selecting the right asset.
- Local development plans
The local development plans can affect the resale value of the investment project, especially when it comes to the time to exit the investment. Choose a property situated in an area that has higher chances of growth. This shows that your asset will appreciate with time.
- Lot size
The land is a factor of production that increases in value, especially when compared to a structure or building. Therefore, sponsors should invest in a structure where there is room for expansion. This is a feasible financial plan that will increase the return on investment in the long run.
- Cost segregation analysis
Cost segregation is a great tax planning tool that allows the real estate syndicator to get a better idea of tax advantages and depreciation of the asset. The main objective of cost segregation analysis is to increase the cash flow through differing federal income taxes and accelerating depreciation deductions.
In addition, a physical inspection of the real estate project should be done to determine the potential rate of property appreciation. A feasible plan will attract potential investors to the project.
b. Satisfying registration and disclosure obligations
As previously stated, real estate syndication is regulated by the Securities and Exchange commission. This body requires the sponsor to form a syndicate when acquiring real estate with passive investors. In addition, you should have an agreement that outlines the returns and risks that each party expects.
c. Marketing the deal
After identifying the right asset, it is time to market and advertise it. Consult with your professional and personal networks to collectively create a group of participants able and willing to invest in the venture. Opt for individuals with specific skills to inject into the project. For instance, consider property managers, accountants, lawyers, and investors in the real estate industry.
d. Acquiring the property
Here you need top-notch negotiation skills to get q good deal with the seller. Ensure you agree on a deal that the passive investors have the ability to purchase. In addition, solve impediments and validate the title to closing the deal.
2. The operation phase
The syndicators have two main duties in the operation phase: managing the property and the syndicate. You will need an array of skills to flourish in this phase. For instance, some of the key skills include good managerial, logistical, and excellent communication skills. The sponsor is responsible for the following:
- Executing a renovation plan
- Negotiating contracts
- Collecting rent
- Making debt service payment
- Performing routine maintenance
- Preparation of the tax returns for the property
- Settling legal disputes
- Distributing cash flow to the investors
- Paying expenses, including insurance
3. The liquidation phase
The liquidation phase comprises of loan refinance or resale of the asset. In the event of selling the asset, the sponsor will be responsible for the following:
- Upgrading and repairing the property to improve its aesthetic value
- Facilitate buyer tours
- Market the property to potential buyers. Sometimes, the sponsor can work hand-in-hand with a real estate broker
- Review offers
- Prepare financial documents for buyer inspection
- Conduct price negotiations
On the contrary, the syndicator will have the following responsibilities in the event of liquidation by loan refinance:
- Apply for a loan
- Distribute loan proceeds to the investors
- Shop lenders
- Close on the new loan
- Arrange new appraisal and loan guarantors
How Investors Make A Profit from Real Estate Syndication
There are two aspects that influence the profit in real estate syndication: the exit strategy and your roles. Equity investors will earn distributions during the operation phase as well as the deposition or refinance of the property. Rental income and property appreciation are two main ways passive investors and syndicators make money.
The profit is distributed to the investors on a monthly or quarterly basis, depending on the present terms. In most cases, the syndicators get around 30% of the total profit, while the passive investors receive 70%. Passive investors earn more because they contribute more money. On the other hand, sponsors earn less because they contribute 5% to 10% of the investment. In some cases, syndicators contribute nothing at all.
Benefits of Real Estate Syndication
1. Portfolio diversification
Real estate syndication can be a large benefit during the recession and the growth of the economy. Assets are not correlated with the volatile stock market. The value of the property will not fluctuate on a daily basis like stocks.
2. High return potential
The real estate industry is booming right now. Therefore, real estate syndication has a high chance of maximizing profit because there is high demand for household and commercial properties.
3. Economies of scale
Investors can collectively raise funds to purchase a property that they could not afford individually. Economies of scale will lead to cost advantages, which occur when the syndicate increases the number of investors. This results in a decreased cost per unit.
4. Favorable financing
A syndicate can access favorable terms from authorized money lenders, including commercial lenders. These terms are not available to an individual or smaller investors acting on their own accounts.
Real estate syndication is an excellent investment opportunity for investors who want to diversify their portfolio in the real estate industry. This investment offers various benefits, including favorable financing, economies of scale, portfolio diversification, and high return potential. If you are willing to invest in real estate syndication, consider a real estate company San Diego.
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