How to Passively Invest in Real Estate Through Real Estate Syndication
Think about it.
It's the 1st of the month - you shuffle out to the mailbox in your slippers after the sun has already been up for a couple of hours.
You grab the mail, wade through the credit card offers, spam mail, letters from brokers trying to buy your properties, and stumble across a rent check.
You almost forgot you were still even invested in the project! After all, the only time you really ever think about it is when a check hits your mailbox.
Sound interesting? Check out the video below:
Guide to the video
- Real estate syndication allows investors to own real estate without the burden of active property management
- In practice, a real estate syndication is crowdfunded capital to acquire a property
- As an investor, it's important to find a deal sponsor you're comfortable with
Video transcript follows
Investing in real estate has been thought of as a pipe dream for many. I’ve heard all the rebuttals before – “I don’t have enough cash” or “my personal financial statement isn’t good enough to get a loan” or “I just don’t have the time and experience.” Well, fortunately for you, none of that matters anymore. Because there’s another way to invest in real estate – and that’s through real estate syndication.
Hey everyone – it’s Matt Marsh with Marsh & Partners.
Marsh & Partners is a development and national consulting firm that helps business owners and investors maximize their real estate and transform their businesses.
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Today we are going to focus on real estate syndication. It’s a topic that really gets me fired up because of how applicable it is for busy working professionals, mom & pop investors, and people that want to break the real estate investing space.
Now, real estate syndication isn’t a new concept, but it’s a trend that has picked up serious steam over the last 5 years. It’s nothing more than the pooling of resources to acquire a piece of real estate – a partnership where a syndicator (or general partner) sources a deal and structures an investment opportunity, and investors (or limited partners) “buy-in” to the deal.
The mechanics of a syndication deal are fairly simple. Let’s say a syndicator finds a 10-unit apartment building that costs $1 million. If the sponsor secures a loan for 60% of the purchase price, they may not have the $400K required to acquire the property. So instead, the syndicator may court 8 individual investors who each commit $50K towards the project.
Investors are normally then paid a return based on their $50K capital investment in addition to their ownership share of the property and claim to rental income.
But instead of focusing on how a deal might look on paper, let’s instead talk about how individual investors can actually benefit from a project in practice.
Let’s first start by facing the present reality - the real estate industry is illiquid. Quality properties are hard to find, and it takes time and expertise to source and cultivate deals and years to build a solid broker partnership network to keep a pipeline stocked.
And if you do acquire a property, managing it can be stressful and time-consuming. You know - the 3 am phone calls about clogged toilets or the weekend emergency maintenance runs.
So as a result, many investors are happily taking a passive investment role to avoid the many headaches.
And that’s exactly what real estate syndication offers investors, in addition to a couple of other distinct benefits that are worth noting.
Now, remember how I said quality deals were hard to find? Well, it’s a problem everyone has. But if you’re an investor, instead of taking on that task yourself, let a sponsor do it. They’ll shoulder the burden of outbound and inbound lead generation and underwrite hundreds of deals before they find the one.
And, because the capital is crowdfunded, a single investor doesn’t have to put up all the cash for a project. Which allows investors access to bigger and more profitable deals they wouldn’t have been able to participate in otherwise.
Another important benefit is syndication aligns incentives between the sponsor and investors. Most syndicators have their own capital invested in a project, which means they’re just as exposed to downside risk as the investors.
And the sponsor is compensated based on the asset performance, which better aligns interests than the traditional wall street fund manager model.
Now, as an investor, it’s hard to find a financial vehicle that truly matches your risk tolerance and financial means. But participation in syndicated projects allows you to make smaller contributions to several deals, reducing your exposure to any single property.
The sponsor also contributes their management and operating expertise to the transaction, further shielding investors from investment risk.
And I’ll tell you, it used to be that you couldn’t own real estate without the burden of having to actively manage a property. Real estate syndication offers a truly passive investment – investors have direct ownership and all the associated tax benefits that pass-through, without the management responsibility.
As a result, investors also have a limited liability against 3rd parties like contractors or tenants. And when that rent check hits your mailbox every month or every quarter, you’ll be happy you made the decision to buy into a project.
But none of this matters if you don’t take action and start. So, if you’re an investor that wants to get into investing through a real estate syndication, but just can’t seem to get the ball rolling, here’re a couple of tips.
First, find a sponsor you’re comfortable with and do your research. Every syndicator has a different philosophy and different experience. Take a look at a deal they’ve managed full-cycle and assess whether they’re a good fit.
You’ll also want to determine what product and investment types you’re interested in. The multifamily syndication space is hot right now, but sponsors are syndicating capital for build-to-suit projects, industrial development, and various other types of transactions.
There’s no need to try and make a deal work if the parameters don’t fit your investment goals.
In addition to this video, we’ve also written extensively on the topic of real estate syndication. If you want to learn more about syndication, how to find and source deals, and how to structure your next real estate syndication, check out the links in the video description below for more information.
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