Real estate syndication can have a lot of benefits, although it does come with certain risks. While it is a good option, there are certain details that you need to understand before you invest in one.
What Is a Real Estate Syndication?
A real estate syndicate is simply the pooling together of funds for the purposes of investment. Typically, the sponsor will invest 10%-20% of personal capital and investors will fund the rest. These syndicates usually come with built-in protection for all parties. There is an operating agreement stipulating all the terms and conditions. The sponsor will usually get the funding and find the property.
Rental from the real estate syndication is split between investors and sponsors on a quarterly or monthly basis. The sponsor takes a fee between 1% – 2% for services rendered. The exact payment terms vary, depending on the structure and the terms of the contract. In most instances, investors will receive a preferred return before the sponsor receives any. However, the sponsor will also acquire property management fees and a fee for finding the real estate.
Different Payout Methods
The preferred return ensures that the sponsor puts the interest of the investors first in real estate syndication. Otherwise, he or she can collect on management fees and acquisition fees without finding the best property. However, there are other options. One model is the straight equity split. Returns are split equally among investors in proportion to their ownership.
There are 3 main real estate syndication structures. These include REITs, LLCs, and LPs. Each of these will have unique pros and cons. For example, a REIT requires more than 100 entities for its formation. Additionally, it requires that 90% of taxable income must be paid in the form of dividends. LLCs are the most common option, while LPs are for more savvy investors.
Crowding Real Estate Syndication Is Great
It is easier than ever to invest in real estate syndication. You can invest online via crowdfunding into certain portfolios. However, while they are great investment tools, you still need to do appropriate research beforehand. Pay attention to sponsor fees in your real estate syndication. They can turn your profit into a loss, although they are generally safe options with modest returns.