05 May Real Estate Syndication Basics
Real Estate Syndication is simply the pooling of funds from numerous investors and channeling those funds into real estate projects. These funds can be used to acquire a property in its entirety, or these funds can be used as an equity contribution to the project in addition to a commercial mortgage, which would fund the majority of the project’s costs.
Real estate syndication is an effective way for investors to pool their financial and intellectual resources to invest in properties and projects much bigger than they could afford or manage on their own. Although real estate syndication has been around for decades, until recently syndicated investments were difficult for individual investors to access.
Real Estate Syndication Principles
How, exactly, does a syndicated deal work? Real estate syndication is a simple transaction between a Sponsor and a group of investors. The SMARTCAP Group is a syndication sponsor.
For example, imagine two people opening a restaurant together. One person has more money to invest and the other has a lot of experience working in and managing a restaurant. The person with the restaurant experience (the Sponsor) finds a restaurant to open and arranges everything, while the other person (the investor) simply invests their money. The person with the restaurant experience naturally runs the restaurant, and, as a result, gets a paycheck for their work and both get a share of the profits based on time and money invested.
The basics of real estate syndication aren’t all that different from the two people opening a restaurant together. As the manager and operator of the deal, the Sponsor invests the sweat equity, including scouting out the property, raising funds and acquiring and managing the investment property’s day-to-day operations, while the investors provide most of the financial equity. The Sponsor is usually responsible for investing anywhere from 5-20% of the total required equity capital, while investors put in between 80-95% of the total.
Syndications are simple to set up and come with built-in protections for all parties. They’re usually structured as a Limited Liability Company or a Limited Partnership with the Sponsor participating as the General Partner or Manager and the investors participating as limited partners or passive members. The rights of the Sponsor and Investors, including rights to distributions, voting rights, and the Sponsor’s rights to fees for managing the investment, are set forth in the LLC Operating Agreement or LP Partnership Agreement.
Why do people engage in real estate syndication?
The biggest reason investors participate in real estate syndication is access to deal flow. Not every investor has the time to search and underwrite hundreds of properties to find a gem to acquire. But there are thousands of real estate companies all over the United States who do this for a living. By getting involved through real estate syndication, investors have access to this deal flow and the ability to invest in real estate without the hassles of property management.
Each property purchased by The SMARTCAP Group is syndicated.