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By Ashley Smith, Exclusively for olddawgsreinetwork.com
When it comes to real estate investment, syndication is rapidly gaining popularity as a passive strategy that yields significant returns. But what is real estate syndication? Real estate syndication is essentially about a group of people pooling their financial resources to purchase properties or projects which would otherwise be too expensive for them to afford on their own. In a recent podcast, Bill Manassero discussed some of the advantages of real estate syndication like diversification and sharing risks among others.
In this scenario, a sponsor is someone who has real estate investment experience, and will generally do the legwork to acquire a property, raise funds, and manage the property, while investors provide the bulk of the financial equity. Sponsors generally invest anywhere from 5-20% of the total capital raise while investors usually put in 80-95%. So, what are the advantages?
A Chance for Your Money to Grow
The goal of any investor is, for the money they put into an investment, to grow their investment over time and help reduce taxes taxes. Castanet explains how syndicated real estate investments, where you enter into a contract utilizing Limited Partnerships and Limited Liability Companies (LLCs), allow you to take advantage of a tax-deferred status while compounding 100% of the fund’s proceeds.
This, of course, works just as long as you don’t distribute the capital gains outside of the fund. In terms of the fundamentals of investing, a post by FXCM defines compounding as the growth of an asset over time. Specifically, it’s the process in which an investment’s earnings are reinvested over time to generate additional earnings — a crucial aspect of successful real estate syndication investing. Additionally, giving your money the chance to compound without paying taxes gives your portfolio a huge boost.
Profits and Value Creation
Now that we’ve talked about how your investment will grow and allow you to take advantage of compounding, how do you get paid? Because real estate syndications generally involve multi-family properties like apartment buildings and or other commercial properties, profits from syndications are made through rental income and property appreciation. Rental profits are generally distributed to investors from the sponsor on a monthly or quarterly basis founded on pre-agreed terms. The property’s value, especially if improvements or upgrades are made, appreciates over time, so investors can earn larger profits in the form of a large bonus payment to investors when the property is sold.
Furthermore, as a passive investor in an apartment building syndication, the syndicator has control over the value of the property as it’s largely based on the property’s net operating income. Founder of Blue Lake Capital LLC, real estate professional Ellie Perlman notes how increasing a property’s net operating income through capital improvements, or by streamlining inefficiencies, will see capital appreciation over time steadily increase the value of the property.
Things to Keep in Mind
While real estate syndication allows you to aggregate risk among investors and offers many opportunities to choose from, there is a lot of capital competing for a variety of real estate investments. It’s best to take extra time, do your due diligence and understand everything about the investment, the other investors, market factors, and sponsor(s) before investing your hard-earned money. In particular, Forbes suggests that you carefully research the sponsor to make sure he or she is knowledgeable and experienced in your geographic location. Different locations have very distinctive real estate markets that can produce different costs and other variables that will impact the bottom line of your investment.
