What You Need To Know About Real Estate Syndication
Investing in the real estate market may be one of the most lucrative moves you could make. So, if you're interested in this venture but lack enough resources or skills to pull it off, you may consider real estate syndication.
DefinitionReal estate syndication, property syndication, or real estate partnership—you may use these three terms interchangeably to mean this; an alliance between several investors with a common goal of making a real estate investment. Often, the properties are of a larger scale, such as apartment complexes, huge land parcels, and other real estate assets.
To become a passive investor in a real estate syndication, you should be a member of a partnership. You and your partners should pool capital and resources to buy or build an intended property. You then become shareholders of the property and get monthly or quarterly passive income distributions and other real estate benefits.
The Involved PartiesThere are three main parties involved in real estate syndication:
- The sponsor: This is the person or company with sweat equities. They're the middle party between investors and real estate work and rely on investors to fund their real estate ventures. They're also known as the syndicator.
- The investor: You and your partners contributing the money fall under this category. Investors are also known as limited partners.
- The joint venture partner: The JV partner may be a third party whose role is to ensure strong communication and transparency between the syndicator and investors. They're also known as the equity partner.
Real Estate Syndication Under The U.S. SECA syndicator collects the amassed money and handles real estate work for you and your partners, such as buying or maintaining the property. For this reason, real estate syndication is an investment contract between you and the syndicator. Thus, it becomes a 'security' as determined by the U.S. Securities and Exchange Commission (SEC).
Need For A Reliable SyndicatorIt's crucial to understand SEC regulations to avoid legal and financial burdens of non-compliance. To do this, you should choose a sponsor who has the backing of a real estate syndication lawyer. Such lawyers are knowledgeable about security legalities. Thus, they efficiently handle the SEC aspect of the investment. Some of their main tasks may include:
- Ensuring the syndicator conforms to the necessary laws and requirements, such as private placement memorandum (PPM) compliance and blue-sky laws compliance.
- Guiding the sponsor on the appropriate syndication documents and handling paperwork to ensure the sponsor's validity and legality.
Therefore, a syndicator with an attorney has more chances of success in the realtor syndication business. Thus, it's vital to thoroughly review a syndication company before agreeing to work with them. Some of the markers of a syndicator's competency to watch out for in their profile may include:
- They have a history of finding top-grade properties
- They have considerable experience in property management
- They're knowledgeable on real estate best practices
- They have a successful record with previous investors
Pros And Cons
ProsSome of the top benefits of joining a real estate syndication include:
- High buying power: You have more buying power due to fund pooling with your group. Thus, you can make more significant investments.
- High ROI: Due to the massive nature of investments from syndication, you correspondingly enjoy a high return on investment, especially since properties appreciate with time. Additionally, you enjoy other realtor benefits such as K-1 tax benefits and a share of the monthly or quarterly passive income distribution.
- Portfolio diversification: You diversify your investment portfolio by adding real estate assets, even if you lack knowledge of the sector. Furthermore, you can also spread your capital across multiple investment syndications.
- Risk minimization: There's a minimization of associated risks as you share liability with other investors.
- Freedom of choice: Unlike real estate investment trusts (REITs), real estate syndications offer you the chance to choose the property to invest in.
ConsRisks are a dominant part of real estate syndications as they're with every investment. Some drawbacks you may face include:
- Losses: Your portfolio may devalue, especially if you work with an unreliable syndicator.
- Long waiting time: It may take a while for the sponsor to reach the desired number of investors to contribute the required amount for the investment.
Eligibility CriteriaTo invest in a real estate syndication, you must either be an accredited or sophisticated investor:
- Accredited investor: You're an accredited investor if you have an individual annual income of at least USD$200,000 or USD$300,000 with a spouse. Alternatively, you may have a net worth of USD$1,000,000.
- Sophisticated investor: You're a sophisticated investor if you have in-depth knowledge and experience in the real estate syndication sector. This means you can accurately evaluate the upsides and downsides of a potential investment before putting your money in it.
ConclusionThis article has touched on the fundamentals of real estate syndication—which is an expansive topic in and of itself. If you intend to invest in real estate syndication, you should first go over the eligibility requirements to confirm if you meet them. You should also do a thorough background check on the syndication company to ensure its dependability. And one of the markers for a reliable syndicator is that they work with a syndication lawyer. Afterward, you may enjoy the numerous benefits of becoming a passive investor in a real estate syndication.
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