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WHAT IS REAL ESTATE SYNDICATION?
A real estate syndication occurs when a group of investors pool their capital together to jointly purchase real estate.
WHO IS INVOLVED IN A REAL ESTATE SYNDICATION?
The first party involved in a real estate syndication is typically a "syndicator" or "sponsor/general partner". The sponsor is either an individual or company responsible for finding the deal, underwriting the opportunity, raising capital, dealing directly with the bank, conducting due diligence, acquiring the property, and managing the real estate once acquired. A good sponsor will have a strong background in real estate and they will have the financial acumen to successfully underwrite the investment opportunity and complete a thorough due diligence process on the proposed property. The other players involved in a real estate syndication are the investors or "limited partners". These individuals co-invest with the general partner and own a percentage of the real estate as a result of their investment. Limited partners receive all benefits associated with owning the real estate, but they are not actively involved with the property acquisition, arranging debt financing, or the day-to-day operational management of the asset. Finally, it is not uncommon for a real estate syndication to include a third party known as the Joint Venture (JV) or Equity Partner. The Joint Venture partner generally has a large network of capital providers and acts as a conduit between the sponsor and the limited partners or investors. Likewise, Equity Partners assist with reporting, communication, and tax documentation.
WHY REAL ESTATE SYNDICATION?
The largest driving reason investors choose to take part in a real estate syndication is to access quality investment opportunities that they otherwise would not have access to. The majority of individual investors do not have the time and/or the professional expertise to identify, analyze, and underwrite hundreds of properties until they find the "one". In real estate syndication, the sponsor or general partner will be responsible for shouldering this burden. Likewise, when a quality deal is found, individual investors are not required to contribute all of the capital needed for the acquisition because the sponsor is pooling equity from a group of limited partners.
In addition, investors are able to diversify their portfolios because they can make smaller financial contributions into numerous deals instead of putting a large lump sum down into a single property.
To continue, real estate syndications are advantageous to investors because there is an alignment of interests between the limited partners and the sponsors. The sponsors invest their own capital into the deal in the form of equity. Sponsors are compensated based on the financial performance of the deal rather than through a management fee, so they are incentivized to optimize the performance of the asset. This alignment of interests should also reduce any agent/principal disconnect or friction.
Finally, real estate syndication provides investors with an opportunity to own real estate and to achieve tax benefits, forced appreciation, and write-offs without actively managing the asset. In short, investors can enjoy a hands-off investment experience through real estate syndication.
WHAT ARE THE RISKS?
While there are myriad benefits associated with real estate syndication, no investment comes without risk. Below are some risks associated with investing in syndications:
Project Delays Due to Economic or Market Factors
Construction Cost Overruns That Result In Capital Calls
Increased Vacancies Due To Raising Rents
The Bank Can Call A Loan
The Sponsor Disappears Overnight
Although these are real risks associated with real estate investments, a good sponsor will comfortably address these risks and take proactive action where they can to mitigate them. Let's take a look at each of these and discuss how a sponsor might mitigate the risk or how real estate syndication helps hedge some of these.
Project Delays Due to Economic or Market Factors
Project delays are typically due to weather, political environments, or other external factors that are largely out of anyone's control. Although this risk cannot be completely avoided, it is important to budget for contingencies proactively to help mitigate this risk.
Construction Cost Overruns That Result In Capital Calls
This scenario is usually the result of poor planning and/or the cost increases on materials driven by economic factors or unforeseen situations such as COVID-19. All value-add opportunities will be subject to this risk. A savvy syndicator will reasonably and proactively plan/budget for such contingencies to limit this risk.
Increased Vacancies Due to Raising Rents
Churn in vacancies is to be expected as rents are raised. However, investing in multi-unit assets allows vacancy to rise without killing cash flow before you can fill your units again. Again, an experienced sponsor will account for this churn in their underwriting and will be able to speak to their vacancy projection over the life of the investment.
The Bank Can Call A Loan
This is a rather infrequent issue, but it is a risk nonetheless. Any person or business who takes out a loan from a bank is subject to this risk, so it is largely out of one's control assuming a strong payment history. Real estate syndications can offer a layer of protection due to their nature of operating alongside numerous investors.
The Sponsor Disappears Overnight
Other than proper due diligence before investing, there is not much that can be done in the scenario that a deal sponsor up and leaves. However, it is vital that investors ask the hard questions and conduct their own due diligence to understand the risk they are assuming prior to committing capital. Investors must feel conviction about the deal they are investing in as well as trust and have a transparent working relationship with the deal sponsor.
SUMMARY
In summary, although not without risk, real estate syndication offers a myriad of benefits to passive investors.
Access to a Diversified Portfolio
Less Money Out of Pocket
Passive Income and Regular Cash Flow
Onsite &/or Professional Management
More Stability Due To Higher Unit Counts &/Or Location
Tax Benefits, Forced Appreciation, And Write-Offs
With a strong team, sponsor, and thorough due diligence, real estate syndications allow investors to have a hands-off investment experience while enjoying the benefits of owning real estate.
Are you ready to get started?
Click the button below to learn more about real estate syndication or to set up a time with our team here at One-9 Holdings. If building long-term, generational wealth while receiving passive cash flow is exciting to you, we'd love to connect with you soon!