What Is Real Estate Syndication?

Real estate syndication is a term that gets tossed around frequently and many people don’t know exactly what it means or what it entails. In short, real estate syndication is a strategic way for investors to pool their funds together to buy properties much larger than they could afford or manage on their own.  That is the short definition, now let’s dig into the specifics.

So, how does a syndication deal work? It is simply a deal between a group of sponsors and a group of investors. Now let’s put it into context.  Say a group of 2-3 people come across a great deal for $5,000,000.  This group is called the sponsors.  The sponsors don’t have the $1,000,000 for the down payment for this deal.  Therefore, they decide to partner with other investors to buy it.  The sponsors decide they will put in $100,000 then raise the other $900,000 from investors. The sponsors then partner with a group of 10-20 investors to come up with that $900,000. Then, shazam they close the deal!

The next question you may be asking yourself is, why would the sponsors do all of that work while the investors just sit back and make money?  Valid point, because the sponsors are in charge of finding the deal, securing the financing, managing the deal, and everything else that comes with owning a property.  Meanwhile, the investors get money direct deposited every quarter. Then they wait for the big payout when the property sells for a profit 5-10 years later.  The answer to this question is, the sponsors will usually get a “sweat equity” percentage of the deal for doing all of the work.  A common split is 30% to the sponsors and 70% to the investors.  Here is an example of what the above scenario might look like (assuming a sale at year seven):

 

 

 

 

 

 

Each investor then owns their own pro rata share of that 70%, based on how much they invested.  Using the above example, if an investor invests $100,000 of the $1,000,000, they would own 10% of the investors share.  That $100,000 investment would look something like this:

 

 

For the investor that wants to be passive and not deal with the daily operations of owning a property, being an investor in a syndicated deal provides great benefits.  Some of the benefits include; reducing taxable income, not having your name tied to the loan, economies of scale through partnership, and the list goes on.  For the sponsor that wants to buy larger deals, syndication provides that capability.

 

Long story short, syndication can be a great option for many people.  But an investor still needs do their due diligence to determine if it is a good deal, and if the sponsors are trustworthy.  While the sponsors need to obtain the proper knowledge and experience to provide the investors with a great return.

If you would like to learn more about partnering with Smart Asset Capital on future deals, please click here.

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