How Do Real Estate Syndications Work?

Real estate syndications have become an increasingly popular way for investors to access larger, more lucrative properties without taking on the full burden of ownership alone. But what exactly is a real estate syndication, and how does it work? In this blog, we'll break down the basics of real estate syndications, how they operate, and why they might be an appealing investment option for busy healthcare professionals.

What is a Real Estate Syndication?

A real estate syndication is a partnership between multiple investors who pool their capital together to purchase and manage a real estate property. This structure allows investors to collectively buy larger properties—such as apartment complexes, office buildings, or commercial centers—that would be difficult to acquire individually. For more on this, check out our blog article; What Is a Real Estate Syndication?

In a Syndication, There Are Typically Two Main Parties:

1. The Syndicator (or Sponsor): This is the person or company that initiates and manages the syndication. The syndicator is responsible for identifying the property, securing financing, raising capital, and managing the day-to-day operations of the investment. In return, the syndicator often receives a share of the profits and/or management fees.
2. The Passive Investors: These are individuals who contribute capital to the syndication but do not take an active role in managing the property. Passive investors receive a portion of the income generated by the property, typically through regular distributions, as well as a share of the profits when the property is sold.
   
   

How Real Estate Syndications Work: The Process

Real estate syndications follow a structured process that involves several key steps:

1. Identifying the Opportunity: The syndicator starts by identifying a suitable investment property. This could be a multifamily apartment building, a commercial office space, or another type of real estate asset. The syndicator will conduct due diligence, analyze the market, and create a business plan for the property.
2. Forming the Syndication: Once a property is identified, the syndicator will form a legal entity, often a limited liability company (LLC) or a limited partnership (LP), to hold the property. The syndicator will then prepare a private placement memorandum (PPM), which outlines the investment opportunity, risks, terms, and other critical details.
3. Raising Capital: With the PPM in place, the syndicator begins raising capital from passive investors. Investors contribute funds in exchange for ownership shares in the syndication, making them limited partners in the entity that owns the property.
4. Acquiring the Property: Once sufficient capital is raised, the syndicator moves forward with the purchase of the property. This includes securing any necessary financing, such as a mortgage, to complete the acquisition.
5. Managing the Investment: After acquiring the property, the syndicator is responsible for managing it according to the business plan. This includes handling operations like leasing, maintenance, and improvements. The goal is to maximize the property’s value and generate steady cash flow.
6. Distributions and Returns: As the property generates income—primarily through rent—the syndicator will distribute a portion of the profits to the passive investors. These distributions are typically made quarterly or annually, depending on the terms of the syndication.
7. Exit Strategy: Real estate syndications usually have a defined holding period, often ranging from five to ten years. After this period, the syndicator may sell the property, refinance it, or execute another exit strategy. Upon sale, the proceeds are distributed among the investors according to their ownership percentage, after which the syndication is dissolved.
   
   

Why Invest in a Real Estate Syndication?

Real estate syndications offer several advantages that make them attractive to both novice and experienced investors:

1. Access to Larger Deals: Syndications allow investors to participate in high-quality, large-scale properties that would be out of reach for individual investors.
2. Passive Income: Investors can earn passive income through regular distributions, without the headaches of managing the property themselves.
3. Diversification: By participating in syndications, investors can diversify their portfolios across different property types and locations, reducing risk.
4. Professional Management: The syndicator’s expertise in managing and improving the property enhances the likelihood of a successful investment.
5. Leverage: Syndications often use financing to purchase properties, allowing investors to benefit from the leverage of borrowed capital.
   
   

Conclusion

Real estate syndications provide an opportunity for investors to access larger, income-producing properties with the potential for significant returns. By pooling resources with other investors and relying on the expertise of a professional syndicator, you can enjoy the financial benefits of real estate investing without the burden of direct property management. However, as with any investment, it’s essential to conduct thorough due diligence and understand the risks before committing your capital.

If you would like to learn more about vetting syndicators, please download our free guide. Our comprehensive guide equips you with the critical questions and insights needed to thoroughly evaluate potential syndicators you may choose to invest with. You can also check out our most recent blog, Is Your Portfolio Diversified Enough? where we discuss the multiple different property types commonly found in real estate syndications.