If you’re interested in tapping into the opportunities that investing in real estate provides, but not willing to buy and manage a property yourself (we don’t blame you), there are a variety of options available to you – but which will you pick?
Perhaps you’ve encountered REITs, or real estate syndications, or something in between. The distinction between these different options can be confusing, so in this article we will break down one of those options: what is a real estate syndication?
We’ll cover how real estate syndications work, their advantages and disadvantages, and how to invest in a real estate syndication.
What is a real estate syndication?
At a high level, a real estate syndication is where a group of individuals or companies pool their money together to purchase a property and benefit from the rental income and potential appreciation that property provides.
Real estate syndications are comprised of two groups:
- The syndicator(s)
- Passive investors
The syndicators are general partners in the deal; they are responsible for finding, structuring, underwriting, performing due diligence, financing, raising capital, completing the purchase, and finally, exiting the deal, among other things. The syndicators spearhead the transaction and perform the critical overhead tasks to make a deal for the property, and ensure the investors receive their pro rata share of available funds.
About those investors: passive investors help by providing the capital needed to purchase the property and in return, they receive equity in the property. Typically, these investments can range from a minimum of $50,000 – $100,000 to several million dollars.
Real estate syndications are structured around a set timeframe for holding the property. These agreements can range from 3 to 10 years, after which the property is sold, benefiting the investors, who share in the profit of the sale in addition to receiving dividends during ownership, when available.
How is a syndication different from a real estate trust?
If you’re familiar with a real estate trust (REIT), this might sound familiar. There are key differences though that are worth noting.
A REIT is usually higher level and structured like a mutual fund where you can buy shares in multiple properties. A real estate syndication, though, is different in that the investors own equity in a specific property. With this comes the potential for lucrative returns along with passive income and numerous tax benefits.
How real estate syndications make money
Both groups (the sponsor and the partners) make money through two sources:
- Increases in the property value
- Rent increases
Income may be distributed among the investors at regular intervals (usually monthly or quarterly, and also depending on how the agreement is structured). As time goes on and rents increase, the property increases in value.
When the property is sold, there is also an opportunity to profit, though the syndication duration can vary. Some properties are held for nearly a decade and others as short as a few years, with five years being the average.
As you can see, real estate syndications can provide an excellent source of passive income, making them attractive to those looking to diversify their investments without having to actively manage them.
Pros and cons of a real estate syndication
Pros
There are plenty of benefits to investing in a real estate syndication, though our favorites to mention are:
- Passive income: Real estate syndications can offer a stream of passive income due to rental income growth. This can be an excellent way to supplement your income while hedging against risk or having to manage your investment actively.
- No hassle of managing property: Real estate syndications offer the benefits of owning a multifamily property without the hassle dealing with tenants and the property itself.
- Control over what you invest in: Funds like REITs are broad and invest in multiple and sometimes diverse properties, removing you from the decision making. By investing in a real estate syndication you control where your money goes and the type of property you invest in.
- Appreciation: Strong management, property improvements and rent increases result in increased property value. (and real estate has a strong track record) allowing for potential consistent income distributions, and profit when the property is sold.
- Tax Benefits: Because syndications are generally structured as Pass-Through Entities, the investors have potential tax benefits.
Cons
Investing in a real estate syndication is not without its challenges, though. There are a few worth mentioning:
- They are illiquid: Compared to a fund like a REIT where shares are traded in a market, real estate syndications are less liquid due to the agreement structure. Typical agreements range from 3-10 years meaning you must be prepared for your investment to stick around.
- Eligibility requirements: Real estate syndications come with eligibility requirements (more on this later) which can bar newer investors from participating.
So, who can invest in a real estate syndication?
Due to the nature of real estate syndications, there are some SEC eligibility requirements to qualify you to invest. It’s not quite as simple as buying shares of an REIT, and as a result you must be either an accredited or sophisticated investor.
Accredited investors have an annual income of at least $200,000 (or $300,000 with a spouse) or a net worth of over $1,000,000 (excluding primary residence).
Alternatively, investors can be considered accredited through additional SEC approved criteria making them eligible to be passive investors in the syndication.
At Colony Hills Capital our requirement is that you be an accredited or sophisticated investor if you wish to invest in one of our properties or funds.
How can you invest in a real estate syndication?
Real estate syndications are becoming more popular and attractive as a way to invest in multifamily real estate. As a result, there are plenty of platforms out there that you could pick from to start your investing journey.
If you recall, real estate syndications allow you to decide which property you invest in. As a result, it’s critical that you invest with a highly experienced group with a strong track record for success and who invests alongside you.
At Colony Hills Capital we are experts in the acquisition, ownership, and management of property in growing markets around the country. While we cannot guarantee results, we always aim to provide consistent and above average passive income to our investors. Past performance is no guarantee of future results. Interested in investing? Contact us today to learn more.