For investors looking to develop a real estate investment portfolio, having a varied selection of profit-generating properties is recommended. A real estate investment portfolio consisting of single-family homes might not be enough for an appreciable portfolio expansion. If you’re seriously considering expanding your real estate portfolio, investing in commercial properties or apartment buildings is the way to go.
However, such an investment would take a lot of capital, not to mention the level of management expertise and commitment it would take to handle such an undertaking. But, through real estate syndication, you can invest in more substantial properties without the need to spend more funds than you’re comfortable with. Plus, you don’t have to involve yourself with the minutiae of managing a number of real estate properties.
What To Know About Real Estate Syndication
Commercial real estate can be a lucrative market, but not everyone has the wherewithal to invest nor the skills and patience to manage such an operation. With real estate syndication, you can own a piece of a profitable, passive investment without the responsibilities of a landowner. If you’re interested in getting into this type of syndication, you need the help of law firms like Moschettilaw to guide you toward the best practices.
But first, here are a few things you should remember about real estate syndication:
What Does A Real Estate Syndication Do?
Also known as property syndication, real estate syndication is a partnership among various investors to combine resources and purchase real estate properties jointly. These properties include land, apartments, storage units, mobile home parks, and other real estate assets. This syndication is essentially a real estate partnership, and the legal structure is usually a Limited Liability Company (LLC) or Limited Partnership (LP).
The People Involved In Real Estate Syndication
There are usually two main roles in this type of syndication: the syndicator or sponsor and the passive investors or limited partners. The syndicator acquires the property, renovates it, and manages it. These real estate syndicators are usually responsible for the operation and organization of the syndication. The syndicator, also known as General Partner, usually has the most experience and expertise in real estate properties.
General Partner in commercial real estate refers to the individual (or a team) in charge of deals and private equity funds from beginning to end. No matter the arrangements, the syndicator has a crucial role in any real estate syndication. Some of the general partner’s primary duties are underwriting (meaning the syndicator evaluates deals, making sure the lender isn’t at risk), dealing with the seller, finding investors, creating a business plan, managing the assets, and others.
Meanwhile, the investors or limited partners provide the funds to purchase real estate properties. Their role, however, is mostly passive—the silent partners in the partnership. They are interested in acquiring commercial properties, but mostly, they leave the actual managing to the General Partner, who has the experience and skill for the job.
How Do The Partners Earn Income?
The limited partners’ primary role is to provide a part of the capital; in turn, they get ownership shares of the real estate property. As part-owners, they receive monthly or quarterly passive income from the property, according to the agreed-upon payout points. They will also get their ROI (return on investment) upon selling the property. The profit they’ll receive will be based on the percentage of their total investment in the deal. For rental properties, the investors can receive dividends, which can either be monthly or quarterly.
Added Benefits Of Syndication
Besides the passive income, investing in real estate syndication has other perks. As an investor, you don’t have to deal with managing the properties, like dealing with the tenants. Moreover, as one of the owners of a real estate property, you are eligible for tax benefits as an investor. Passive investors are taxed at a lower rate.
Moreover, the value of real estate eventually appreciates, so your ROI will undoubtedly increase over time. You can also have the luxury of choosing any particular piece of property in which you want to invest. And as an investor, you can diversify your portfolio on various real estate syndications.
The Eligibility Criteria For Investors
You must also know that not every Tom, Dick, and Harry can invest in a real estate syndication. There are eligibility criteria that an investor must meet. For example, to be an accredited investor, your annual income shouldn’t be lower than USD$200,000. If you’re married, that goes up to USD$300,000. You can also be eligible if your net worth is at least USD$1 million.
But some real estate syndications are open to ‘sophisticated investors.’ Sophisticated investors are those who have extensive knowledge and experience in the field of real estate. They can accurately analyze the advantages and disadvantages of a potential investment and can give valuable insights into a deal or the properties themselves. Such a partner is welcome to invest in real estate syndication.
Investors in real estate syndication pool their resources to acquire properties that are otherwise too expensive to purchase on their own. Through this arrangement, the investors don’t have to be involved in the day-to-day operation of the property. The general partner, who has the skill and experience, is responsible for that.
The article only discussed some key points of real estate syndication, which is a broad subject. Consulting with real estate syndication lawyers can be worthwhile if you want to learn more.