Why You Should Invest In Real Estate Syndications (And How To Find Them)
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Some people are DIY types.
When it comes to any kind of project (including commercial real estate investing), they love
the idea of “doing it yourself.”
I’ve got a lot of respect for those people, but what about the rest of us?
That’s probably the best way to think about commercial real estate syndications … the
difference between “DIY” and “Done For You.”
If you love taking the time and effort of researching a market, making calls yourself,
and laying down a bit more risk, you’ll probably want to work with a brokerage, that’s
DIY.
If you don’t have the time for research, road work, negotiations, and paperwork, real
estate syndications -- the Done For You choice in this analogy -- might be the answer.
I’ll say this, if I had to start over from scratch, I’d go all in on a trusted, proven
syndication.
So let’s take a closer look at why I think you should invest in commercial real estate
syndications, and a little advice about how to get it done right ...
What Is A Commercial Real Estate Syndication?
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The short answer?
A commercial real estate syndication is a way for investors to pool their funds together
in order to buy a larger and more stable asset (or assets) than any of them could have on
their own.
You’ve likely seen the concept of a syndication at work in other industries, it’s not a
new idea at all.
Commercial Real Estate Syndications are a much easier way for most people to invest
in real estate because you can spread out your capital into multiple deals with multiple
different sponsors, diversifying your portfolio along the way.
In its simplest form, you (the investor) find a trusted deal sponsor (the syndicator) and
the sponsor uses their years of experience in the commercial real estate market to invest
and grow your money.
Sounds easy, right?
Not that there are no downsides -- I’ll get to those in a moment -- but syndication
is definitely the “easy button” when it comes to commercial real estate.
And yes, done right, it can be extremely profitable.
A Few Syndication Buzzwords You Should Know ________________
Before we start down this road, let’s get familiar with just a few of the buzzwords
we use in the industry.
In a moment, you’ll be talking like a commercial real estate syndication pro!
Fees The fees in your particular deal are something
you’re going to want to watch carefully.
If you’re working with a reputable deal sponsor, the fee structure should be simple
and minimal.
If not, just like any other business deal, those fees can start to add up and cut way
into your investment.
Some common fees you’ll see in a syndication deal include: Acquisition fee, construction
management fee, refinance fee, asset management fee, loan guarantee fee, and/or a disposition
fee.
Syndication Investor Investors, also called the “limited partners”
(LP), are the passive party in the investment.
That’s you!
Syndication Structures There are many different ways to structure
real estate syndications.
And they can be as simple or as complicated as you would like for them to be.
I prefer to keep my offerings as simple as possible so that there’s complete transparency
and no potential confusion at any point in the process.
General Partner Vs Limited Partner In layman’s terms, a general partner holds
most of the responsibility in a syndication deal.
A limited partner is usually only contributing money as an investor, and carries less risk
in several ways.
506(C) Vs. 506(B) Syndication There are two primary types of real estate
syndication: 506(b) and 506(c).
They are more commonly referred to by which investors are generally allowed to invest:
accredited and non-accredited investors.
The 506(b) offering is referred to as the “friends and family” offering.
The 506(c) offering is for accredited investors only.
Deal Sponsor The deal sponsor, also called the “syndicator”
or “general partner” (GP), is the active party in the investment.
Their responsibilities include: finding and sourcing the investment opportunity, performing
all underwriting, putting together any renovation and operational plans, raising capital and
placing debt, operating the day to day of the asset, and handling all investor relations,
tax returns, K1s, etc.
Waterfalls This is the structure -- agreed upon in advance
-- which will determine how the returns on your investment are distributed to you, the
investor.
Waterfalls can be simply structured (recommended) or very complex, based on the nature of
a given deal, or the parties involved.
The Benefits Of Investing In A Commercial Real Estate Syndication
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The benefits of investing in commercial real estate syndications are nearly as good as
it gets when it comes to investment strategy.
They are many, and include the nature of returns, tax benefits, and my favorite, almost complete
passivity...
You Can Invest In Larger Assets And Projects If you’re on your own, you only have so
much juice.
If you throw in with others, even though you only have a slice of that pie, it can end
up being much larger than what you could have done on your own.
Larger assets tend to hold their value better and are more liquid than smaller properties
since the buyer pool is better capitalized and seeks the confidence in income that larger
assets can bring.
More Stability Due To Higher Unit Counts And/Or Location
If you buy a single family home, and your renter bails, your income goes to zero until
you bring in another renter.
If you join with other investors in a syndication and buy into multi-family or multi-tenant
units … one of those renters leaving isn’t going to send you in a tailspin.
And real estate is all about location, location, location, so if you buy a site in a premium,
high-demand area, you won’t have to fight as hard to keep occupancy high as you would
if your site was in the middle of nowhere.
Less Money Out Of Your Pocket Same point here, but from a different angle.
The combined power (and knowledge) of a group of investors is always going to be much greater
than the knowledge you can acquire on your own.
And that combined power also means less money from you up front, as well as greater returns
on the back end, had you invested that same amount on your own.
Completely Passive Real Estate Investing And Cash Flow
Simply put, find an amazing deal sponsor and, as a limited partner, you’re literally just
placing your money in the pot and watching it grow.
No hassles, no research (unless you want to), no endless phone calls, no guessing.
This is as truly passive as passive investing gets.
Onsite And/Or Professional Management A professional property management team are
the ones onsite each day dealing with the tenants, preventative maintenance of the building,
repairs, budgeting, etc.
Properties of scale have enough income that they can justify covering the expense of a
property management company so that you won’t have to deal with all of that yourself…
which you would be, on your own.
Tax Benefits, Forced Appreciation, And Write Offs
Since commercial properties are physical structures that age and experience wear and tear, the
IRS allows investors to write off a piece of that against any earned income, this is
called depreciation.
Not to mention that since these are not active investments (unless you’re the deal sponsor),
you’re taxed as a passive investor, which offers a lower tax rate.
My favorite benefit of real estate investing?
The forced appreciation.
Like I said under property management, commercial real estate is valued based off the income
you bring in.
So, if you increase the income, you can substantially increase the value thanks to capitalization
rates.
The Drawbacks Of Investing In A Commercial Real Estate Syndication
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Are there risks and drawbacks to investing in a real estate syndication?
Of course!
As you already know, nothing in the investing world is guaranteed, there are always ways
in which things can go wrong.
Let’s take a look at some of the more common risks of investing in syndications...
Increased Vacancy Due To Rents Being Raised This one is the mirror image to the benefit
above.
Yes, as rents are raised in a normal environment, there will be some churn in vacancies.
However, this risk goes both ways, because you’ve invested in multi-unit properties,
one or a handful of vacancies should not break the bank before you can fill them again.
Construction Cost Overruns That Lead To Capital Calls
We’re seeing this more and more these days, which is often due to poor planning and/or
the cost hikes on materials due to things like, you know, a global pandemic!
However, this is going to be a risk in any real estate deal you put together, and with
your pooled resources run by a smart deal sponsor, this problem can many times be head
off at
the pass.
Project Delays Due To Weather, Political Environments, Etc.
This is another one that is not unique to syndications, but deserves mention.
I’d label this as “out of my control” and, though worth preparing what you can in
advance, not worth worrying about.
The Bank Can Call A Loan Yep, it happens.
Not very often, but it does.
And again, this has the possibility of happening to any of us who loan money from banks, at
any time.
So it’s another one in the “out of my control” bucket, assuming all financial
ducks are in their respective rows.
However, I would say that syndication could offer a bit more protection against this happening,
due to the fact that they operate with multiple investors.
The General Partner Disappears Overnight I’ve witnessed this firsthand.
It’s not pretty.
Outside of due diligence beforehand, there’s not much that can be done in these situations.
However, with an experienced deal sponsor that has a track record of successful projects,
you likely won’t need to be worried about any of these scenarios.
It’s important, however, that you perform your own due diligence and understand the
risk you’re taking on, whether you’re the deal sponsor or an investor.
How To Find Deal Sponsors And Syndication Opportunities
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OK, I think I’ve made my case, I obviously believe that commercial real estate syndications
offer the best investment opportunity on the planet, for many reasons.
As I said at the start, if I had to begin again with nothing, I’d scrape the capital
together, walk straight to a reputable deal sponsor’s office, and place my money on
the table.
Now, I will say that finding real estate syndications can be tough, because a lot of them don't
(or can't) advertise because of SEC regulations, so many potential investors have no idea that
these opportunities exist.
But I see this as yet another benefit to you, the investor.
It’s not a very crowded market, so if you do your due diligence, there’s a lot of
deals out there with sponsors looking for investors, and it can also mean that you have
some leverage in the terms of the deal.
So how do you do that due diligence?
Let’s keep this to just a few easy and effective steps...
Go Online.
Now.
Without a doubt, the Internet is an absolute miracle.
This is where I’d start, and there are several places that I specifically recommend, FundRise
and CrowdStreet.
You can make your search as detailed as you want within those platforms and likely find
a syndication that works for you.
There are also many other independent websites and forums that can be not only helpful, but
life-changing in terms of getting you started.
If you only do one thing to find your deal, go online and get researching.
Meet With Deal Sponsors As incredible as the internet is, there’s
still nothing like face to face.
When you meet a handful of vetted deal sponsors in person, it gives you the invaluable opportunity
to decide if this person is someone you actually want to work with.
And don’t underestimate that… you’ll potentially be giving this person a good chunk
of your money, can you look them in the eye and hand it over confidently?
Invest In Projects You’re Familiar With This might be my favorite piece of advice.
Be who you are.
Triple down on what you know.
Don’t try to be someone you’re not!
If you know storage, do storage.
If you’ve got Nashville on lock, do Nashville.
Enough said.
Old Fashioned Networking Let’s go back a few decades and learn from
our elders.
Depending on where you live, it’s likely that there are several real estate organizations,
or clubs, or even bars where all the real estate people hang out.
Find them, go there, be yourself, meet people, become actual friends with them.
And finally, learn from them.
These people are the real ones, the people that know what’s actually going on in your
area, you’d be amazed at the intel you can pick up, intel that just might take you to
the next level as an investor.
Need A Little Guidance On Commercial Real Estate Syndications?
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Me and my team are always available.
In fact, as you may already be aware, we’ve run a commercial real estate syndication in
greater Nashville, TN for over 3 years.
If the idea of an opportunity to build long-term, generational wealth while taking advantage
of truly passive income is interesting to you, we’d love to talk.
Click here if it’s time to invest in commercial real estate, without all the work.