The Ultimate Guide To A Real Estate Syndication Structure

syndication-structure

Real Estate Syndication Structure

It’s amazing how many doctors and other high-income professional members of our Passive Investors Circle that have never heard of real estate syndications.

Actually, until a few short years ago, I hadn’t either. It seems that more and more doctors are in search of building passive income streams and syndications are a great way to help.

Quick story. A dentist practicing in California and his wife recently reached out as they’d heard my interview on Dr. Bette Robin’s “Dentistry Rising” podcast.

They recently sold a commercial building for a hefty profit and heard me discussing syndications on the show along with ways that doctors could save on taxes.

One way is by using a 1031 exchange.

Specifically, they were interested in learning more about how to 1031 exchange into a syndication.

I was able to connect them with:

  • a sponsor that could help them identify up to three possible properties within the 45 day time period required
  • a company that would act as a 1031 intermediary during the process

This couple reaching out to me is the #1 reason why I love providing this type of information.

If we have something that can help others, why keep it to ourselves?

Before we get into the real estate syndication structure, let’s briefly review what a syndication is.

What Is a Real Estate Syndication?

A real estate syndication is simply the pooling of funds from a group of investors in order to purchase a property that’s more expensive than any of them could have afforded on their own.

So instead of buying a bunch of small properties individually, the group of people can come together and buy a larger asset together.

For instance, let’s say I have $50,000 to invest.

If I was an active real estate investor, I’d have to do a few things first such as:

  • set aside time to find a property
  • put it under contract
  • perform the inspections
  • run the numbers
  • obtain the loan
  • rent it out
  • manage the property

I don’t know about you, but trying to manage a practice and still be a good husband and dad takes up a lot of time.

Being an active real estate investor for me at this point in my career is out of the question.

That’s why I chose to become a passive investor.

Investing in syndications allows you to put your money into real estate without having to do the work of finding or managing the property yourself.

So I can take that $50,000 and invest as a passive investor. My investment would be paired with someone else that puts in $50,000 and another that puts in $100,000 and on and on.

By pooling our resources, we now have enough to buy not just a rental property, but something bigger, like an apartment building.

What’s great about being a passive investor, we don’t have to do any of the day-to-day work of managing the property.

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Basic Syndication Roles

There are two basic roles in a real estate syndication:

  • Sponsor
  • Real Estate Investors

Let’s take a look at how each one is involved:

Sponsor

The sponsor is also known as the operator, syndicator or General Partner (GP).

As you can imagine, they play the most critical role in the investment process.

This person or group is the one that:

  • Find the investment property
  • Obtain financing
  • Acquire the investment property
  • Manages the property

Not only does the sponsor invest their time, they also invest their money. Typically this amount can range from 5-20% of the total equity capital for the real estate investment.

Investors

Investors are also known as Limited Partners (LPs). Remember, these are the passive investors who invest into the deal.

They have no active responsibilities in managing the asset.

Syndication Types

There are different types of real estate syndications that focus on:

Most of the syndications I personally invest in and recommend to members of the Passive Investors Circle are value-add multifamily deals.

An example of this would be investing in an apartment complex whose units haven’t been updated in 12-15 years. These kitchens are outdated, counter tops are old, carpets are worn and new landscaping needs to be put in.

By making improvements, we can increase the rents, which increases the income of the property and thus, the overall value.

syndication-structure

How Does a Real Estate Syndication Work?

The two groups previously discussed come together to form a syndication: general partners (GPs) and limited partners (LPs) (passive investors).

Remember, the GPs do the work that you would be doing as the owner and landlord of a rental property, just on a much larger scale.

The LPs represent you, the passive investor that has no active responsibilities in managing the asset.

All you have to do is collect a check each month. Not a bad deal.

A real estate syndication can only work when both the GPs and LPs come together.

The GPs find a good deal and put together a great team to execute on the intended business plan. The LPs then invest their personal capital into the deal, which makes it possible to acquire the property and fund the renovations.

Together, the GPs and LPs join an entity (usually an LLC), and that entity holds the underlying asset. Because the LLC is a pass-through entity, you get the tax benefits of direct ownership which is GREAT for the high-income earner.

Once the deal closes, the general partners work closely with the property management team to improve the property according to the business plan.

During this time, the investors receive regular and ongoing cash flow distribution checks.

All of the deals I’m currently in provide a check (direct deposit) on a monthly basis.

Most of these deals have a five year hold period. During that time, all the planned renovations are completed and the general partners sell the property at the end of the hold period.

Once it’s sold, they return the limited partners their capital and split the profits. Typically it’s a 70/30 split where 70% goes to the investors and 30% to the GPs.


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Investing In Real Estate Syndications

Now that we’ve discussed what’s involved with the real estate syndication structure, let’s shift gears to investing.

What’s the process for investing?

Here are the basic steps for investing in a real estate syndication, once you’ve defined your investing goals and found a sponsor you want to invest with.

  1. The sponsor announces that the deal is open for funding, usually via email.
  2. You review the investment summary deck and decide to invest.
  3. You submit your soft reserve, telling the sponsor how much you’d like to invest.*
  4. The sponsor holds an investor webinar, where you can get more information and ask questions.
  5. The sponsor confirms your spot in the deal and sends you the PPM (private placement memorandum).
  6. After signing the PPM, you wire in your funds or send in a check.
  7. The sponsor confirms that your funds have been received.
  8. The sponsor notifies you once the deal closes and lets you know what to expect next.

*Real estate syndications are almost always filled on a first-come, first-served basis. Thus, sponsors use a soft reserve to help them determine who’s interested in investing.

Why invest in a real estate syndication?

Now that you know how a real estate syndication structure is set up and the investment process, let’s talk about what’s in it for you.

There are a number of reasons that investors decide to invest in syndications such as:

  • You want to invest in real estate but don’t have the time or interest in being a landlord.
  • You want to invest in physical assets.
  • You want to invest in something that’s more stable than the stock market.
  • You want the tax benefits that come with investing in real estate.
  • You want to receive regular cash flow distribution checks.
  • You want to invest with your retirement funds.
  • You want your money to make a difference in local communities.

Next Step

If you’re ready to stop trading time for money, take the next step and join the Passive Investors Circle.

jeff@debtfreedr.com
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One response to “The Ultimate Guide To A Real Estate Syndication Structure

Xrayvsn

I am a huge fan of adding real estate to my portfolio and have pretty much exclusively invested in it, outside of retirment contributions, since May 2017. My preferred method is syndications because of the convenience of it and allowing people far better informed than me to make the business decisions for acquiring and managing properties.

You need due diligence up front but once you build a relationship with a syndicator it becomes easier. After that it really does seem like mailbox money.

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