A Guide to Real Estate Syndication: Key Strategies and Insights

For a long time now, it's been common knowledge in the world of financial investments that real estate investing is a profitable avenue to go down. That couldn't be any more true in 2024, as we are currently in the midst of a record-breaking year for apartment construction. That trend is looking to continue into 2028.

The real estate market is booming; now is the time to jump on the wagon. But if you're new to real estate investment or want to expand your existing portfolio, it might be challenging to know where to start in a financially wise way.

One investment strategy that works for many investors who want to reap the benefits without taking on too much risk is real estate syndication. Real estate syndications are a way for you to go in on investment property with other real estate investors who share the profits.

But how do real estate syndications work? And how can you get involved in one? We here at Income Property Advisors, Inc. specialize in the investment side of rental property and are here to answer those questions for you. Let's dig right into what goes into a real estate syndicate.

What is Real Estate Syndication?

Real estate syndication involves a partnership between you and a group of investors to purchase rental property. Each partner contributes a share of the capital needed for their investment opportunities.

Real estate syndication investment is performed jointly by two groups: general partners (GP) and limited partners (LP). The general partner oversees real estate syndication deals. They are more hands-on during the investment process, handling things like discovering a profitable investment opportunity, completing the transaction, and running the property once it's bought.

Limited partners, or passive investors, far outnumber the GP. A passive investor can be one of hundreds involved in syndicated real estate deals. They contribute a percentage of the property cost, pooling funds together to buy a larger property.

In return, the LP receives passive income from the investment according to their share invested, a percentage of the property ownership, and a return on investment when the property is sold. Investing in this way can be a great way for all parties involved to generate cash flow more easily and diversify their real estate portfolio.

Benefits and Risks of Syndicated Real Estate Investing

All of this makes real estate syndication sound like a pretty air-tight deal. And while the benefits do outweigh the drawbacks, as with any investment, syndication also has its share of risks involved. So let's outline the most common of both.

Benefits

The benefits of real estate syndicates include:

• Reduced Risk: With less capital invested, you'll have less financial liability in the event of profit loss. Losing money is less detrimental, but you'll still be able to enjoy passive rental income on a monthly or quarterly basis.

• Financial Benefits: Property values naturally grow over time through appreciation, meaning your initial investment will grow over time with less risk to you. Since you're a part owner of the property, you'll also receive tax benefits on your annual income.

• Diversification: Certain types of real estate assets with higher market value are harder for an individual to acquire alone. Entering into a syndicated deal will allow you to diversify with investments like commercial real estate and multifamily properties like apartment complexes.

• Ease of Entry: Even a single-family home that you invest in alone can tie up a lot of your finances. Syndicated real estate investment makes it much easier to continue growing your wealth and invest in multiple properties at once.

Risks

As for the risks of these kinds of investments, the typical challenges of a real estate deal such as market fluctuations, economic uncertainties, and changes to regulations apply.

The unique risk of syndication is the company you decide to go into business with. Unlike deals you orchestrate yourself, syndicated deals with be largely carried out by the company you partner with.

Though LPs do often get a say in where their money is invested, the business plan is carried out by the GP. Because of this, you have to be careful in who you entrust with your money when deciding on a syndication. They'll be responsible for the money you invest and for following all legal guidelines for the property.

Real Estate Syndication Structures

Real estate syndications can vary in structure but their core principles stay the same. LPs pool funds and resources to purchase a real estate asset while the GP oversees the operation. There are different ways in which the profits can be shared, however. The two most common models are:

1. Straight Split: This is the simplest syndication model. As the name suggests, a straight split in profit and returns is established at the beginning of the deal. If the split established is 75/25, then LPs would split 75% of any rental income generated or profit from the sale of the property. The GP would receive 25%.

2. Waterfall Structure: This structure of profit shares is a bit more complex but typically more favorable for the LP investors. In it, the agreement outlines a "preferred return" in which a set percentage of returns are given 100% to the LPs. For example, if the preferred return is set at 6%, the first 6% of profits are given to the LPs. Everything over would be split similarly to a straight split model.

How to Invest in a Real Estate Syndication Deal

So how do you become a part of a real estate syndication? The first thing to know is that there are specific eligibility requirements for joining one. Eligibility can be met in one of two ways:

1. You must be able to prove or showcase significant experience or extensive knowledge in investing. This is so you can demonstrate a healthy knowledge of investment criteria and sufficiently weigh options for investing
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2. You must have either an individual annual income of $200,000, a household income of $300,000, or a net worth of $1,000,000 or more. Because these requirements are set forth by the U.S. Securities and Exchange Commission, certain types of syndications can only be joined by meeting this requirement.

From here, it's all about networking and finding the right syndication company to go into business with. As we mentioned, your most important decision will come in the form of what company you invest with. Rely on your own personal network, social media, and thorough research to find a reputable company that will help you see growth with your invested cash.

Empowering Your Real Estate Investments

Real estate syndication investments are a perfect place to get started as an investor or scale your portfolio without having to put out too much more of your time and capital. Joining one is a great idea for diversifying and continuing forward on your growth journey.

One key component of these types of investments that we haven't mentioned is property management. With so much time being needed from the GP on the investment side of things, LPs being passive in the process, and these types of investment properties typically being much larger, a property manager is needed to handle running the property.

You'll want a property manager with experience in these large investments so the investors can be hands-off. There's no one better for that objective than our team at Income Property Advisors, Inc.

We offer comprehensive services for property management and real estate asset management that keep your investment objectives in mind. We're San Diego County's leading firm, with 50 large-scale apartment buildings under our management.

For multifamily or residential property management, take the first step and explore more of our services today.