October 18, 2021

Investing in Real Estate Syndications

HUDSONPOINT Team
Written by: HUDSONPOINT Team
Alternative Investment, Real Estate

Real estate syndication, otherwise known as property syndication, involves pooling a partnership of investors who can contribute their own resources and capital toward purchasing properties that otherwise wouldn’t be affordable. In exchange, investors receive fractional ownership of the properties as well as monthly or quarterly returns.

 

There are two roles involved in real estate syndication: the syndicator (or sponsor) and the investors. The sponsor scouts and secures properties for the investors while also taking on property management, and the investors contribute capital toward the investment. This collective entity of both investors and their sponsor is referred to as the syndicate.

Real Estate Investing

 

A sponsor may contribute some capital of their own (usually between 5% and 10%), but the sponsor’s investment usually comes in the form of their own effort and time.

 

Sponsors earn commissions for bringing in new properties as well as a piece of the profit when a property is sold; however, the sponsor may pay the investors an annual preferred return ranging from 0% up to 10% before paying themselves.

 

 

7. Potential reduction of Risk & Liabilities.

All investments carry risk, but real estate syndication deals may carry less risk for investors than solo deals because of the structure of the syndicate. If the legal structure of a real estate syndicate is an LLC or LLP with the investors acting as limited partners (or simply members) and the sponsor as the general partner (or managing member), then this in effect could reduce the liability of the entity.

 

As an investor in a real estate syndication deal, you receive no liability for the managing partner’s debt obligations nor direct exposure to liability risk. The greatest risk and ongoing concerns are your principal contributions and collecting profits (as long as the chosen property yields profitable returns).

As a limited partner, you’re also protected from liability resulting from negligence of the general partner as well as from that of other vendors and operational components involved in the project.

 

 

6. The Sponsor Handles the Property Management.

Another benefit of investing in real estate syndication is that, as the investor, you don’t have to do any of the property management work. Usually, if you were to self-manage a real estate investment, you yourself may have to:

 

  • Hire a real estate attorney and/or broker;
  • Obtain financing;
  • Navigate the deal;
  • Close the deal;
  • Manage the property or hire property management;
  • Manage its tenants;
  • Respond to tenant complaints if you don’t hire property management;
  • And more.

 

That can be a lot of work.

 

In a real estate syndication deal, the sponsor takes on all of this responsibility in exchange for a property management fee if they don’t hire third-party property management; however, as the investor, it’s your job to vet the sponsor as well as the investment opportunity to discern the sponsor’s ability to manage the property well and generate profitable returns for their investors.

 

In the end, the amount of work you’ll actually do could be far less than if you were to manage everything yourself.

 

 

5. You’ll Get Access to Larger Commercial Real Estate (CRE) Investments.

History has demonstrated that CRE investments could be an alternative asset class with uncorrelated market performance., Commercial real estate is not usually within reach of most individual investors; however, investing in CRE through a real estate syndicate could allow individual investors the potential to generate  capital appreciation and income with a relatively  smaller amount upfront capital and potentially less risk exposure. But because profits are shared among so many parties, you may not receive as large a cut from a single deal as you would if you were flying solo.

 

These types of investments typically require investors to contribute anywhere between $50,000 and $100,000 to a real estate syndication deal, but some funds may take contributions as low as $10,000.

 

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4. Syndicates add to Portfolio Diversification.

If your investment portfolio’s diversification is minimal due to your own capital limitations or lack of ability to find real estate properties, going with real estate syndication may not only diversify your portfolio but take the worries of property acquisition and management off your mind.

 

For instance, if your current portfolio owns a vacant $200,000 single-family home, that investment is not generating income at all until that vacancy is filled; on the other hand, if your portfolio places that same $200,000 into fractional ownership of a 100-unit apartment complex through real estate syndication and 10 of those units are vacant, 90 of those units are still generating rent minus (Include fee structure)

 

 

3. Commercial Real Estate has access to Finance Larger Projects with Debt

It’s not uncommon to see commercial real estate properties largely financed with debt. The same goes for those under real estate syndication. While the sponsor has investor capital at their disposal, leveraging debt in combination with that capital Could outperform an all-cash deal.

 

Returns from syndicated properties that receive about 30% investor capital and 70% debt-financing usually run upwards of 10%. The general partner will obtain and remain responsible for any and all financing involved in the deal.

 

What’s more is that, if a sponsor is leasing a property to creditworthy tenants on long-term leases, leveraging the property makes more sense and involves less risk than, say, if the sponsor were leasing a property to small businesses on short-term leases.

 

 

2. Syndicates may Provide Tax-Efficient Investments.

Investors may receive real estate tax deductions when they invest through real estate syndicates. As an equity holder of a property, you can compound your money for years tax-free until it comes time to sell. For tax purposes, the acquired property can show a loss due to depreciation, interest payments, and other expenses despite positive cash flow.

 

Other tax benefits of real estate syndication include:

 

  • Long-term capital gains tax rates capped at 20%;
  • Tax-free refinancing;
  • Losses can offset current income or be carried to future gains;
  • And more.

 

Income generated from real estate syndication is passive income in the eyes of the IRS that is treated differently (and taxed more generously) than active income.

 

 

1. Historical Performance demonstrates Real Estate Syndication could Provide a Hedge against Inflation.

Because real estate is often uncorrelated investment whose value appreciates over time, it may not be affected by inflation; in fact, rents has previously increased during periods of inflation. More tenants are returning to their multifamily properties across the country now that the nation is entering its post-COVID economy, that appears to favor syndicated multifamily investments.

 

As with any investment, there are risks involved in a syndication. Risks such as losing your money, Losing your passive investor protection and lack of transparency. Understanding these risks and performing your own due diligence prior to investing in a syndication can minimize these risks.

 

Ultimately, most investors choose to invest in commercial real estate through a syndicate for passive income that requires minimal investor effort. Real estate syndication is ideal for busy investors who have their hands tied with other projects but are still looking to diversify portfolios with tax-efficient, low-risk, and hands-off investments.

Learn more about how to Diversify Your Portfolio with Real Estate Syndications.

Access more exclusive real estate syndication deals with the help from our financial specialist here at HUDSONPOINT Capital.

 

We’re 100% client-focused and committed to providing transparent advising. If you’re ready to dive into real estate syndication, schedule a call with us to get started

 

 

 

Please note that any investment involves risk including loss of principal. Some risks of investing directly or indirectly in real estate include declining real estate values, changing economic conditions and increasing interest rates.

This is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation of any products or services. Opinions are subject to change with market conditions. The views and strategies may not be suitable for all investors and are not intended to be relied on for legal or tax advice.

Securities offered through National Securities Corporation Member FINRA/SIPC

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