October 07, 2020

What is syndication (fractional ownership) in real estate?

Russ Zalatimo
Written by: Russ Zalatimo
Real Estate, Syndicate and Investment Banking

what is syndicationFor many, real estate can be a compelling, profitable investment. Unlike owning stocks or bonds, real estate is tangible. You can reach out and touch it. While a building’s value may fluctuate with the market to some extent, it’s still a physical asset with a clear purpose: for people to live and work in.

But while real estate is appealing, a lot of investors believe the entry price point is too high. Right now, the median home price in America is $320,000 and the average for a 5-story, 50 unit apartment building is around $10.5 million. Even if you’re doing quite well financially, real estate can appear to be price prohibitive.

But not anymore. Real estate syndication has changed the game completely. Syndication gives investors the ability to have fractional ownership (a percentage of the building), while still reaping the benefits and mitigating risk.

Let’s take a deeper look at syndication (fractional ownership) in real estate.

 

What is syndication?

The term syndication comes from syndicate, a group of investors or businesses who come together to take on a large investment. This is very common in the world of securities, where institutional investors and investment banks will pool their money to bring a new security to the market.

When it comes to real estate, it’s the same process: multiple firms join together to help carry the costs of a large development (like a new residential or commercial building). Before 2012, this type of practice was reserved for investment firms with large amounts of capital.

Thanks to the Jumpstart Our Business Startups (JOBS) Act, however, the doors opened up to retail investors as well. The JOBS Act provided new levels of access to securities via crowdfunding.

Crowdfunding allows regular investors to pool smaller amounts of money into big projects. So rather than getting several large institutional investors to put up the capital for a $10 million apartment building, you can get several hundred retail investors to accomplish the same task.

All investors own a part or fraction of the property, hence the term “fractional-ownership.” This allows for many of the benefits of owning the property and protects against many of the downsides. By divvying up the equity, there is less risk for each individual investor.

Advantages and disadvantages to syndication real estate investments

Real estate investment has historically good returns in general. It’s important to understand, however, that real estate investment is different from real estate ownership. Real estate growth rates are usually not much better than inflation.

But with real estate investment, you have three distinct advantages:

  1. Leverage: Real estate is often bought with borrowed money. Typically, the down payment is around 20%, or one-fifth of the property value. Let’s say you were to invest $100,000 on a $500,000 property. That year, the property went up 3% in value. You wouldn’t just be making 3% on the $100,000 ($3,000), you’d be making 3% on the $500,000 property, or $15,000.
  2. Passive income: Properties receive cash flow from rent. Because of that, you can earn passive income from the people renting the property. This increases the overall return you receive from the property.
  3.  Tax benefits: Being an owner of a real estate property entitles you to certain tax benefits that are not shared by stock or bond owners.

 

All of the above are standard benefits to real estate investing. However, with syndication, you have the potential benefit of reduced liability and risk exposure.

Rather than covering the cost of an entire $10 million apartment complex, you are only a fractional owner. This allows you to invest in several properties for the price you would pay in one, significantly reducing your risk exposure thanks to diversification.

Also, investing via syndication often means avoiding a lot of the legal paperwork and additional costs that come with purchasing a property outright.

However, with investment in real estate, it’s always important to consider the risks as well. Unlike stocks or bonds, real estate is subject to liquidity risk. A stock on the S&P500 can usually be sold in seconds, whereas with real estate, your money could be locked up in that investment for a long period of time with no easy way to get it out.

There are also additional costs to factor in. For example, commissions paid to a real estate agent can be a significant percentage of the property and negate the returns earned in the first few years.

Learn More About Syndicate Investing

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How to get into a real estate syndicate

The best way to start is by speaking with a firm that specializes in real estate syndication. They go through the process of vetting properties and providing you insight into what your options are as an investor.

Through HUDSONPOINT Capital’s strategic relationships we have access to real estate syndication and have several options for investors seeking new channels for investment.

 

If you want to take the next step, schedule a call to discuss your options 1-888-544-5244 or visit www.hudsonpoint.com 

 

 

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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