The Top 10 Questions About Real Estate Syndications — asked by investors like you
Real estate syndications and real estate investments are a great way to grow your wealth and diversify your portfolio, no matter how the market is performing. When you’re ready to diversify your portfolio and start investing in real estate, there’s a lot of information out there!
- How much capital will I need?
- What investments yield the highest returns?
- How secure are real estate investments?
- How can I tell the difference between a good investment and a bad deal?
Then some new language pops up: REITs, real estate crowdfunding platforms, real estate syndications, commercial property real estate investments… then someone mentions passive income and revenue streams at a networking event… and you might feel like, wait! Am I missing something?!
Here are the top 10 questions that potential investors often ask, so if you’re thinking about investing in real estate syndications this is a great place to start.
Top 10 Questions about Real Estate Syndications (FAQs) Answered
1. What is a real estate syndication?
In basic terms, a real estate syndication is an opportunity to invest in commercial real estate deals with a group of qualified investors.
Real Estate Syndications are a great opportunity to invest in real estate, generate passive income, positive cash flow, and diversify your portfolio, without the stress of being a landlord.
In practice, real estate syndications are structured as LLCs or LPs. There is a general partner (also called an active partner) who is the one that structures the deal and manages the investment, and there are also limited partners (also called passive investors). Together, these partners pool their capital together to invest in a specific commercial real estate deal.
Each real estate syndication is put together with its own terms, but they all have some similarities when it comes to tax benefits, payouts, and hold times.
Common types of investments for a real estate syndication would be commercial assets such as apartment complexes, shopping malls, self-storage facilities, and mobile home parks.
2. What is a limited partner in a real estate syndication deal?
A limited partner in a real estate syndication is one of the investors in the group, but they are considered a passive investor (not an active investor).
A limited partner has limited liability (they can’t be sued, and they aren’t on the loan), and the personal risk is limited to their particular investment (and not more). As a passive investor, you aren’t involved in managing the investment or properties. You’re also not responsible to take care of any details involved with the syndication.
As a limited partner, once your investment is made the hard work is done. Now you get to sit back and receive all the benefits of being a passive investor. Such as passive income, regular cash flow, tax benefits, and any profits that are made when the property is sold.
3. Who can invest in real estate syndications?
Most real estate syndication investments are currently regulated by the SEC and are therefore available only to accredited investors.
An accredited investor is currently defined as a person who has:
- An annual income of $200,000 ($300,000 for joint income) for the past two years, and a reasonable expectation that you’ll earn the same income (or higher) for the current year.
- A net worth exceeding $1 million (individually or joint), not including your primary residential home (as an asset or a liability).
However, the SEC recently released a proposed amendment that will expand the definition of an accredited investor, to allow for greater inclusion into these types of investments.
While many of our real estate investments are only available to accredited investors, the SEC has proposed some changes that may open up opportunities for many potential investors.
4. Is there a minimum investment required?
Real estate syndications require a minimum investment for each investor in the group and each deal is structured slightly differently.
A typical minimum investment is $50,000 with some investments requiring a higher investment.
The SEC has some guidelines on the maximum amount an investor can invest as well (both for active investors and passive investors). This is something to ask about when you’re ready to move on an opportunity.
5. What is the hold time for a real estate syndication investment?
The hold time for each investment will vary and is usually determined by a lot of factors that will help create a successful deal.
Typically, the hold time for real estate syndications is about 5 to 7 years. Each project has a timeline that is designed to produce a solid return, and the most common turnaround time is 5 to 7 years. During this period, most investors will receive passive income and can also take advantage of tax benefits. At the close of the project (when the property is sold), final profits are distributed to all the investors in the group.
Since each investment is connected to real property (a physical asset), any money that is invested will not be available for withdrawal during the life of the investment.
6. What is a standard timeline when investing in a real estate syndication?
Timelines vary depending on the sponsor, the type of deal and what type of commercial assets are included in the deal.
For most real estate syndications, there are a few standard processes in place:
- Get a property under contract
- Exercise due diligence to vet the deal (30-90 days)
- Start the equity process with investors (4-8 weeks)
- Prepare the PPM, and send to investors (1-2 weeks)
- Investors sign and fund the deal (1-2 weeks)
- Close on the property (2-4 weeks)
The first investor distribution may happen within the next 60 days, or it could be very different depending on the type of real estate syndication deal.
7. What are the risks involved in a real estate syndication?
As with any investment, there are risks involved with real estate syndications. However, the risks are different than the stock market, which is one reason why real estate syndications remain a great option to diversify your portfolio.
- Real estate syndications typically invest in commercial real estate that is fairly recession-resistant such as property assets like apartment buildings, self-storage facilities, and mobile home parks.
- Even when people decide to downsize, these commercial property investments tend to keep thriving.
The details of expected risks will be included in the PPM for a real estate syndication deal.
8. What are the fees with this kind of real estate investment?
Most real estate syndications include an acquisition fee (typically between 2-5%) based on the purchase price. This fee is paid to the sponsor (general partner) as a one-time fee once the property closes. Another common fee is an asset management fee (typically between 2-3%) which is most often based on the monthly revenues during the life of the investment.
These fees are intended to cover the costs associated with finding the investment, managing the investment, and the final sale of the investment property. The general partner manages every aspect of the investment, including the proper execution of the overall business plan.
9. What kind of investment returns could I expect with a real estate syndication?
As with any investment, returns will vary. Real estate syndications typically outperform the market and can sometimes yield an annual return upwards of 20% when you consider passive income (during the investment), final profits (at the close of the investment), and tax benefits along the way.
Expected returns, preferred rates, cash-on-cash returns and other details will always be included in the detailed documentation for every deal.
10. What other questions should I be asking about real estate syndications?
Great question! My third wish when I was young was to have unlimited wishes.
When you are looking into real estate syndications, there are a number of questions that are more detailed, and some things you will want to clarify before you enter into any deal. For example,
- Specific type of asset
- Deadline for capital
- Preferred returns and cash-on-cash returns
- Expected equity multiples
- Expected annual return and IRR
- What happens if there’s a downturn in the economy
- What happens if you experience a personal hardship
- Tax benefits, both short-term and long-term
A typical PPM (Private Placement Memorandum) that describes the deal in detail is usually over 100 pages.
This is why one of the most important steps to investing in a real estate syndication is to work with someone you trust.
Do your due diligence and start the conversation with an experienced investor who has a solid track record, who is willing to explain the details and help expand your education, and who has great referrals from other investors. Working with the right sponsor means that there are no questions that are off-limits.
The Big Takeaway
There are a LOT of benefits when it comes to real estate syndications. If you’re just getting started then congrats on building your education! Great next steps:
- take inventory and think about your investment goals
- decide how much risk you’re comfortable with
- think about how much you might want to invest
If you’re ready to expand into real estate, connecting with an experienced real estate investor can really help. Real estate syndications are a great way to diversify your investments and build your wealth!