How to syndicate a real estate deal Texas
Real estate syndication is a way in which investors come together to invest in larger properties which they can’t afford individually.
Real estate syndication is group investments where all investors involve combining their individual money to purchase a large property that they are not able to purchase or manage individually.
Imagine a large commercial or residential real estate is up for sales and the cost of the property is very high. It will be very difficult for individual investors to purchase the property. When individual investors combine their resources, they will be able to purchase the property.
The aim of real estate syndication is to generate larger returns on investments.
In real estate syndication, there is always a person or group that will manage the property. The manager, who should be very experienced, will be responsible for decision making. The investors enjoy the profits from their investments.
Real estate syndications are actively regulated by the Securities and Exchange Commission.
How to participate in a real estate syndication
- Accredited investor – You need to earn more than $250,000 as an individual or $300,000 as a married couple. Or you can have at least $1,000,000 in assets. These assets should be outside your primary residence.
- Connections – You need to know the Sponsor or you need to be invited by a limited partner to invest in the syndication.
- Have a fundamental understanding of the syndication – You need to understand what type of real estate investments you will be investing in. You also need to know the timeline and returns for your investment.
How does Real Estate Syndication work?
A real estate syndication deal is pretty simple. It involves a Sponsor/developer and a group of investors.
A Sponsor or developer is the person who is physically involved in the daily operations and management of the property.
The investors are the ones with more money who invest more money to purchase the property but are not involved in the daily operations and management of the property. The investor simply invests money and gets a share of the profit based on time and the amount of money invested.
A Sponsor is usually responsible for investing a smaller portion of the investment capital. The Sponsor usually invests anywhere from 5-20% of the total equity capital required for the purchase of the property.
The investors are responsible for investing a larger portion of the investment. The investors are usually responsible for investing 80-95% of the total equity capital required for the purchase of the property.
Syndications are usually simple to set up and it comes with built-in protections for everyone involved. It is usually structured as a Limited Liability Company or a Limited Partnership. The Sponsor participates as the General Partner or Manager while the investors participate as limited partners or passive members.
The Sponsor rights and Investor rights, including voting rights, distribution rights, and the Sponsor remunerations rights for managing the investment are all written in the LLC Operating Agreement.
Real Estate Syndication profits
How do a Sponsor and investors make money in a real estate syndication?
The money in a real estate investment majorly comes from rental income and property appreciation.
The Sponsor distributes the rental income is to the investors on a monthly or quarterly basis in accordance with the pre-set terms.
The value of a property usually appreciates over time, hence investors are expected to make more profits when the property is sold.
When does everyone get paid?
The time for payment depends on the terms and when the investment gets matured. Some investments can take within 6-12 months while others can take a longer period of time. It could take up to 10 years or more. Everyone who is a part of the syndication receives a share of the profits according to their investment equity capital and the terms of the agreement.
How does everyone get paid?
Investors receive what is called a Preferred return.
A Preferred return is a benchmark payment that is distributed to all investors. Preferred return is usually about 5-10% annually of the initial money invested.
A Sponsor may earn an average acquisition fee of 1%. It could also be anywhere from 0.5 to 2% depending on the transaction and terms. Before a Sponsor will share in the profit as a manager of the property, all investors must have received a preferred return.
Here is an example of a payment structure of a real estate syndicate:
If for example, an investor invests 100k in an investment with a 10% preferred return, the investor could take home 10k each year once enough money has been made from the property to make payouts possible.
After all the investors have received their preferred return, the money remaining is shared between the Sponsor and the investors in accordance with the syndication’s profit split structure.
For example, if the profit split structure is 70/30, all the investors will receive 70% of the profits after they have received their preferred returns and the sponsor receives 30% after preferred returns.
How to Structure a real estate syndication deal
Real estate syndication deals are usually structured as an Equity Partnership, Private Loan or Capital Structure. It is very important that you understand how a deal is structured before you take part in it.
In an Equity Partnership, all expenses and profits are shared between the investors and the Sponsor as stated in the deal documents.
Equity Partnerships tend to have higher risk more than a Private Loan. The risks often occur when dedication and due diligence is lacking in the parties involved. Equity Partnership can generate more returns for investors if risks are properly mitigated.
In a Private Loan, an investor lends money to a Sponsor/developer who must pay back at the agreed time frame. A Limited Liability Company (LLC) is used to increase the level of protection, mitigate risks and provide opportunities for investors to become members of the LLC.
The investors can then enjoy the benefits of the LLC becoming partners with the developer or lend the investment funds to the developer.
Capital Structure is also known as Capital Stack. It refers to the organization of all financial capitals that are included in syndication.
Capital Stack defines who has the rights to the income and profits generated from the property all throughout the rental period up to the sale of the property. It also defines in what order investors will get paid and who has rights to the actual asset in case of default.