If you have listened to the lingo in the investing world, you likely have heard talk of real estate syndication. If you have never invested, the term can be even more intimidating. In this article, I provide an intro to the subject of syndication for simple understanding.
To start, I will explain two ways to invest in real estate.
The first method of investment, the method in which I and many have started, is to use your own money. Examples include buying cash or getting a loan in your name. Many investors prefer to use their own resources to invest in real estate. There are pros and cons of doing so and the subject is debatable. Regardless of opinion, the fact is, in only using one’s own investment funds, that person is limited to how large and fast he or she can scale his or her investments, if that is that person’s goal.
Another method of investment is using other people’s money (OPM). On a small scale, using OPM can be borrowing money from friends and family or partnering with others in joint venture on a project such as a flip or rental property. Leveraging others’ resources through partnerships or raising money allows those involved to achieve more together than they could do alone.
Syndication is leveraging other people’s money on a grander scale.
Rather than joint venture, which is partnering with “active” investors – those who have control and actively manage the asset with you – syndication is basically obtaining investors who buy equity shares into your investment. This is done with businesses and all types of assets. In real estate, syndications are formed for office buildings, retail, and my favorite, multifamily apartments.
Why is syndication awesome?
Whether you are an active or passive investor, syndication allows investors to participate in larger value and sized real estate using “leverage.” My use of the term leverage encompasses more than debt, but leverage of resources such as human capital and talent. When syndications are formed, there are General partners (active investors) who bring various skillsets to make the deal happen and Limited partners (passive investors) who invest for their own goals. General partners seek to control the value of the investment and generate a targeted return for the Limited Partners. Limited partners observe management performance, review the reports and data and collect their sweat-free check.
Done properly and successfully everyone wins.
Passive investors generate totally passive returns on their investment through cash flow and from the eventual sale of the property, allowing them to recoup their original investment plus the return on investment
Active investors, through their role in the deal (asset management, fundraising, investor relations, etc.) put in the hard work to ensure that the property performs through its operations – rent and other sources of income minus expenses such as maintenance – by improving those operations and generating massive value for themselves and passive investors.
The term syndication itself can be intimidating; it certainly was to me. But multifamily syndication is nothing more than raising funds from investors to acquire a property. Many times those funds are raised to pay for the down payment to acquire the property using a loan. This leverage further allows investors to generate high returns on their original cash investment.
Remember: There are very important restrictions and regulations in these types of arrangements, so anyone participating and especially sponsoring these deals should be very well-versed with the law and work with an attorney.
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Rodney Robinson II