Real Estate Syndication for Beginners
Have you ever pooled money together with friends? Say for a fancy airbnb, a nice dinner, you name it. Well, what about pooling money… to buy Real Estate?
Today, we’re talking about some basic fundamentals of real estate syndications. This is a bit more complicated than just pooling money together with friends, but it’s a powerful way to acquire income producing commercial assets, especially if you don’t have the funds to get started on your own.
Let’s dive into real estate syndications, how they work, and how to evaluate them for your own portfolio.
1. Sponsor Role
First, let’s talk about the crucial role of THE DEAL SPONSOR.
The sponsor is, typically, an experienced real estate investor who identifies promising investment properties, pulls all of the capital together, and handles the day to day management of the investment.
This allows smaller investors that may not have the access or expertise to do such deals on their own to participate in major commercial deals led by a seasoned pro. The sponsor pretty much handles everything.
In return for performing all of this work, the sponsor earns certain fees over the hold period plus a share of the back-end profits upon sale.
I’ve been the deal sponsor on a few real estate deals (pictures of each one to pop up here. These include: 4015 Travis Drive, Newell Tower, Madison Square, Salt Ranch, 1404 Dickerson) and here’s how I’m typical compensated:
An acquisition fee to cover the costs of pursuing the deal
An asset management fee to cover the costs of running the day to day of the asset
And a 20% to 40% share of the equity in the deal, depending on a few different factors
2. Investor Benefits
The passive investors simply contribute their share of equity to close and then receive quarterly cash flow distributions and final sale proceeds based on their proportional ownership stake.
Investors benefit from the sponsor’s experience in identifying promising deals, ability to negotiate favorable financing terms, oversee major renovations and capital projects, implement effective professional property management, and sell for maximum valuation.
Things individual investors would find extremely difficult to match on their own. Syndications allow average investors to participate in major commercial real estate assets and geographies that they likely couldn’t access or afford otherwise.
3. Typical Properties
The most common types of commercial properties for syndications include:
Apartment buildings with 100+ units
Class B and C value-add multifamily
Storage facilities
Medical offices near hospitals
Senior or student housing communities
These property types offer stable cash flows, built-in diversification from having many tenant units, and room for operational improvements to increase rents and occupancy over time.
Sponsors target assets valued at $1 million or higher in growing secondary markets with strong demand drivers and upside potential through renovations, better management, and increased rental rates.
4. Hold Period
A defining feature of syndications is the long-term investment horizon, usually around 5-7+ years. Sponsors require this extended hold time to fully execute operational changes that improve cash flow and boost property value leading up to the eventual profitable sale.
This duration also allows the initial purchase price to season, works through any temporary dips in performance, and makes for better tax treatment. Investors must be comfortable with multi-year capital lock up to earn the projected returns.
Returns accrue through quarterly cash flow distributions based on ownership share and the final sale proceeds. Patience lets the sponsor’s business plan fully play out.
5. Ownership Structure
Investors purchase a proportional ownership share in the investment property based on the percentage of equity capital they contribute. Minimums are often $25k to $50k.
This structure allows for diversification across different real estate types and geographic markets extremely hard for individual investors to match on their own.
6. Returns
Syndications aim to achieve an average internal rate of return or IRR of 15-25%+ over the multi-year hold. Returns come from the quarterly cash flow distributions and profitable backend sales.
Projected returns account for the leveraged risk with commercial real estate, periods of low occupancy, budgeted for maintenance costs, and the sponsor's fees diluting some profits.
Top syndicators are able to consistently achieve these strong returns for their investors. Anything above 8-10% beats most alternative investments after factoring the timeline and risk. The higher potential returns compensate for the long capital lock up.
7. Passive Investing
A huge appeal of syndications for those newer to commercial real estate investing is the completely passive nature if desired. With the sponsor handling everything, hands-off investors can simply collect their distribution checks.
This allows busy professionals or those without real estate experience to invest in major multifamily, office, retail, and industrial assets that would be impossible for them to find and manage independently.
Rather than take on the effort of sourcing your own deals, you can leverage the sponsor’s expertise in identifying promising properties, overseeing improvements, ensuring smooth operations, and selling for maximum profit.
8. Sponsor Evaluation
When you’re assessing syndication sponsors, key criteria to evaluate include:
Years of direct commercial real estate investing experience
Total number of properties successfully acquired and sold
Types of assets they specialize in
Markets they target
Sample business plans and offering documents
Past investor references and returns
Fees charged and sponsorship economic structure
Vetting several potential sponsors helps identify the ideal partner for your goals and risk tolerance. On paper investors are just putting their money into the deal, but the sponsor is so pivotal in the success of that deal, in a way investors are also investing in the sponsor.
9. Getting Started
Tips for getting started with syndications:
Begin with small investments to test the waters
Diversify across several sponsors and properties
Join masterminds and communities to learn
Read books and resources to build knowledge. See 3 helpful books below.
Don't let analysis paralysis prevent taking action
Real estate syndications have a learning curve, but by starting small, diversifying wisely, leaning on proven sponsors, and evaluating deals carefully, they can significantly enhance portfolio diversification and returns.