Before we delve into the benefits of real estate syndication, we must understand its entails. Do you know how some wedding registry items may be too expensive for only one person to buy? Well, two or more people could contribute funds to buy it for the couple. In the end, all those who chipped in get to have their names on the gift card.
That’s basically what real estate syndication is. It’s a process where several people combine resources and skills to buy a piece of property. That makes it possible to own an investment that one person would otherwise not afford alone. Thus, we can say that it’s a partnership between varied numbers of investors. In this case, all the contributors get a share of the profit.
Property Syndication Roles
Generally, there are two major roles in syndication regarding real estate investments. They are the syndicator and the investor. The former also called the sponsor a wide range of real estate and managerial skills to the table. That means it’s this individual who scouts properties, secures them with a contract, and eventually manages them.
Meanwhile, the investor supports the enterprise by providing monetary capital. The syndicator may also donate some funds if available, but it’s usually between 5 and 10 percent of the total amount. Thus, their significant contribution is in the time and effort spent to ensure the investment’s fruitfulness. Most people who take up this role are real estate professionals.
How Syndication Works
In the past, investing in real estate was something one could only do with vast sums of money. Thus, it seemed restricted or reserved for only the wealthy and highly placed people in society. However, with the help of syndication, regular individuals can pool resources together. It enables them to invest in projects and properties one wouldn’t ordinarily be able to afford.
In this venture, the sponsor is the deal operator and manager, as aforementioned. Most times, the investor takes on a passive role, especially if there are several of them. It also means that some may contribute a higher percentage of capital than others. Hence, there’s usually a legal structure to describe the right of each party involved, so everyone gets the appropriate returns.
-
The Legal Structure
As a general rule, real estate syndication takes the structure of either a limited liability company or a limited partnership. The sponsor works as the manager or general partner in this entity, while the investors are the limited partners or members. The importance of this feature is that it defines partner entitlement, including voting rights and other things you deem fit.
It’s essential to clearly show the expectations from each member to avoid miscommunication at any time. Thus, you must ensure to get an experienced real estate attorney to draw a solid contract. This feature also protects the syndicate members in case of any unfavorable outcomes. You can also learn something from top real estate syndication companies.
-
The Role of Investment Companies
Investment companies are also a form of syndicate establishments. That’s because they use funds from clients to invest in properties and give them returns. The only difference, however, is the level of order and experience they already have. In essence, their clients are usually passive investors in whatever venture they undertake while they assume the managerial position.
Investing with these companies is relatively safe compared to other ways that require personal involvement. They take responsibility for both the selection, acquisition, management, and sales of the property. That means the only contribution is your money, and then you get returns on the profits made. That’s why most people opt for this opportunity.
There are numerous real estate investment companies like Steed Talker Capital. The key to choosing right lies in checking out their portfolio. Most people lookout for the kind of properties in which they’re interested. Nonetheless, some others, especially those new to the industry, may not have particular interests. They can do some research and seek appropriate guidance.
Benefits of Syndication
Besides the apparent profitability, there are many benefits of real estate syndication. They include the pooling of resources, the capability to diversify and participate in large investment deals, and risk reduction. Highlighting such information is essential because it gives people reasons to consider this venture. So we’ll discuss some of these advantages below.
-
Larger Investment Opportunities
One of the most significant benefits of syndication is that it provides access to extensive investment opportunities. That means the investors can get involved in better and more profitable ventures. A good example is commercial properties that have price ranges in millions. With the benefit of pooling resources together, people can get a profit share without owning it all.
-
Enables Diversification
It’s easier for any investor to get involved in more than one of such opportunities since they don’t require huge sums. Hence, real estate syndication enables diversification. That’s because one doesn’t have to put all the money they have as capital for a particular property. As long as the person has the necessary funds, he/she can invest in different projects.
-
Experts Do the Work
Syndication provides better management, whether it’s one individual assuming the managerial role or a company. It ensures that the person or people with the appropriate skills and experience do the work. Therefore, they can apply proven investment strategies and any other actions required for the success everyone desires.
-
Reduced Risks
Several beneficial features of this type of venture limit the risks facing each investor. The diversification of capital among various asset classes and deals presents less potential for less than a particular investment. Also, the fact that it’s people with the necessary skill that manage it helps prevent blow-ups and flimsy failures.
-
Tax Sheltering
Pooled investments using a limited liability company or limited partnership structure enjoy tax deferment. That means you get all the fund’s proceeds for years without any deduction. There are usually various write-offs that decrease and may eventually diminish the tax exposure. However, that doesn’t take away the rate they’ll collect on the gain for sales.
-
Passive Investment
Another benefit of real estate syndication for investors is that they mustn’t have direct involvement. Therefore, it’s a passive investment because an assigned manager takes care of the details. That means you go on with your life without any additional responsibilities, but you get the returns.
