A real estate syndicate is a partnership between investors (professional and individuals looking to move into the space) that pool their funds together and purchase property like apartment or office buildings, hotels, and shopping centers. And the process is easy.
An experienced investor (syndicator) finds an investment property and then sets up a syndicate. This includes finding other investors and then managing the investment. The reason the syndicator does this is that they receive a combination of syndication fees from the other investors and they get a share of the profits.
The investors provide the money needed for the purchase, and then they remain hands-off to let the syndicator manage the investment. In return for their money, the investors receive ownership shares. This is why real estate syndications are good ideas for investors who want to be in the real estate investing industry, or diversify how their money is invested, but don’t have the time to manage properties or learn real estate investing.
If you are part of a real estate syndicate, you will get monthly (or quarterly) distributions from the profits. When the property is sold, the profits are then distributed depending on your ownership share. And there are more reasons to try joining a real estate syndication.
By joining a real estate syndication you can earn passive income, diversify your portfolio when stocks are shaky, and there are tax write offs for many situations. But with all good, there are some downsides. You won’t have control over the investment, you have to trust the syndicator. Another downside to real estate syndications is that you cannot access your investment quickly, and the amount of risk that is involved depends on what the syndicator does.
Pro-tip: If you want to access the property and amenities, try a tenancy in common agreement instead of a real estate syndication. As a group you can agree to rent it out and build revenue while you’re not using the property. You won’t be able to make as much money as a real estate syndication, but you can make some passive income while enjoying the investment property.
Under federal securities laws, only sophisticated or accredited investors can invest in real estate syndications which protects smaller investors. A sophisticated investor is a person with in-depth knowledge and experience in financial and business matters that allows them to evaluate the merits and risks of this investment (17 C.F.R. §230.506).
To be an accredited investor, you must be:
- A corporation, partnership, limited liability company, tax-exempt organization or similar trust having assets over $5,000,000 (17 C.F.R. §230.501(a)(3)).
- Person whose individual net worth (or joint net worth with a spouse) is over $1,000,000 (17 C.F.R. §230.501(a)(5)).
- Someone who has had income in excess of $200,000 in each of the two most recent years or joint income with a spouse in excess of $300,000 (17 C.F.R. §230.501(a)(6)).
- A trust with total assets more than $5,000,000 who is led by a sophisticated investor (17 C.F.R. §230.501(a)(7)).
- An entity where all of the owners are accredited investors (17 C.F.R. §230.501(a)(8)).
Pro-tip: If you need to sell another property to have the money to invest in a real estate syndication, use a 1031 exchange. This helps you avoid some of the capital gains tax you would owe in a traditional sale because you are moving the proceeds directly from the sale of one investment property to another.
Real estate syndications are a great way to diversify your investment portfolio if you want to steer away from stocks and bonds, and they’re the perfect way to get into real estate investing if you don’t have the time to flip houses or manage properties. If you want more real estate tips like these, join our newsletter below.