What Is Real Estate Syndication?

There are many types of real estate business opportunities. You can purchase multifamily rental units and have long-term tenants. You can make passive income through commercial properties. You can flip homes. Buy and rent short-term or vacation rentals. Or make money through Airbnb. And then there’s real estate syndication.

While not as well known as some other real estate property investment modes, real estate syndication can be an excellent asset class for passive investors. Since the syndicate’s sponsor handles the property management, you get the cash flow and property value appreciation without the headache of being a landlord. Here’s how it works.

Real estate syndication is when investors combine their funds to acquire an investment property. The number of individual investors in a real estate syndicate is usually between two and 10. However, with many real estate syndication deals now happening online, the number can run into hundreds of investors for a property. The JOBS Act of 2012 significantly relaxed the rules on raising capital for real estate syndication. Real estate syndication opportunities are accessible by accredited investors, who must satisfy specific criteria related to their wealth, income, or expertise.

An example of a real estate syndication is when several real estate investors pool their money to purchase a large asset, such as an apartment building or a hotel. The property is then owned and managed by the syndicate, with the profits, costs, and voting rights shared by each member.

How real estate syndication works

Real estate syndication typically involves two main parties:

The sponsor: The sponsor, also known as the general partner, is often a company or an individual that manages the real estate syndication. This individual or company is responsible for finding and inviting potential investors into the syndication and overseeing the investment strategy. The sponsor will hire contractors, supervise progress, and be responsible for the distribution of income and profits.
The investors: The investors, sometimes referred to as limited partners, are the group that provides the capital for the purchase and refurbishment of the property. The investors in a real estate syndication deal are hands-off, with the management of the property left to the sponsors for an asset management fee.

Many modern real estate syndication deals are now online, with sponsors listing real estate syndication deals on real estate crowdfunding platforms, who charge a fee for acting as the middleman and dealing with regulatory requirements.

There are three main phases of a real estate syndication deal. These include:

The origination phase: During this project stage, sponsors evaluate potential investment opportunities, conduct due diligence, and analyze the associated costs and investments needed to determine its feasibility and successful execution.
The operation phase: The real estate syndication project is now live with the received investment. In this phase of the real estate syndication deal, work begins on the property, including construction, renovations, refurbishments, etc. The operation phase typically starts once the property has been acquired and a business plan is implemented.
The liquidation phase: This is the last phase of a real estate syndication phase and comes into play when the property is sold or refinanced. Once that happens, the investors can cash out their profit share.

Pros and cons of real estate syndication

While investing in a real estate syndication has a lot of advantages, it’s not the right investment vehicle for everybody. Here are a few things to consider before investing.

Pros of real estate syndication

The benefits of real estate syndication include:

Access to high-value real estate investments: One of the biggest benefits of investing through a real estate investment syndicate is that you’ll have access to unique and high-value opportunities that aren’t available to everyone. You can finance the building of a hotel or mall, among other ventures, without the need for substantial upfront costs running into millions of dollars.
Potential returns: Commercial real estate transactions through a real estate syndication may offer the possibility of returns. However, the level of return is not guaranteed and depends on various factors.
Diversification: If you already have a rental property business with vacation rentals or single-family units, real estate syndication offers the chance to expand your real estate portfolio to encompass commercial or large-scale projects that may have been inaccessible otherwise.
Tax benefits: The real estate syndication structure also gives you a unique tax advantage. When you purchase property through this model, you buy shares in a limited liability company or partnership that owns the asset. This allows you to take advantage of pass-through taxation.
No landlord responsibilities: Real estate syndication is a truly passive investment. As the sponsor is responsible for identifying and overseeing the property, you need not concern yourself with the obligations of being a landlord, yet still reap the benefits of monthly cash flow and potential appreciation gains.

Cons of real estate syndication

Accredited investors: You must be an accredited investor to invest in real estate syndication deals, especially through crowdfunding portals. An accredited investor is someone who has an earned annual income of more than $200,000 (or $300,000 if combined with a spouse’s income) in each of the last two years, a net worth of $1 million, excluding the primary residence, or is a “knowledgeable employee” of certain investment funds. Legal entities such as banks, investment brokers, insurance companies, and trusts with assets that exceed $5 million can also be considered accredited investors.
Illiquidity: If you’re looking for liquid investments, real estate investment syndicates may not fit you. Unlike a real estate investment trust (REIT), where you can liquidate your shares at any time or a building or property you fully own, which can be sold, your shares in the real estate syndicate cannot be solid for the entire holding period.
Investment in real estate syndicates: This type of investment carries a level of risk, which means there is the potential for both gains and losses. Please note that past performance is not indicative of future results. Always consider your personal risk tolerance and investment objectives before investing.
Delayed income: Investing in a real estate syndicate does not guarantee immediate income, particularly if the project is in its development stages or requires significant renovations. Depending on the property and its intended use, the cash flow may be ad hoc and vary considerably from year to year.
Lack of control: Investors have no control over how a property in a real estate syndicate is managed or run, which means that while the income is passive, there’s nothing you can do if the property is mismanaged or not up to your standards.
Fees: There are management and other costs for passive real estate assets, and real estate syndication is no different. Sponsor, acquisition, and management fees can add up quickly, so make sure to run the numbers and not judge the investment solely on the purchase price.

How real estate syndication differs from REITS

REITs, while similar to real estate syndication, have a few key differences. At Arrived, our investments are structured as REITs and, as such, benefit from the many advantages of the investment vehicle, including:

Low investment: REIT minimum investment amounts are lower than the usual investment threshold for real estate syndication, which may typically run into tens of thousands of dollars.
Accessibility: Our platform grants access to accredited and unaccredited investors, while most syndications are typically only available to Reg D investors.
SEC-regulated: Arrived’s offerings are all qualified by the SEC (U.S. Securities and Exchange Commission), which provides investors with certain safeguards regarding accounting procedures and disclosures.

The bottom line

Arrived’s mission is to enable financial freedom for everyone, achieved by facilitating investment in profitable rental properties through REITs. Our platform allows you to acquire shares of rental properties for as little as $100.The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The views reflected in the commentary are subject to change at any time without notice. View Arrived’s disclaimers.