Real estate syndication is a contractual transaction between a Sponsor and a group of investors. The person with the experience (the Sponsor) finds a property to invest in and arranges everything, while the other person (the investors) invests their money. The person with experience naturally runs the project, and, thus, gets a paycheck for his work. Both get a share of the profits based on time and money invested.
As the manager and operator of the project, the Sponsor invests sweat equity, including scouting out the property, raising funds and acquiring and managing the investment property’s day-to-day operations, while the investors provide most of the financial equity. The Sponsor is usually responsible for investing anywhere from 5-20% of the total required equity capital, while investors put in between 80-95% of the total.
Syndications are set up to comply with state regulations and or SEC security rules and come with built-in protections for all parties. They are structured as Limited Liability Companies or a Limited Partnership with the Sponsor participating as the General Partner or Manager and the investors participating as limited partners or passive members. The rights of the Sponsor and Investors, including rights to distributions, voting rights, and the Sponsor’s rights to fees for managing the investment, are outlined in the LLC Operating Agreement or LP Partnership Agreement.
Real Estate Syndication Profits
Investors make money when participating in a real estate syndication from rental income, mortgage reduction over time and property appreciation. Rental income from a syndicated property is distributed to investors by the sponsor on a monthly or quarterly basis according to the terms outlined in the agreements. A property’s value usually appreciates over time, investors benefit from the increase in property values, plus any mortgage debt reduction, and thus realize a profit when the property is sold.
Payouts depend upon the time the investment needs to be held to mature; Most syndicates are long term investments and can take 5-10 years. Everyone who invests receives a share of the profits. At the beginning of the deal, the Sponsor may earn an acquisition fee of 1 to 2% (although it can be anywhere from .5 to 2% depending upon the transaction). Before a Sponsor shares in the profits for their work as manager and promoter, all investors receive what is called a preferred return. The preferred return is a basic payment distributed to all investors that are usually about 5-10% annually of the initial money invested.
Real estate syndications are structured so that the sponsor is motivated to make the investment perform well for everyone. Let’s look at an example of a preferred return. If you’re a passive investor who invests $50,000 in a deal with an 8% preferred return, you could take home $4,000 each year once the property earns enough money to make payouts possible. After all the investors have received their preferred return, the remaining profit is shared between the Sponsor and the investors based on the syndication’s profit split structure. If, for example; the profit split structure is 65/35 — investors net 65% of the profits after receiving their preferred return. Then the sponsor nets, 35% — for example: after the investors receive their 8% preferred return, and there is $500,000 remaining, the investors would receive $325,000 and the Sponsor would receive $148,000.
A Mobile Home Park Syndication Click Here
Typical Real Estate Syndication Statistics
- There are about 49,000 investors participated in real estate syndications in th US.
- The average size of a real estate offering was just over $2 million.
- Passive investors provided 80-95% of the initial capital investment
- Sponsors came up with 3-20% of the initial capital investment
- The average preferred return was 8%.
- Sponsors netted an acquisition fee of .5 to 2%.
- Sponsors netted a property management fee between 2% and 9%.
- Sponsors who are licensed real estate agents often received a sales commission as part of the transaction.
If you are interested in this type of passive investing please register as a lender and let us know that your interest is in Multi family/commercial area.
Jim E Glasgow Edwardjim59@yahoo.com