Many opportunities are available in the real estate market for investors, but without enough funds, your options tend to be limited. One of the easiest ways to gain access to the type of funds required for larger real estate deals is through syndication.
Real estate syndication can seem like a daunting option to somebody who has never made use of it before, but it does offer numerous advantages. However, just like any business venture, making use of syndication requires a proper understanding of how it operates in addition to the pros and cons involved.
The concept behind real estate syndication
Real estate syndication enables investors to pool their financial and intellectual resources. This allows them to invest in projects and properties that are typically larger than what they would have been able to afford by themselves. This means that syndication is in essence a crowdfunding model for the real estate market. It is also an option that is favored by investors who want to invest in real estate but do not necessarily have the required skills or want the responsibility of property management.
A real estate syndication entails a sponsor, also called a syndicator, who is in charge of the acquisition and management of the real estate. Ideally, this person will bring a lot of experience in this area to the table.
Also part of the syndication are the investors who are investing with the sponsor in exchange for an ownership percentage of the real estate. In some cases, there will also be a joint venture partner who serves to bring the investors and syndicator together while also helping with financing, reporting and other tasks.
Pros and cons of real estate syndication
For many investors, the biggest pro of taking part in a real estate syndication is that they have a passive role and won’t have to worry about the day-to-day operations. Other investors are drawn to the fact that they cannot lose more than the amount that they initially invested as their liability is limited. When it comes to property sales, refinancing and other major decisions, the investors also tend to hold voting rights.
For investors who like to be involved in the day-to-day operations, the lack of control will be a con. Of course, as with any investment, the real estate market can be volatile, which means value can increase and decrease depending on market conditions.
Always properly research the project and the people heading the syndication before making any commitments. If you’re the syndicator, be prepared to demonstrate superior knowledge of your offering. Syndication can be a win-win situation for everyone involved, but only if it is handled properly.
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