TL;DR: Real estate syndicates are a great way to generate diversified, outsized returns, with very little effort from you, the investor. They have some minor downsides related to fees and tax treatment, but generally speaking those are outweighed by the positives mentioned above. If you’re an accredited investor and interested in this space, start first by creating a system to generate deal flow, then follow a checklist for each investment you consider. The tools outlined below can help walk you through each of those steps.
There are a wide range of options to invest in real estate, as outlined in my ultimate guide to real estate investing and my overview of real estate investment strategies. Each approach has varying levels of risk, return, and involvement required from you, the investor. For passive real estate exposure, one of the best methods I use is the real estate syndicate. A syndicate (or syndication) is a real estate deal where an investment group brings on financial partners. They provide access to the deal, while you provide the capital to make the deal happen. There are a lot of pros and a few cons to this approach, which I’ll outline below. In addition, I’ll share my perspective on the better ways to get access to these types of deals.If you’re really interested, you should sign up for The Ramen Review and check out the other Syndicate Resources. It’s a great way to jumpstart your syndicate deal flow, and keep your ear to the street, so sign up today.
Benefits of syndicate investing
There are a few main reasons to invest in syndicates, which include:
- Higher returns
- Low level of effort required
Syndicates come in many shapes and sizes, but in early 2018 you can find many deals offering an 8% preferred return, with total annualized returns targeting 18%+:
If it wasn’t obvious, over 30 years, the difference between an 8% return from the stock market (S&P 500 long term average) versus an 18% return from real estate results in a 14X difference in outcome:
That might make it worth taking a second look.
But if the returns weren’t enough for you, another great reason to consider syndicates is for diversification. Real estate is a regional / local game. To invest successfully in a market you need to get to know that market, the dynamics affecting supply and demand, and the players competing against you. That’s hard to do for even a single market, let alone doing it for multiple markets. Syndicates offer you exposure to different markets by allowing you to invest alongside an investment team who is an expert in the market. This means you can spread your bets over different markets and investment strategies to hedge your risk. The key here, as I outline in my syndicate checklist, is that you want to be partnering with a true expert on that market. Find a syndicate sponsor who has invested there before, and is deep in that space, and they will help steer you to the right deals.
Last, but not least, syndicates require a very low level of effort from you, the investor. Ideally, the syndicate sponsor has done the proper diligence on the market and opportunity. All that you need to do is validate and confirm their research to get comfortable with their assumptions. Once you make the investment, everything is automatic – if all goes well, you’ll simply see a check show up every month or quarter, and you’ll get some tax documents every February or March. The rest is taken care of for you by the sponsor.
Downsides of syndicate investing
Of course, there are some drawbacks to investing in syndicates. The main limitations are:
- Less favorable tax treatment
- Limited deal duration
- Limited control
- Only for accredited investors
The biggest downside to syndicate investing is that it is difficult to take advantage of the 1031 exchange when a deal wraps up. Because most syndicates are structured as corporations, you don’t actually own a direct piece of the property, and therefore cannot roll that ownership into another property or deal. This means you will get taxed on the depreciation recapture and capital gains every time a deal wraps up, which wipes out some of the great long term tax advantages of real estate. There are some sponsors who will let you roll your funds into the next deal they do, which is one way you could do a 1031, but that’s not always possible. It’s unfortunate, but I find the upside potential from these deals is often enough to offset those tax implications.
Most syndicates target a 3-5 year investment hold. The idea is that they want to purchase the property, execute their value add strategy, then exit with a profit for the sponsor and the investors. A profitable exit is a good thing, but it means you might be getting a big chunk of money back in the future that you need to re-deploy. Again, not a bad thing. But if you’re looking for long term cash flow, you might have preferred to simply keep the property along with the ongoing yield.
The last thing to note is that you will likely be a minority investor in the syndicate, and you’ll have very limited control on the deal. This is, of course, by design – you effectively hired the sponsor to deal with all the details. But, if things go poorly it might mean you have limited recourse to help course correct. This is why great diligence of the sponsor and the deal is key!
Are you accredited?
So let’s say you’re sold on the idea of investing alongside a syndicate… what’s the next step? Well, first of all, check your financial situation. Most syndicates require you to be an accredited investor, which generally speaking means you earned $200K in the last two years, or $300K including your spouse. You can also qualify if you have >$1M in liquid assets (excluding your primary home). If you don’t qualify for this, then syndicates might not be for you yet. Realistically, if you’re not making that much, it will probably be hard to invest in them anyhow, as most deals have a $25-50K minimum investment. You might be better off checking out some options to invest in single family rentals or other smaller deals to get yourself started.
How to generate deal flow
Now that you’re ready to invest in a syndicate, you want to generate a robust pipeline of deal flow so you can both get comfortable and familiar with different deals and terms. This will also help you recognize the good deals when they hit your radar. There are a few ways to get access to deal flow:
- Online platforms
- Online forums
- Friends, family and connections
If you want to jumpstart all of this, simply sign up for the The Ramen Review where I summarize and highlight some of the best opportunities hitting the market across the different sponsors and platforms out there today.
Online platforms are the easiest and fastest way to jumpstart your deal flow. There are a few types of platforms out there:
- Individual sponsors
Marketplaces are, in my opinion, the best place to access deals. They are, as the name suggests, a marketplace where sponsors join and list deals for people to invest in. The marketplaces typically charge the sponsors a fixed fee for listing, but they don’t add any additional fees for the investors. Also, in this model you get direct access to the deal sponsor, so you can build a relationship with them in the future. For these reasons I prefer marketplaces. Lower fees, and more direct access, plus I build my personal rolodex of potential sponsors. The two best marketplaces that I’ve used are CrowdStreet and RealCrowd. They have great deal flow, and good systems for executing an investment. Check them out today!
Aggregators act by pooling funds from a group of investors and committing that larget check to a primary sponsor of a syndicate deal. In this model you don’t get as much direct access to the sponsor, and it’s possible the aggregator will layer on additional fees and costs. For this reason I generally stay away from these types of sites. That said, it’s worth getting on their mailing list so you can see the types of deals they have coming through. The two best aggregator sites I’ve checked out include Realty Mogul and Realty Shares.
Lastly, there are some websites that act like an online investment platform, but are really individual sponsors who source their capital through a platform. This isn’t a bad option, but it’s really a technology enabled primary sponsor. Good to have in your rolodex, but won’t build deal flow as quickly. One example that comes to mind is ArborCrowd.
The other way to get access to syndicates is through online forums and tools. One of the best sources is Crowdd, which is basically Yelp for real estate syndicators. Check out their reviews for each sponsor. Another good source is online forums on sites like Bigger Pockets – often times syndicators will be on those forums answering questions, and ultimately trying to connect with investors who can write checks. This can be a good way to get connected with folks, but remember to do your diligence before pulling the trigger.
Friends & family
Lastly, if you have friends and family who are investing themselves or leading deals, then that could be a good source of deal flow. But remember to put the same level of rigor and diligence into those investments as anything else. Just because you know them doesn’t mean that they’ll be bringing you a great deal. Again, buyer beware.
Primary sponsor vs. Aggregator
One thing to note with all of this is that ‘syndicates’ can generally be grouped into two types:
- Primary sponsors
The best way to invest (IMO) is with the primary sponsor – the actual investor / group who is running the deal. You’ll be getting direct access to the deal on similar terms to other investors. Aggregators basically have a rolodex of investors they bring to a deal alongside a primary sponsor. Investing through aggregators might layer on unnecessary fees. If the aggregator is doing it for a living, then it’s likely they’re taking a cut somewhere. Perhaps this is worth it if the aggregator gets you privileged access to a really great deal, but I’m skeptical of that. So buyer beware. Generally speaking, I stick with deals where I’m dealing with the primary sponsor.
How to invest for success
So now that you’ve got deal flow, how do you separate the wheat from the chaff? You need a good system to track and evaluate deals. Fortunately, you can get started by using the system I’ve put in place. I have a multi-step approach:
- Syndicate screen sheet – the first step is track all the inbound deals you find remotely interesting. This will help you to get familiar with deal terms, and give you a list of deals to compare against when considering a new one. It’s also the right way to do an initial screen of a deal to see if you want to dig deeper
- Syndicate checklist – once you find a deal you like, go deeper and run it through the detailed syndicate checklist. Read more here on how you should think about every syndicate investment
Once you find a deal that checks all your boxes, the only thing left to do is decide how much to invest and pull the trigger. You’ll need to meet the investment minimum (usually $25-50K), and then you’ll wire funds from your bank to the investment fund, so you’ll need to pull all of that money into a single account.
Once you get comfortable with the world of larger commercial real estate deals, you’ll find that syndicates can be an invaluable tool in your arsenal. Bringing you the potential for higher returns, diversification, and truly passive investment, it is something everyone should consider. If you want to learn more, as always, drop me a line at firstname.lastname@example.org. Alternatively, sign up for my real estate syndicate digest, which brings the best deals and analysis right to your inbox.
Best of luck, and remember to enjoy the journey!
Other relevant notes & links:
- Guide to syndication – Adams Investor Group