If you’ve been investing in the real estate market for some time now, perhaps you’d like to consider investing through a process known as real estate syndication as your new approach. Read on to learn more!
What is a Real Estate Syndication
A traditional real estate syndication is a group of investors pooling their resources to invest in properties. Why do it in a group rather than going solo? Well, you can purchase properties much higher in value than any you’d be able to purchase on your own.
The key difference between crowdfunding and a traditional real estate syndicate is that an investor has to be accredited. for the most part. There are exceptions, which we’ll discuss below. If you are not yet one, consider these other real estate investment vehicles.
So, real estate syndication is best for those with experience in real estate investing. This type of investment vehicle is great for people who want to invest in this particular market without having to be so involved in the actual investment. No property management, no dealing with tenants—all passive. For the real estate investor with less experience, consider crowdfunding through Fundrise!
What is an Accredited Investor?
An Accredited Investor is a person that can in invest in securities that are not registered with financial authorities such as the Securities and Exchange Commission (SEC).
The SEC believes Accredited Investors are sophisticated enough to take on the economic risks associated with unregistered securities that are do not have to meet the same disclosure as the SEC.
Who Qualifies as an Accredited Investor?
In order to qualify as an Accredited Investor you must meet the following criteria:
- Your earned income was greater than $200,000 ($300,000 if married) for the last two years, and reasonably expect to earn the same or more in the current year. OR;
- You have a net worth of over $1 million (single or married), excluding the value of your primary residence.
Why This Matters to Real Estate Investors
Some of the of the most tax-advantaged and secure investment opportunities are limited to Accredited Investors. These opportunities are often called alternative investments and include:
- Real Estate
- Privately Held Companies
- Limited Partnerships
- Oil & Gas
- Private Equity
- Hedge Funds
In many cases, these investments aren’t advertised to the general public, and due to legal issues, these opportunities are often never even shown non-accredited investors.
Some of the best passive real estate investments are either syndicated or are in the form a private equity fund that allows the investor to become a limited partner, receiving many of the benefits of direct real estate ownership.
Luckily there are some rules that allow non-accredited investors to invest in these types of investments. However, to find out about them you will need to have some sort of relationship with the management teams that put these deals together.
Types of Real Estate Syndications
Projects higher in value means projects in larger scope. Think: apartment complexes, multi-story office buildings, or even a portfolio.
Real Estate Syndication Niches
There are four main types of areas that syndicates will fall into:
- New Development: Purchasing or constructing brand new properties
- Unstabilized Properties: You see the value in a property that isn’t performing well and want to turn it around to profit.
- Momentum Play: Properties that are in line with the upwards purchase or value trend
- Value-Add: Properties that you can add value to through renovations, repairs, or forced appreciation
As you consider different options, try identifying which category yours falls into. Ask yourself: am I comfortable with the risk associated with this approach? Is my research of the area growth in line with the approach?
Difference Between a Syndication and an REIT
Maybe you’ve thought that a real estate syndicate sounds very much like a real estate investment trust (REIT). The two key differences are:
|REIT||Real Estate |
|Manage many real estate holdings||Manage one specific property|
|Own shares in the overall company||One shares in one property|
|Publicly traded in stock||Private, accessible via group only|
Which vehicle you decide to participate in will go back to your comfortability with risk.
The key difference is in diversification: an REIT spreads your investments across multiple properties in a company. A syndicate concentrates on one property. Which sits right for you?
Since a real estate syndicate is a group of investors, there are different roles held within each of them.
The Sponsor: This person sources, develops, and manages the project and the group of investors. The sponsor often holds the most experience.
The Investors: These are all the people contributing money to fund the real estate deal; they are passively investing. The investor in a traditional real estate syndicate will generally have to be an accredited investor.
The Property Management Team: This is the group that will be managing the real estate property. It won’t be the investors, and it often won’t be the sponsor. This is the team that will be responsible for the active part of real estate investment. This means leasing, maintenance, tenants, etc. The sponsor will often contract these teams out.
The LLC or LP: Now, this isn’t a separate party in itself. Generally, a sponsor will set up a syndication as an LLC or a Limited Partnership. This is for protection of all parties. Through them, distribution rights, voting rights, and any fees will be set forth.
But what if you’re not an accredited investor? How can you invest in syndications?
Reg D 506(b) Offerings
Reg D is an SEC regulation that allows syndicators (aka sponsors) to efficiently raise capital by bypassing the expensive and time consuming SEC registration process.
The two most commonly used rules under Reg D are 506(b) and 506(c), but only 506(b) allows non-acreddited investors to invest.
Rule 506(b) & 506(c)
506(b) allows a sponsor to raise capital from an unlimited number of accredited investors, and up to 35 non-accredited investors. Non-accredited investors must also be sophisticated investors, meaning you must have “sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment”.
Sponsors using 506(b) to raise capital cannot use “general solicitation or advertising” to find investors. For this reason they must have to a “pre-existing, substantive relationship” with you before you can invest, which makes 506(b) offerings harder to find. You can find these deal by joining real estate groups on social media or talking to your network.
Whereas, 506(c) allows a sponsor to raise capital from an unlimited number of accredited investors only, but can advertise their offering in anyway they see fit (i.e. the internet, publications, public events, etc.)
Because of the ability to advertise freely, many sponsors, including crowdfunding sites, with larger capital raises will choose to use 506(c) over 506(b).
Profits in a Real Estate Syndication
There are two main ways that it can make profit: property appreciation and rental income. Property appreciation happens over time. The terms of your syndicate set forth by your sponsor will determine the amount of profit that comes with rental income. This same contract determines the percentage in profit that each real estate syndicate party member will receive.
On our last episode, the REI Brothers shared that they believe real estate syndications are great sources of wealth building. If you’ve had some time in the real estate industry, perhaps it’s time for you to consider this investment vehicles.
Check out these Yo Quiero Dinero partners to accelerate your Real Estate Investing goals!
Rocket Dollar – With a Rocket Dollar Account, you can invest in things like second or multiple investment properties in your community, rental vacation homes, multifamily, apartments, commercial property, mobile homes, raw land, natural resources, and more!
Roofstock – Earn passive income by purchasing rental homes with tenants.
Fundrise – Invest in REITs & earn passive real estate income! Have your advisory fees waived for 90 days.