What is Syndication?
There are many definitions for syndication but here we will be discussing real estate syndication.
Real Estate Syndication is an effective way for investors to pool their financial and intellectual resources to invest in properties and projects much bigger than they could afford or manage on their own.
This structure allows investors to invest passively while the fund operator or “sponsor” handles the management aspects and day-to-day duties of the project.
One of the great benefits of investing in syndications is that it gives investors the opportunity to leverage other operators’ expertise with their capital. This can open up doors to new asset classes, which helps diversify investors’ holdings, while delivering high returns.
Here’s how it works…
- The operator will locate a property and create a syndication where they will pool investors’ capital. There will be a small (3%-5%) acquisition fee that the operator will receive for pinpointing the property and closing the deal.
- There will be a preferred return to investors so that they get paid before the operator receives gains from cash flow and equity. Usually, the preferred return will range from 8-12%. This means, if the preferred return is 8%, the investors must receive an 8% return before the operator gets paid from equity or cash flow.
- Also, the operator will be receiving a small (1-3%) fund management fee for his duties relating to the day-to-day management of the fund.
- The real bulk of how sponsors should be making money in real estate syndications is through the equity and cash flow participation split. After the preferred return is satisfied, the remaining cash flow and gains from appreciation will be split at the negotiated rate. Usually, the operator will receive anywhere from 20-50% of the proceeds after the preferred return is met. The size of the split will depend on how much of the fund operator or sponsor's expertise is necessary for the performance of the fund, and how profitable the opportunity will be to investors.
When you structure your opportunities like this, the sponsor only makes good money when the investor makes money. That way, both the sponsor and the investors’ incentives are more closely aligned for the fund’s performance.