Many real estate investors “get their feet wet” through some form of residential real estate. Whether those initial investments are flips, standard single-family rental homes, or even duplexes, that’s a great start. But we also know people who have been in the real estate investing game for 10+ years and have never heard of a “real estate syndication” before.

Actually, that’s pretty common. 

Syndication isn’t a common word and most people don’t think of group investing when they imagine real estate investing opportunities.

We want to make passive real estate investing easier and accessible to more people. That’s why we’re here.

You buy a house and rent it out –  simple, right? Actually, syndications offer even easier ways to invest in real estate than buying a house and becoming a landlord.

But maybe you’re new to the term “Syndication” too and are wondering things like: 

• What is a real estate syndication?
• How does it work to invest in a real estate syndication?
• Why should I put my money in a syndication deal?
• What would an example real estate syndication look like?

Quick Real Estate Syndication Backstory

The SEC (Securities Exchange Commission) regulates investment opportunities so you are less likely to be taken advantage of by someone out to steal your money. They are the arm of the government whose mission is “protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation” according to their website.

Until somewhat recently, SEC regulations did not allow for real estate syndication opportunities to be publicly advertised. This made it so, you had to be part of the “inner circle” (i.e., you had to know someone who was doing a deal) in order to invest in one. This cut most of us out of the opportunity.

Luckily, the SEC now allows certain opportunities to be publicly advertised, which opens the gates for more people to learn about and invest this way. There are also people like us at Flow State Investing who can help you gain knowledge, experience, and confidence to join one of the non-advertised deals. 

So What Is A Real Estate Syndication?

Let’s start with the basics. The term syndication means pooling resources. A real estate syndication is when a group of people pool their funds and expertise together to invest in a real estate asset together. Instead of buying a bunch of small properties individually, the group of people come together and buy a larger asset together.

Let’s pretend you have $50,000 for investing, beyond other savings and retirement funds. You could invest it in an individual rental property, but that would also require time to find a property, negotiate the contract, do the inspections, run the numbers, get the loan, plus find the tenant and manage the property.

But it’s likely you don’t have the time or energy to deal with all this work. Most people quit here, assuming real estate investing is too hard and too much work. But not you. You know there has to be something else.

Real estate syndications are the alternative that allow you to still put your money into real estate, without having to do the work of finding or managing the property yourself. 

Instead, you can invest that $50,000 into a real estate syndication as a passive investor. So you contribute $50,000, maybe a friend has another $50,000 to invest, someone else puts in $100,000, and on and on.

By pooling resources, the group would now have enough to buy not just a rental property, but something bigger, like an apartment building. As a passive investor, you don’t have to do any of the work managing the property. A lead syndicator or sponsor team does the day-to-day management (i.e., all the active work), and in return, they get a small share of the profits. 

When done right, real estate syndications are a win-win for everyone involved.

How Does It Work To Invest In A Syndication Deal?

Now you want to know what goes on “behind the scenes” of a syndication. This will help you see how it all works.

First off, there are two main groups of people who come together to form a real estate syndication: the general partners (GPs) and the limited partner passive investors (LPs).

General Partners’ Role in a Syndication

The prior section mentioned a team that would take care of all day-to-day management (so you don’t have to!) in exchange for a small share of the profits. That syndication team is made up of general partners (GPs). They do all the legwork of finding and vetting the property and creating the business plan. Essentially, they do the work that you would be doing as the owner and landlord of a rental property, just on a massive scale.

Limited Partners’ Role in a Syndication

The limited partners (LPs) are the passive investors (others like you), who invest their money into the deal. The limited partners have no active responsibilities in managing the asset. Your responsibility as an LP comes in vetting which General Partner team (or Sponsors) and which deal you want to invest in (don’t worry, we’ll teach you how to tell which deals meet your goals). 

Limited Partners are also more protected legally if something happens. You’ll learn more about the risks in the documents you’ll sign to join a deal. Of course, always consult your own attorney, CPA, and other professionals on your wealth-building team for specifics.

GPs and LPs As A Team

A real estate syndication can only work when general partners and limited partners come together. The general partners find a great deal and put together an efficient team to execute the intended business plan. The limited partners invest their personal capital into the deal, which makes it possible to acquire the property and fund the renovations.

Together, the general partners and limited partners join an entity (usually an LLC), and that entity holds the underlying asset. Because the LLC is a pass-through entity, you get the tax benefits of direct ownership.

Once the deal closes, the limited partners’ job is over. Enter fully passive investing mode.

The general partners get right to work. They work closely with the property management team to improve the property (or “add value”) according to the business plan. During this time, the limited partner investors receive ongoing cash flow distribution checks (usually every month or quarter).  

Once all the planned renovations are complete, the general partners sell the property. At this time they return the limited partners’ capital (if not sooner), and split the profits according to the LLC operating agreement.

Why Should You Grow Wealth In A Syndication?

Okay, now that you’ve got a general understanding of how real estate syndications work, let’s talk about why you would want to invest in one. There are a number of reasons that passive investors decide to invest in real estate syndications.

Here are a few of the top reasons:

• You want to invest in real estate but don’t have the time or interest in being a landlord.
• You want to invest in physical assets (as opposed to paper assets, like stocks).
• You want to invest in something that’s not as volatile as the stock market.
• You want the tax benefits that come with investing in real estate (i.e.; writing off income).
• You want to receive regular cash flow income streams.
• You want to diversify and invest with your retirement funds.
• You want your money to make an impact in communities.

A real estate syndication is a nearly perfect way that a active professional can invest in large-scale, physical real estate assets, without the spending tons of extra time or excessive mental energy. These deals can also positively impacting the community by improving the quality of housing. Syndications also earn interest and generate tax benefits. 

This opportunity for passive income is sounding better and better.

What Does An Example Syndication Deal Look Like?

Perhaps you still are asking yourself “Is this real?” Here’s an example of what a real estate syndication deal could look like.

Let’s say that Jackie and Pierre are working together to find an apartment community in Dallas, Texas. Jackie is a local in Dallas, so she works with real estate brokers in the area to find a great property that meets their criteria. After looking at a bunch of properties, they find one that is listed at $10 million.

Pierre dives into the underwriting (i.e., analyzing all the numbers to make sure that the deal will be profitable), since he loves numbers and working in spreadsheet models. They see that this property has a ton of potential to improve.

Since Jackie and Pierre don’t have enough money to purchase the $10-million property themselves, they decide to put together a real estate syndication offering. This is how these large buildings are often purchased. They build a solid business plan and investment summary for prospective investors and work with a syndication attorney to structure the deal (decide the percentage ownership splits, preferred returns, etc.).

Then, they start looking for limited partner passive investors who want to invest money into the deal. Each passive investor invests a minimum of $50,000 until they have enough to cover the down payment, as well as the cost of the renovations.

Once the deal closes, Jackie works closely with the property management team to improve the property and get the renovations done on budget and on schedule.

During this time, Jackie and Pierre send out monthly updates, as well as quarterly cash flow distribution checks, to their passive investors.

When the renovations are complete, Jackie and Pierre determine that it’s a good time to sell and the property goes for $15 million after just 3 years. Each passive investor receives their original capital plus their split of the profits according to the original deal. In this case, a 70/30 split was agreed upon at the outset of the syndication (70% to investors, 30% to Jackie and Pierre, the general partners).

At this point, each passive investor has received quarterly cashflow checks during the renovation and hold period, plus their initial capital investment back once the property sold, plus their portion of the profit split after the sale.

This is a pretty sweet deal for little-to-no work!

In Conclusion

Now that you know the behind-the-scene details of a real estate syndication, including what it is, how it works, how little effort on your part it requires, and how simple it could be to begin receiving your first passive income check, we hope you can see why you shouldn’t wait 10 years to make a move. 

We always recommend you research and understand an investment opportunity until you’re comfortable with the details and structure. Once you understand the basic anatomy of vetting these deals, it becomes easier and easier to get your money working in real estate with even less of your time. Afterall, you can sit back and relax (or spend time pursuing your passions) once you sign the paperwork and transfer funds.

Now that you’re armed with this knowledge about real estate syndications though, you’re miles ahead of most other investors. Keep at it!