How to Choose the Right Syndication Opportunity

As a passive investor, you’re likely always on the lookout for new investment opportunities. As you’ll come to find out, the real estate sector is full of many great potential opportunities if you know how to spot them. If you’re not yet taking advantage of real estate syndication, we’re going to change that today.

What Is Real Estate Syndication?

This process typically involves getting together with other investors to do deals. Everyone pools together capital to purchase a rental property. Nowadays, more recent technology has made syndication a breeze. Syndication is commonly referred to as crowdfunding for real estate. Many online syndication sites can connect you with potential investors and deals you can take advantage of.

Syndicators

Syndicators, also known commonly as sponsors, are individuals or companies who are in charge of handling the deal. This means finding the deal, acquiring the property, and managing the real estate. Syndicators tend to have a long history of real estate experience and an understanding of how to perform due diligence for a potential deal.

Investors

As you’ve likely guessed, investors are the other party to this transaction. These are people like you who invest some of their capital into the deal. In exchange, you’ll get a percentage of ownership in the real estate. With syndication, you can enjoy all the benefits of owning a property without the hassle of obtaining or managing it.

JV Partners

Depending on the syndicator, they may work solely with JV (joint venture) partners. Think of these partners as similar to brokers. Instead of investors dealing directly with the syndicator, the JV partner is the middle link. The JV partner pools together a list of investors for the project. These JV partners can be a great asset for investors who are looking for consistently flowing deals.

Is Syndication Right For You?

Many well-known real estate investors opt for adding syndication as one of their main wealth building strategies. As a passive investor, syndication can be a great tool to assist you in growing your wealth portfolio. Here are some of the top reasons that you should really consider syndication in your wealth building strategy:

Access To Deal Flow

One of the most time-consuming jobs of investing in real estate is the research. You want to ensure that a potential property will bring you a good ROI over the long-run. If you’re like most investors who don’t use syndication, then you probably scan close to 100 deals before you find the right one to invest in. That takes a lot of time.

Syndication, on the other hand, allows you to easily have access to good deals without having to perform the research. In fact, you’re getting access to property that have be researched by real estate companies who research investment properties for a living. Instead of spending your time on research, you can simply sift through good potential deals until you find one you like.

It’s Passive Investing

Passive investing is a way of life for many of us. As soon as you start rolling in that income without having to actively participate to receive it, you’re hooked. Syndication is a fantastic strategy to receive passive income in the rental property market. You won’t have to worry about day-to-day management and fostering a deal. All you need to do is decide which syndication deal you want to invest in and commit your money to it.

You Get Access To Professional Management

Real estate companies who take on the role of syndicators have lots of experience in their industry. Most companies will have a long track record of previous successes that they’ll be able to show you to prove their status. With a professional syndicator, they will work closely with the property management company to ensure the property stays in good condition, and all operations go smoothly. They’ll even send you monthly or quarter updates, so you know how your investment is doing.

Provides Portfolio Diversification

Any good investor knows that diversification is a must. You shouldn’t put all your eggs in one basket because they all could be gone with one turn in a specific real estate market. Instead, syndication offers a way to help diversify your investment portfolio. The best part is that you can get into these deals for much less than you would have to spend if you were undertaking the investment solely on your own.

Tips On Investing In The Right Syndication Opportunity

If you’ve decided that real estate syndication is a must-have for your passive income wealth strategy, the next logical step is learning how to find the right deals. Just as with any sort of investment, you want to get your bearings in this new type of deal. It’s best to take your time and follow the tips we outline below to ensure that your first syndication investment is a profitable one.

Know Your Investment Time Strategy

Everybody invests with different goals. Part of these goals is having money by a specific time. Whether it’s having a certain amount of money when you retire or having money available for your child’s college fund, you likely have deadlines you need to meet. It’s important to have these figured out ahead of time, so you know which types of investment periods are right for you.

You’ll be able to find real estate syndication investments that range from as little as 1 or 2 years up through 10 to 15 years. Let’s say your goal is tuition money for your child who graduates high school in three years. You’re going to be looking for a syndication opportunity that is in the one to two-year range.

Know Your Acceptable ROI

As an investor, you know that ROI can make or break a deal. Each investor should have a clear idea of what ROI minimum they’re willing to accept. Each syndication deal is going to be a bit different from the next in terms of ROI. By having your minimum ROI percentage ready to go, you can easily sift through syndication deals and expel those which don’t meet your minimum ROI requirement.

Decide On A Syndication Strategy Up Front

Syndication deals come in different strategies. It’s important that you decide what syndication strategy you’re going to be investing in before you start looking for a sponsor. The most common types of syndication strategies include:

Aggressive Value-Add Strategy

With this strategy, an entire property will be purchased and vacated. It will undergo extensive renovations. Once the renovations are finished, the building will be leased at higher rental rates than in the past.

Mild Value-Add Strategy

With this strategy, the property isn’t vacated once bought. Rather, as normal tenant turnover occurs, the existing units are renovated. Then, they are rented for higher rates than in the past.

Buy And Hold

This is the most traditional investment strategy most investors are familiar with. An investment property is simply bought and held for long-term cash flow benefits.

As you can see, each strategy comes with its own pros and cons. The value-added strategies can be riskier than the buy and hold strategy. If you’re willing to take on a lot of risk, then the aggressive value-add strategy may be a profitable one for you. If you want to limit your risk, then buy and hold syndication deals are your best bet.

A Note On The Legal Structure

If you’re really getting excited about the potential of using syndication deals in your wealth building strategy, then you’ve likely questioned the legal structure. Any good investor knows that their deal is only as good as the legal paperwork. With syndication, you’ll find most deals will be structured in the form of a limited partnership or limited liability company.

With either of these legal entities, you’ll need to pay close attention to the LP Partnership Agreement or LLC Operating Agreement. These vital documents outline the rights of the investors and the sponsor in regards to the property you purchase. Some examples of rights include voting rights, distribution rights, and sponsor’s rights to fees for managing the property.

How To Find Syndication Opportunities

If you’re on board with this strategy, it’s time to discover how to find these deals. Syndication opportunities can be found via local sponsors or online platforms. Most communities have local meetup groups for real estate investors, which you should be attending. These groups can allow you access to more seasoned investors who are likely to reveal their sponsors.

Otherwise, you can opt for viewing online syndication platforms at your leisure. The two most popular online platforms are Fundrise and CrowdStreet. Even if you’re considering talking with other investors to find local sponsors, taking a look at these online platforms can be helpful. They can give you a good understanding of how deals are formulated and so forth.

As a passive investor, you should always be on the lookout for new opportunities. Hopefully, we’ve opened up your eyes to the profitable strategy of syndication. This investment strategy is one that should definitely be included in your investment portfolio.             

 

Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.

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Joe Fairless