Some people are DIY types.
When it comes to any kind of project (including commercial real estate investing), they love the idea of “doing it yourself.”
I’ve got a lot of respect for those people, but what about the rest of us?
That’s probably the best way to think about commercial real estate syndications … the difference between “DIY” and “Done For You.”
If you love taking the time and effort of researching a market, making calls yourself, and laying down a bit more risk, you’ll probably want to work with a brokerage, that’s DIY.
If you don’t have the time for research, road work, negotiations, and paperwork, real estate syndications — the Done For You choice in this analogy — might be the answer.
I’ll say this, if I had to start over from scratch, I’d go all in on a trusted, proven syndication.
So let’s take a closer look at why I think you should invest in commercial real estate syndications, and a little advice about how to get it done right …
What Is A Commercial Real Estate Syndication?
The short answer?
A commercial real estate syndication is a way for investors to pool their funds together in order to buy a larger and more stable asset (or assets) than any of them could have on their own.
You’ve likely seen the concept of a syndication at work in other industries, it’s not a new idea at all.
Commercial Real Estate Syndications are a much easier way for most people to invest in real estate because you can spread out your capital into multiple deals with multiple different sponsors, diversifying your portfolio along the way.
In its simplest form, you (the investor) find a trusted deal sponsor (the syndicator) and the sponsor uses their years of experience in the commercial real estate market to invest and grow your money.
Sounds easy, right?
Not that there are no downsides — I’ll get to those in a moment — but syndication is definitely the “easy button” when it comes to commercial real estate.
And yes, done right, it can be extremely profitable.
A Few Syndication Buzzwords You Should Know
Before we start down this road, let’s get familiar with just a few of the buzzwords we use in the industry.
In a moment, you’ll be talking like a commercial real estate syndication pro!
The fees in your particular deal are something you’re going to want to watch carefully. If you’re working with a reputable deal sponsor, the fee structure should be simple and minimal. If not, just like any other business deal, those fees can start to add up and cut way into your investment. Some common fees you’ll see in a syndication deal include: Acquisition fee, construction management fee, refinance fee, asset management fee, loan guarantee fee, and/or a disposition fee.
Investors, also called the “limited partners” (LP), are the passive party in the investment. That’s you!
There are many different ways to structure real estate syndications. And they can be as simple or as complicated as you would like for them to be. I prefer to keep my offerings as simple as possible so that there’s complete transparency and no potential confusion at any point in the process.
General Partner Vs Limited Partner
In layman’s terms, a general partner holds most of the responsibility in a syndication deal. A limited partner is usually only contributing money as an investor, and carries less risk in several ways.
506(C) Vs. 506(B) Syndication
There are two primary types of real estate syndication: 506(b) and 506(c).
They are more commonly referred to by which investors are generally allowed to invest: accredited and non-accredited investors. The 506(b) offering is referred to as the “friends and family” offering. The 506(c) offering is for accredited investors only.
The deal sponsor, also called the “syndicator” or “general partner” (GP), is the active party in the investment. Their responsibilities include: finding and sourcing the investment opportunity, performing all underwriting, putting together any renovation and operational plans, raising capital and placing debt, operating the day to day of the asset, and handling all investor relations, tax returns, K1s, etc.
This is the structure — agreed upon in advance — which will determine how the returns on your investment are distributed to you, the investor. Waterfalls can be simply structured (recommended) or very complex, based on the nature of a given deal, or the parties involved.
The Benefits Of Investing In A Commercial Real Estate Syndication
The benefits of investing in commercial real estate syndications are nearly as good as it gets when it comes to investment strategy.
They are many, and include the nature of returns, tax benefits, and my favorite, almost complete passivity…
You Can Invest In Larger Assets And Projects
If you’re on your own, you only have so much juice. If you throw in with others, even though you only have a slice of that pie, it can end up being much larger than what you could have done on your own. Larger assets tend to hold their value better and are more liquid than smaller properties since the buyer pool is better capitalized and seeks the confidence in income that larger assets can bring.
More Stability Due To Higher Unit Counts And/Or Location
If you buy a single family home, and your renter bails, your income goes to zero until you bring in another renter. If you join with other investors in a syndication and buy into multi-family or multi-tenant units … one of those renters leaving isn’t going to send you in a tailspin. And real estate is all about location, location, location, so if you buy a site in a premium, high-demand area, you won’t have to fight as hard to keep occupancy high as you would if your site was in the middle of nowhere.
Less Money Out Of Your Pocket
Same point here, but from a different angle. The combined power (and knowledge) of a group of investors is always going to be much greater than the knowledge you can acquire on your own. And that combined power also means less money from you up front, as well as greater returns on the back end, had you invested that same amount on your own.
Completely Passive Real Estate Investing And Cash Flow
Simply put, find an amazing deal sponsor and, as a limited partner, you’re literally just placing your money in the pot and watching it grow. No hassles, no research (unless you want to), no endless phone calls, no guessing. This is as truly passive as passive investing gets.
Onsite And/Or Professional Management
A professional property management team are the ones onsite each day dealing with the tenants, preventative maintenance of the building, repairs, budgeting, etc. Properties of scale have enough income that they can justify covering the expense of a property management company so that you won’t have to deal with all of that yourself… which you would be, on your own.
Tax Benefits, Forced Appreciation, And Write Offs
Since commercial properties are physical structures that age and experience wear and tear, the IRS allows investors to write off a piece of that against any earned income, this is called depreciation. Not to mention that since these are not active investments (unless you’re the deal sponsor), you’re taxed as a passive investor, which offers a lower tax rate. My favorite benefit of real estate investing? The forced appreciation. Like I said under property management, commercial real estate is valued based off the income you bring in. So, if you increase the income, you can substantially increase the value thanks to capitalization rates.
The Drawbacks Of Investing In A Commercial Real Estate Syndication
Are there risks and drawbacks to investing in a real estate syndication? Of course!
As you already know, nothing in the investing world is guaranteed, there are always ways in which things can go wrong.
Let’s take a look at some of the more common risks of investing in syndications…
Increased Vacancy Due To Rents Being Raised
This one is the mirror image to the benefit above. Yes, as rents are raised in a normal environment, there will be some churn in vacancies. However, this risk goes both ways, because you’ve invested in multi-unit properties, one or a handful of vacancies should not break the bank before you can fill them again.
Construction Cost Overruns That Lead To Capital Calls
We’re seeing this more and more these days, which is often due to poor planning and/or the cost hikes on materials due to things like, you know, a global pandemic! However, this is going to be a risk in any real estate deal you put together, and with your pooled resources run by a smart deal sponsor, this problem can many times be head off at the pass.
Project Delays Due To Weather, Political Environments, Etc.
This is another one that is not unique to syndications, but deserves mention. I’d label this as “out of my control” and, though worth preparing what you can in advance, not worth worrying about.
The Bank Can Call A Loan
Yep, it happens. Not very often, but it does. And again, this has the possibility of happening to any of us who loan money from banks, at any time. So it’s another one in the “out of my control” bucket, assuming all financial ducks are in their respective rows. However, I would say that syndication could offer a bit more protection against this happening, due to the fact that they operate with multiple investors.
The General Partner Disappears Overnight
I’ve witnessed this firsthand. It’s not pretty. Outside of due diligence beforehand, there’s not much that can be done in these situations. However, with an experienced deal sponsor that has a track record of successful projects, you likely won’t need to be worried about any of these scenarios. It’s important, however, that you perform your own due diligence and understand the risk you’re taking on, whether you’re the deal sponsor or an investor.
How To Find Deal Sponsors And Syndication Opportunities
OK, I think I’ve made my case, I obviously believe that commercial real estate syndications offer the best investment opportunity on the planet, for many reasons.
As I said at the start, if I had to begin again with nothing, I’d scrape the capital together, walk straight to a reputable deal sponsor’s office, and place my money on the table.
Now, I will say that finding real estate syndications can be tough, because a lot of them don’t (or can’t) advertise because of SEC regulations, so many potential investors have no idea that these opportunities exist.
But I see this as yet another benefit to you, the investor. It’s not a very crowded market, so if you do your due diligence, there’s a lot of deals out there with sponsors looking for investors, and it can also mean that you have some leverage in the terms of the deal.
So how do you do that due diligence? Let’s keep this to just a few easy and effective steps…
Go Online. Now.
Without a doubt, the Internet is an absolute miracle. This is where I’d start, and there are several places that I specifically recommend, FundRise and CrowdStreet. You can make your search as detailed as you want within those platforms and likely find a syndication that works for you. There are also many other independent websites and forums that can be not only helpful, but life-changing in terms of getting you started. If you only do one thing to find your deal, go online and get researching.
Meet With Deal Sponsors
As incredible as the internet is, there’s still nothing like face to face. When you meet a handful of vetted deal sponsors in person, it gives you the invaluable opportunity to decide if this person is someone you actually want to work with. And don’t underestimate that… you’ll potentially be giving this person a good chunk of your money, can you look them in the eye and hand it over confidently?
Invest In Projects You’re Familiar With
This might be my favorite piece of advice. Be who you are. Triple down on what you know. Don’t try to be someone you’re not! If you know storage, do storage. If you’ve got Nashville on lock, do Nashville. Enough said.
Old Fashioned Networking
Let’s go back a few decades and learn from our elders. Depending on where you live, it’s likely that there are several real estate organizations, or clubs, or even bars where all the real estate people hang out. Find them, go there, be yourself, meet people, become actual friends with them. And finally, learn from them. These people are the real ones, the people that know what’s actually going on in your area, you’d be amazed at the intel you can pick up, intel that just might take you to the next level as an investor.