How to Find the Best Real Estate Syndication Deals
What Is A Real Estate Syndication?
Can you invest in real estate without having any of the hassles and work, and day-to-day management, and risks of being a landlord while still making great passive income and having exceptional tax advantages? Yes, yes you can. It’s called a real estate syndicate, which is essentially the pooling of resources (capital, knowledge, expertise) by essentially two groups of investors. The one group of investors – the deal sponsors/syndication sponsors a.k.a. general partners (GP’s) and the other group of investors – passive investors a.k.a. limited partners (LP’s) to form a commercial real estate syndication – or what we will cover in this article – a multifamily real estate syndication.
What Are The Type Of Offerings In A Real Estate Syndication?
To participate in a real estate syndication you usually must meet certain criteria depending on the type of offering (either a 506b or 506c) that is being presented – this is the Rule 506 exemption of Regulation D. Regulation D, simply put, was instituted in the 1982 Securities Act and allows a safe harbor for companies under the Rule 506 exemption to sell securities without having to register with the SEC as long as certain rules are met.
This allows more prospective investors to have access to many more investment opportunities and to have a limited partnership stake in larger projects like commercial properties through multifamily syndication. There are some guidelines that must be followed when investors partake in these offerings. Most of these rules fall on the shoulders of the real estate syndicator, but it is helpful for real estate investors to know what benchmark is required of them to invest in these offerings. There are two different 506 exemptions of Regulation D Offering: 506b and 506c.
In a 506c offering, for example, you would need to be an Accredited Investor to invest in that type of offering. An accredited investor is anyone who earned in excess of $200,000 a year for the previous 2 years (or earned $300,000 a year including a spouse) and must reasonably expect to have the same earning potential going forward. They must also have a net worth of $1,000,000 or more (not including the equity in their primary residence).
In a 506b offering, for example, you can invest even if you are not an accredited investor but the regulations by the Securities and Exchange Commission limits the amount of non-accredited/sophisticated investors to only 35 in these types of offerings. Additionally, to invest in a 506b, potential investors must have a relationship with the real estate sponsor. “Relationship” is loosely defined by the SEC, so we won’t go into the logistics of our legal team’s interpretation.
Both Reg D 506c and 506b offerings allow for an unlimited number of accredited investors.
Understanding the power of real estate syndications
Once you begin to understand the earning power of passively investing in real estate syndications with a good sponsor, without ever having to be a landlord and do any of the day-to-day management, you will see that these kinds of deals can be an excellent way to potentially provide you with great cash flow. When you start working with a real estate syndication company, and you are in the process of reviewing the Private Placement Memorandum (PPM) and the Operating Agreement and the Investment Summary and various other documents, then I assure you, you will have a lot of questions.
That is where a good real estate sponsorship team comes into play. A good sponsorship team – general partners – will always be available to take calls from their potential investors, provide extensive information to the investors, and make sure everyone has a complete understanding and is 100% comfortable with the investment BEFORE they invest in a real estate project.
Investing in real estate can be a big step, and you should have all of the questions that you may have answered. While we are always available to our investors for any questions they may have, it is a good idea for any investor to conduct their own due diligence on the project. Furthermore, most people are unfamiliar with real estate syndications, so it’s very likely that your friends and family will not be able to answer any questions you may have, but more importantly, they may not even know what you are talking about.
Performing your own due diligence
As with any investment, you will want to perform your own due diligence on the investment being offered as well as the company and sponsors. So, that’s why it is so important to have a trusted deal sponsor with a successful track record as well as your ability to perform your own due diligence. For this exact reason, it’s important you find a trusted, knowledgeable resource to get your questions answered and do plenty of your own research.
In an attempt to make this more understandable, we will address 4 big questions:
- What types of properties can I invest in by syndicating?
- What are some of the risks of investing in real estate syndications?
- Where can I find real estate syndication opportunities?
- What are some of the differences between private real estate syndication opportunities and crowdfunding sites?
This will hopefully clarify a lot of questions you may have, so let’s jump in!
What types of properties can I invest in by syndicating?
You can invest in private real estate syndication deals such as an apartment building, a self-storage facility, mobile home parks, a development investment property, hotels, student housing communities, warehouses, industrial complexes, office buildings, assisted living facilities, and much more. Some real estate syndication opportunities are for construction projects that are ground-up, and other real estate syndication opportunities are a buy-and-hold investment strategy that entails improving efficiencies and remodeling units to further stabilize the property and increase the value of the asset while holding for a number of years with the ultimate goal of exiting the property with an anticipated profit and a profit split with all of the investors.
A great example of a value-add real estate investing strategy is to acquire an apartment community that may have deferred maintenance where units may need considerable updating or energy efficiencies need to be improved. For example, the kitchens and bathrooms may be outdated, the flooring needs to be replaced, the building needs energy-efficient modalities installed, and the landscaping and exteriors may need extensive improvements.
By making those improvements, we can increase the living standards of the community, which increases the income of the property and thus, increases the overall property value. Win-win, right?
What are some of the risks of investing in real estate syndications?
As you already know, every investment has risks. Real estate syndications are no exception.
One of the biggest risks can be in the business plan execution and the sponsor team and property management company in charge of that task. That’s why it is imperative that you are working with a deal sponsor team – general partners – that have a proven track record of success.
Don’t be lulled into slick marketing presentations if the deal sponsors can’t answer the questions you need to know or answer your questions in a way that will make you feel comfortable in proceeding with this initial investment with this team.
The general partnership team needs to be able to execute the business plan to the best of their ability even when things don’t go according to plan.
You will want to invest with sponsors who can demonstrate a strong track record in the asset class you are investing, and they need to prioritize capital preservation for the individual investors that are investing in these opportunities.
There Are No Guarantees with Any Investment
Varying real estate sector conditions and economic conditions can always pose a risk. Although we can forecast real estate market conditions and economic conditions, there is never any guarantee that we will know (or forecast) conditions exactly as was proposed. No one can predict the future, no matter how much data we have. No one can predict what the market and economic factors will be at the end of a projected hold time.
That said, what you want to look for is that if, for example, the projected hold term is 5 years, you will want to see that the loan term is at least 5 years (preferably longer) to make sure that in the event of unfavorable real estate market conditions or unfavorable economic conditions, that the sponsor team has more time – a buffer – to meet the business plan objectives so that you can capitalize on the anticipated equity splits and returns.
As a limited partner / passive investor – an equity partner, you may be concerned about what your level of personal liability is in these investment properties. And the good news is your liability in these real estate syndication opportunities is limited. At worst, you could lose your original investment capital, but you could not lose more than that; that is why it is called a “limited” partnership.
Where can I find real estate syndication opportunities?
As we discussed earlier, publicly advertised real estate syndication opportunities are for accredited investors only. So, how does someone get to invest in a real estate syndication deal? How would someone interested in learning about the opportunities find them?
The best approach in finding deal flow into real estate syndication opportunities is to network with people, like PCRP Group. We always have outstanding real estate syndication opportunities available for investors, but we also know dozens of syndicators who syndicate other assets classes that we don’t invest in, and we can help guide you to other sponsors if our deals are not what you are currently looking for.
The good news is that we know syndicators in virtually every asset type and asset class, such as other apartment syndicators, self-storage facility syndicators, mobile home park syndicators, assisted living syndicators, industrial complex syndicators, etc. So if our deals don’t quite suit you, we can likely direct you to some other sponsors who do have the type of deals you may be looking for.
The syndication community is really quite small, and once you make the connections with people who can help you, you’ll easily be able to find sponsor teams and an array of real estate syndication opportunities that can fit your investment goals.
What are some of the differences between private real estate syndications and crowdfunding sites?
You might have heard of someone investing in a syndication deal on a crowdfunding site for a couple of thousand dollars – the amount of money varies. This is because there are now crowdfunding sites like Fundrise and RealtyMogul that are available for people to passively invest in real estate where you do not need much money.
Real estate crowdfunding sites may be a perfectly fine place to start for some investors who may not have enough cash to start investing with private real estate syndications. However, there are some factors that you should be aware of.
First, virtually all of these crowdfunding investment platforms have a requirement that you must be accredited to invest in the offerings.
Also, some of these crowdfunding platforms do offer investments into REITs (real estate investment trusts) as an alternative available to non-accredited investors. Typically, you can invest in these REITs with a low minimum investment, and that may be a good place for you to start, with say $500, to see how you feel about this approach. You should know, however, that investing in REITs is not the same as investing in private real estate syndications.
Other differences between REITs and Real Estate Syndications
When you invest in a REIT, you’re investing in a company that buys real estate; you are not investing in the real estate per se like you are when you are a limited partner investing in a real estate syndication. Investing in a company like a REIT may still afford you good returns, but you are investing in a number of different assets that you will likely not be privy to. Whereas, when you invest in private real estate syndication, you have direct ownership into an asset that you know exactly what type of asset it is and where it is, so a real estate syndication gives you more control ultimately.
The starkest difference between a REIT and private real estate syndication for passive investors is the extraordinary tax benefits that you receive with private real estate syndication that you do not receive when you invest in a company such as a REIT. This is one of the main reasons why real estate syndications are very desirable to most investors. But it may be helpful just getting your feet wet into this type of investing to explore real estate crowdfunding sites just to see if that is a good fit for you at this stage of your investment strategy.
At the end of the day, the best way to move forward with any investment strategy is to understand the varying risks, understand what the terms mean, understand what different options are available to investors, what type of assets are available for you to invest in, and where to locate deals that fit your comfort level and your investment strategy.
A good deal of people invest in real estate syndications, but they may not be for everybody. Just know syndications can be an extraordinary way to diversify your portfolio, gain tax advantages, increase your annual income, and help you to grow your wealth overall. Now that we’ve covered the basics of what you need to know in how to passively invest in real estate opportunities, dive into the process of checking out your options.
Just know we’re always available if you have any questions. In the meantime, Earn Passively & Live Abundantly!
Ready to Learn More?
The best way for you to learn more about commercial real estate syndications is to join the PCRP Passive Investor Club.
Through the PCRP Passive Investor Club, you’ll get a priority review of all the deals we offer. We’ll work with you to determine your investing goals and then present you with the best deals to meet those goals. We’ll then guide you every step of the way as you invest in those deals.
So if you’re ready to start investing passively in institutional-grade, commercial real estate in fast-growing, climate-resilient markets in the U.S., join the PCRP Passive Investor Club – IT’S FREE! – and get started on your path to EARN PASSIVELY and LIVE ABUNDANTLY!
If you would like to know more about what we do and how it may be of value to you, please reach out to us anytime. We’re always happy to help!