What You Need to Know About Syndications
Updated: Aug 31, 2019
Every portfolio is different, but every investor has similar goals. You want to maximize your portfolio’s value with the least amount of risk. What you don’t want to do is gamble with your money – you want to make calculated risks that will pay off in the long run.
When you’re new to a type of investment, it feels risky. It can even feel like gambling. Investing in anything without first understanding it does carry risk, which is why you’re here.
You’ve heard about syndications, but what are they exactly?
In this short Madison Investing guide, you will learn what real estate syndications are, uncover what you don’t know about them, and what it takes to get involved in this increasingly popular and desirable investment.
What is a real estate syndication?
Related: Check out this video for more (https://www.youtube.com/watch?v=8t9gbEp0LmM)
A syndication is a group of investors that pool their money together to purchase properties. The properties are then managed by an experienced company or group of individuals.
For example, a single investor may have $50,000 available capital in their investment portfolio. This investment wouldn’t go very far in buying a home to rent in a desirable neighborhood, and they would still be left to manage the property, find tenants, and act as their own landlord. This amount of capital would also not be enough to purchase a commercial rental property that provides a stable, regular stream of income.
The $50,000 could be used along with money from other investors to purchase rental homes or commercial properties, allowing each member of the syndication to own a portion of a real estate portfolio. Based on the size of their investment, each investor in a syndication owns a percentage of all the investments in that syndication. The entire syndication can be comprised of a wide variety of assets.
At Madison Investing, we focus on specific commercial real estate asset types. Our projects mainly feature:
Mobile home parks
Other commercial rental properties
The syndication team takes out a commercial loan to purchase the property, which means they may be able to secure a $40M property for far less capital than $40M worth. The pooled investors in the syndication are referred to as "Limited Partners," while the Operator - also known as a “Deal Sponsor” or "General Partnership" - manages the entire project.
This is the basics of real estate syndications. However, there are several things that are helpful in providing the insight needed to take advantage of syndications and help them become an important part of your growing investment portfolio.
What you don’t know about real estate syndication
Here are 5 things you might not know about real estate syndication that will help you better understand why they are becoming a favorite among goal-focused investors looking to grow their portfolios.
Monthly or quarterly payments -- passive income
Commercial real estate syndications provide investors with a passive stream of income. Coming in either monthly or quarterly payments, each investor receives regular payments throughout the life of the syndication. This type of passive income is extremely attractive to the investor because there is no management or administrative tasks required of the investor on an ongoing basis. The operator does the work.
No tax payments are required on income received from the regular payments from the investment
Despite receiving regular payments for being part of the syndication, this income is most likely not taxed. This provides a significant benefit over other taxable sources of passive income that investors add to their portfolio.
Syndications carry significant decrease in individual risk
While an investor who purchases a rental home to lease to an individual family runs the risk of 100% vacancy with the departure of a single tenant, meaning if it’s not rented, they receive no rental income, members of a syndication face less risk for two reasons:
There is a pool of investors, spreading out the burden of risk. Commercial apartment deals dozens or even hundreds of units, meaning if just two of 400 units aren’t rented, the syndication still generates income on more 99% of the units, instead of incurring a total loss that month on a single property rental. When a single family rental loses a tenant, the vacancy rate jumps from 100% to 0%, overnight.
Investors receive a large payout after around 5-10 years.
Commercial real estate syndications are structured in a way to provide regular passive income to investors, and to give them a return on their investment in the long-term. The commercial properties that are part of the syndication are later sold, and the return on this sale is then paid back to the syndication investors.
Not every type of investor can join syndications.
Syndications are open to specific types of investors, which we will discuss below. Not everyone has access to join a syndication.
How do I get involved in real estate syndication?
Joining a real estate syndication is not quite as simple as purchasing a stock, but it is one of the simplest passive income streams to start that you will find anywhere.
Real estate syndications are considered Private Offerings which are regulated by the SEC under Regulation D. This requires investors to be either sophisticated or accredited investors.
While there is no legal definition for Sophisticated Investor, we take take a look at several factors when working with investors of different levels. For the Sophisticated investor, we want to know that they make a strong income (anywhere between $100,000-$200,000) for at least two years. We also look at joint income levels and net worth, beyond the primary residence. Ultimately, what matters most to qualify as a "Sophisticated" is that the investor clearly understands the benefits and risks associated with the investment decision they are making.
Accredited Investors are less restricted in their access to real estate syndications because these individuals have an annual income of over $200,000 that they have maintained over the past two years, or a joint income over $300,000. Others hit accredited status by having a net worth excess of $1,000,000 (excluding their primary residence).
Start with Madison Investing
Beginning your journey with Madison Investing and continuing to learn about syndications is extremely straight forward. Simply join our mailing list here to receive regular updates and notifications when investment opportunities are available.
Don’t stop just yet! After joining our mailing list, keep learning to increase your chances of moving your investment portfolio closer to your goals. Read more from Madison Investing by clicking on the articles below:
No Offer of Securities—Disclosure of Interests
Under no circumstances should any material at this site be used or considered as an offer to sell or a solicitation of any offer to buy an interest in any investment. Any such offer or solicitation will be made only by means of the Confidential Private Offering Memorandum relating to the particular investment. Access to information about the investments are limited to investors who either qualify as accredited investors within the meaning of the Securities Act of 1933, as amended, or those investors who generally are sophisticated in financial matters, such that they are capable of evaluating the merits and risks of prospective investments.
Disclaimer: This article is intended for educational purposes only and does not constitute investment advice. You should always contact a registered financial professional before acting on this, or any advice. I am not a tax advisor or financial planner. This article represents my opinions.