Have you ever tried to save a little money every month so that you can one day have enough to invest in real estate?
Well, if you’re tired of waiting for that one day to come and want to start building your real estate portfolio today, real estate syndication may be the perfect opportunity for you!
Self-storage real estate syndication is the low cost way to enter the real estate market without spending a fortune.
But how does it work?
What is Syndication in Real Estate
Real estate syndication operates on a much larger scale than traditional real estate investments both in terms of the size of the property as well as the profits generated.
Real estate syndication is when a group of investors pool their money together to make up the investment capital necessary to invest in any particular real estate market. Typically these investors can not fund or handle managing the property by themselves.
Previously syndication was only available to exceptionally wealthy individuals with a high net worth. Things, however, have changed. Now it is open to ordinary investors with even the smallest sums of money. According to the Annual Impact Investor Survey 2020, 12,000 investors took part in syndication that year.
Real estate syndication deals are typically run as a limited partnership or an LLC. Two participants are involved in real estate syndication, the sponsor and the investor.
The sponsor is otherwise known as the general partner or syndicator and usually invests 5-10% of the equity capital.
The Sponsors responsibilities include:
- Scouting and selecting the real estate opportunities
- Underwriting property
- Raising money for the property
- Managing investor relations
- Managing tax returns
- Property management
On the other hand, the investors are known as limited partners and cover 80-90% of the capital but have no responsibilities.
Real estate syndication is an excellent source of passive income in real estate and cash flow. There are many other benefits of this type of investment opportunity too. These include:
- You don’t need to have any experience in real estate investment.
- As an investor, your risks are reduced because multiple investors are funding the property. This means your liability is limited.
- Real estate syndication offers access to more significant properties, and more units in those properties, leading to more stability through diversification.
You may be thinking, real estate syndication sounds a lot like crowdfunding.
While real estate syndications and crowdfunding are similar, unlike real estate private equity funds, investors may not be aware of the details of the properties they are investing in.
Both real estate syndication and crowdfunding have multiple investors, but the number of investors varies. Typically with crowdfunding, the aim is to get funding via as many investors as possible. However, these investors do not need to be in the sponsor’s network.
Another difference between crowdfunding and real estate syndication is the investment fees. Crowdfunding aims to have as many investors as possible, which means that the price of investment is much lower than the fee required to participate in real estate syndications.
How to Syndicate a Real Estate Deal
Knowing how to syndicate real estate deals is essential, not only for the sponsor but for the investor too.
Here are five basic steps to help you syndicate a real estate deal.
Analyze and select the right property market
The property’s location will be a massive factor in this step. You will need to pay close attention to the rental income, listing prices and cash on return. Important factors that need to be kept in mind before selecting the location include the affordability of the location and ensuring that you will receive a reasonable rate of return on your investment.
Once you have selected the location, a rental property analysis will need to be conducted. The rental property analysis helps find the cash flow of a particular property.
When you think of real estate, you may automatically think of homes and apartments. But, there is a whole other side to real estate investment opportunities, for example, commercial real estate.
Commercial real estate encompasses a whole range of properties, including those that offer facilities like self-storage. This diversity means that commercial property is an excellent market to consider during this research and analysis step.
The main benefits of investing in self-storage through real estate syndication are the consistent cash flow from rental income and low-cost operations. This is an essential part of real estate deals and what makes self-storage a great investment through syndication.
Find the property to invest in
After an in-depth analysis of the location and after conducting the rental property analysis, you will have a good idea of which properties are worth investing in.
Once you have selected your property, an inspection will need to be conducted by a member of the American Society of Home Inspectors. The purpose of this inspection is to ensure the property’s electrical system, building foundation, plumbing, and roofing are all up to standard.
Get the real estate deal under contract
Getting the real estate deal under contract means the seller of the selected property agrees to put your property under contract preventing the seller from entering any agreements with other buyers.
It is crucial to hire an attorney when syndicating real estate deals to limit the risk of potential lawsuits. An attorney will also ensure that you have adhered to the Security and Exchange Commission (SEC) rules. An attorney will also inform you about the process and the necessary documentation needed.
Look for potential real estate investors
The perfect investor is not just someone who has enough money to invest in this project but also someone who shares the same vision and values.
Close the real estate deal
This is the final step of syndicating a real estate deal. After completing due diligence throughout each of the steps, you will be ready to close. Your attorney should help you through this last step.
The Phases of the Syndication Process
The 3 main phases of the real estate syndication process are as follows:
The origination phase consists of all the basic steps included in how to syndicate a real estate deal. A brief overview of a few of the tasks the project’s sponsor will need to complete during this phase include:
- Construct a business plan.
- Complete an audit of the selected property’s financial records.
- Establish the structure that will hold the asset,–either a limited partnership or an LLC.
- Generate closing costs, renovation fees, and the down payment from the passive investors.
The implementation of the business plan occurs in the operation phase, which begins once escrow has been completed. A property manager or contractor could be very helpful during this phase of the real estate syndication process. Note that the operation phase can often take several years.
Typically, the tasks completed by the sponsor during this phase include but are not limited to:
- Management and ensuring all the property’s maintenance is done
- Collection of the rent
- Advertising available units
- Ensuring passive investors are paid
- Preparation of tax returns
The liquidation phase only occurs in the event of the sale of the asset. In this case, the capital will be returned to the investors involved in the real estate syndication.
However, as a result of the liquidation, the asset may be refinanced until eventually the asset can be sold.
All three real estate syndication phases are essential to ensure a profitable real estate syndication investment.
How can Real Estate Syndication Companies Help?
Although real estate syndication does not take a lot of management once you are an investor, it can be challenging to find the investment that is best suited to you. In this case, real estate syndication companies can be of great benefit.
As an investor in a real estate syndication deal, you do not need to have any expertise in investing. However, it still may be very beneficial to go through a real estate syndication company if you are not experienced in real estate investing.
A real estate syndication company will provide all the expertise needed to manage a real estate syndication deal effectively. A real estate syndication company will also be helpful with finding investors that are best suited to your vision to participate in your project.
In conclusion, real estate syndication is a great way to get a jump start on your investment portfolio and offers you a great source of passive income.
While you might be hesitant to invest in real estate apartments, the self-storage investment market may be an excellent alternative for you!
Bolster your portfolio and become a self storage investor now!