A real estate syndication establishes, sells, buys and operates real estate investments. Typical forms for a real estate syndication are corporations, limited liability companies and full or limited partnerships.
In its simplest form, a real estate syndicate is simply the pooling of money from numerous investors and organizing these funds as a whole into real estate projects. The moneys contributed can be used as an equity investment to a real estate project in addition to a commercial loan secured by a mortgage or trust deed to fund the bulk of the cost and development of the project. Investing in a real estate syndicate is essentially investing in a commercial real estate venture.
Investors in a real estate syndication can end up owning a small percentage of the real estate property being offered without having to be involved in the day-to-day management of the project. Investing in a real estate syndicate requires thorough due diligence and critical examination of the pros and cons of the potential investment. There are never any guarantees that the venture will be profitable. As such, it is highly recommended that individuals interested in investing in a real estate syndication do a thorough background search of the individuals involved in getting the project off the ground and consult with their financial advisors as to the merits of the investment and inherent risks.
The person who desires to create a real estate syndication must comply with the laws of the state where the real estate syndication is to be created and operated. The syndicator of such a venture usually receives compensation for locating the property to be purchased, performing the due diligence for its acquisition and intended development, and getting the purchase to close. Investors in the transaction typically pay the syndicator’s fee based upon a percentage of the costs of the transaction when the targeted property is acquired. The syndicator also receives a management fee, typically based upon a percentage of gross revenue on a yearly basis. For instance, if there has been an apartment complex constructed and owned by the syndication, the gross profits for management of the apartment complex would be paid to the syndicator for collecting rental money, maintaining the complex, paying insurance, taxes and making repairs.
A person can also make money through a real estate syndicate by investing in the project itself, which is typically the case. The investor typically receives a high rate of interest paid monthly on a preferred return status and quarterly on cash flow on his investment, besides maintaining an ownership interest in the syndicated project.
In most states, the Department of Corporations oversees real estate syndications to protect the public as well as potential investors, requiring yearly reporting by the syndicator for each real estate syndication. Investing in a real estate syndication should be done only after the syndication team and project itself are thoroughly vetted.