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This post was updated Apr. 4, 2024.
If you’re drawn to the idea of earning passive income, spreading your risk and owning a piece of premier commercial real estate, then investing via a real estate syndication could be a smart choice.
A real estate syndication is essentially a group investment in which a number of investors put money toward a high-value commercial property, such as an office building, a self-storage facility or a multifamily property. By pooling their capital, investors get access to a property they likely couldn’t acquire alone.
Once the property becomes profitable, investors are paid quarterly distributions in cash. They also receive a payout if and when the property is sold.
A real estate syndication might sound like a real estate myth that’s too good to be true, but it’s legit. However, there are some disadvantages to consider before deciding if it’s right for you.
How a syndication works
A sponsor or general partner spearheads a syndication by scouting the investment opportunity, contacting investors and managing the property.
The investors or limited partners contribute capital and receive shares of equity and distributions of profit. Investors don’t typically have a say in the management of the property, although they’ll receive regular updates.
Who can participate
A real estate syndication is like a crowdfunded investment, but instead of investing through an app, it’s only open to a select group of proven investors.
To invest in most real estate syndications, you typically have to be an “accredited investor.” That means you have an individual income of at least $200,000 or a combined income of $300,000 for two consecutive years. You can also qualify if you have a net worth of $1 million, not including the value of your primary residence.
If you’re a non-accredited investor but still want to participate in a real estate syndication, you are legally allowed to invest in a 506(b) deal. You’ll have to network your way into that opportunity, though, because 506(b) deals can’t be publicly advertised.
Don’t delay — 506(b) deals can have only 35 non-accredited investors.
How you get paid
Once you invest in a real estate syndication, there are a number of ways you could be paid.
Quarterly distributions
Real estate syndications typically pay distributions quarterly out of the property’s net operating income. These distributions may not start immediately if the property needs upgrades or repairs, but they shouldn’t be delayed more than two quarters after you make your initial investment.
Sale of the property
If you keep your money in for the entire investment period, you’ll receive your initial investment back once the property is sold, plus a share of the profit based on your equity. However, if there are outstanding expenses or debts related to the property, those must be settled before distribution.
Refinancing
Occasionally, improvements or upgrades to the investment property will increase its value enough that refinancing to more favorable terms will free up capital that can be returned to investors.
Pros and cons
A real estate syndication is an exceptional way to invest your money, and it can produce excellent returns, but there are also drawbacks to consider.
Pros
Great returns
Multifamily syndications routinely deliver at least 10 percent returns after taxes and fees. That far outpaces the S&P 500 Index from 2000 to the present.
Truly passive income
There are a lot of investments that promise passive income but actually require a lot of work to secure that income. A real estate syndication is truly passive income. You won’t have to do anything except cash your quarterly check.
Stability
A real estate syndication offers much more stability than investing in a real estate investment trust or putting your money in the residential market. Home values can fluctuate wildly because of buying and selling trends, but sponsors who lead syndications usually find solid, stable investments that offer exceptional returns.
While there’s no sure thing, you should feel confident investing your money in a syndication.
Depreciation
One of the biggest benefits of investing in a real estate syndication is that you’ll be able to take advantage of depreciation on the investment property. Depreciation is based on the lifespan of the property, and each year, owners can deduct a certain amount of depreciation from their taxes.
This can dramatically reduce your tax burden, and it’s one of the most coveted benefits of owning real estate.
Cons
Long holding periods
Once you put money into a real estate syndication, you’re usually required to keep your capital invested for a significant time. Typical holding periods are five to 10 years, so this is very much an investment that is not liquid.
If you really need to pull your money out, you do have options. When you invest in a real estate syndication, you essentially buy shares of the investment, usually through an LLC. If you absolutely must pull your money out of the syndication, you can often sell your shares to other investors in the syndication or those outside of it.
You’ll need permission from the general partner or sponsor to do so, though. Carefully read the fine print in your initial paperwork to see if you’ll be allowed to sell your shares.
High minimum investment
There is a steep price of admission to most real estate syndications. Most syndications require you to put up at least $50,000, and minimum investments of $100,000 aren’t rare, either.
Very little control
One of the benefits of investing in a real estate syndication is that you don’t have to do anything to reap your passive income. On the flip side, even if you’re inclined, you can’t do anything to manage the syndication.
As a passive investor, you’ll have no say in how the property is managed, and you won’t even be able to pull your money out by selling your shares unless the sponsor approves it.
Once you buy into a real estate syndication, you’re on a ride you have no control over. But sit back and relax. It’s probably going to be pretty lucrative.
Luke Babich is the CSO of Clever Real Estate in St. Louis. Connect with him on Facebook or Twitter.
