If you have been looking to invest in real estate, specifically multifamily, then you may have heard the word “syndication” thrown around. For some of you, this word may be foreign, but I promise it is a straightforward concept. Simply put, a real-estate syndication is when investors come together to pool their money in order to purchase a piece of real estate as well as execute the property’s business plan. Structure: The structure of a syndication will be made up of General Partner(s) (GP) and Limited Partner(s) (LP). The General Partner is also known as the Sponsor or Syndicator. They are responsible for sourcing the deal, securing financing, raising capital, developing/executing the property’s business plan, asset management, and much more. The Limited Partner, also known as the passive investor, puts their own money into the deal. As mentioned before, this capital is used to acquire the property as well as execute the business plan. Part of the business plan may be to renovate all the units or add new amenities which is where a portion of the capital raised would be deployed to. All syndications are structured differently, some with preferred returns and some not, but what is a common practice in syndications is an equity split. These splits may differ across deals so for this example we will use an 80/20 equity split which is ultimately the profit split. What this means is that the Limited Partners (LP) will get 80% of the equity while the General Partners (GP) will get the remaining 20%. The reasoning behind this is that the LPs put their own money into the deal in order to purchase and execute the business plan so they will get the majority of equity in the deal. The GPs will then get a smaller piece of the equity because they have sourced the deal/investment opportunity, will execute the business plan, hire staff/property management, work with contractors, secure financing, etc. Along with their piece of equity, the GPs will also collect an acquisition fee at closing as well as asset management fees over the course of the hold period. As previously mentioned, there are plenty of ways to structure these deals, but this will give you a great base understanding and expectation for what you may see. Also, please note that many GPs will also invest their own capital into the deal too. This is fairly common unless there is a long list of LPs looking to invest, which would then force the GPs to withhold from investing in order to allow more passive investors into the deal. Types of Offers: Within the industry there are two main types of offerings which will signify whether you, the investor, can participate in the deal. What does this mean for you? Below I will walk through the difference between a 506(b) and 506(c) offering and what that means for a passive investor. 506(b) A 506(b) offering is an investment that allows the syndicator to accept investments from both non-accredited and accredited investors. This type of offering allows for an unlimited number of accredited investors and up to 35 non-accredited investors. These offerings may be harder to find because they cannot be marketed to the general public. The investors must have a substantive pre-existing relationship with the syndicator for the opportunity to be presented. With these being the rules set in place by the SEC, it is important to make sure you build a good relationship with syndicators so that you can qualify for one of their deals if it happens to be a 506(b) offering. 506(c) A 506(c) offering is an investment that only allows the syndicator to accept investments from accredited investors. Similar to a 506(b) offering, a 506(c) offering allows for an unlimited number of accredited investors. These offerings may also be easier to come across since they can be publicly marketed and there does not need to be any substantive pre-existing relationship. Although you may see more of these deals, it is crucial to investigate each one. It is always worth speaking to and building a relationship with the syndicator(s) to make sure you trust them and their business model. How do passive investors make money? Investors in syndications will make money off of the cash flow and from either the refinancing or disposition of the property (which will be determined in the business plan). Some syndications are structured with a preferred return which is usually between 6% to 8%. What this means is that before the GPs receive any money, the LPs will be guaranteed that percent return on their money each year. Any money leftover will then be distributed based on the equity split. Commonly, you will see an 80/20 or 70/30 split. Using the 70/30 split, this is simply saying that if you have $10,000 of profit then the LP would get $7,000 and the GP would get $3,000. Conclusion: Now that you understand more about what a Real-Estate Syndication is it is time to begin performing some research on potential GPs that you would trust with your money. Networking events are a great way to meet new people that are already syndicating deals and may be looking for new investors. Building relationships will be imperative to your success as a passive investor. No one wants to invest their hard-earned money and have it managed by poor operators. Therefore, you should get out, network, ask for referrals, and perform your own due diligence in order to find the best syndicator for you!
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