Should I participate in a real estate syndication investment?

[Erin Wicomb]

I’ve noticed a few posts floating around about real estate syndication with some misconceptions. I’ve been in real estate acquisition and development for a decade and I thought I would shed some light on what syndication is and give some balanced information on why you would or would not participate. 

I’d be interested to hear about others experiences as well.

To start, what is real estate syndication?

Real estate syndication is simply pooling capital together from multiple sources to invest in real estate projects.

For investors, syndication offers investment opportunities in real estate projects that they wouldn’t otherwise be able to access. It’s as if the investor were purchasing shares or equity in properties or real estate projects.

How does it work?

Real estate syndication is a process that involves a sponsor to lead the operations of the project and investors to fund the project. You have two options for investing in a project: Debt or equity.

When you invest money on the equity side, you become a part owner in the project. This means that you are taking on greater risk, but for a greater return. Often you’ll receive quarterly distributions from your investment. The risk, of course, is that as an owner, if the project goes sideways you could lose your money.

If you invest on the debt side, you’re essentially a private lender for the project, but not an owner of the property. This comes with lower risk, but also lower returns. Where you could get 10%+ with equity, you’ll likely receive around 3% with a debt investment.

For either, it is important to understand the timeline of the project to make sure it matches your expectations. In many markets right now, it makes more sense to buy and hold than to flip (especially in commercial or mixed-use properties) so those investment timelines could be 2 years+.

Is it a good option for me?

This really depends on your risk profile, experience and the opportunity.

As discussed, on the equity side of real estate syndication you stand to make a greater return but you also assume more risk (which is typical in any investment). That is why it is very important to work with a sponsor with a strong track record and has a proven and capable team.

If you can work with a team that has done some real due diligence and knows the real estate market, it is definitely a safer investment; however, it’s not to say that you shouldn’t do your research, too.

As for your experience level, real estate syndication is an excellent entry point for those who are looking to be a passive investor. Because you’re leveraging someone else’s time and knowledge, you don’t really need to know much to invest and make a return. 

You do need to know enough to make sure you’re looking for the right opportunities though.

The downside in this scenario is simply that you have less control over the deal itself. Again, that is why it is so important to be sure that you work with the right people on the right opportunities.

Things to Look For

In my experience, it’s good to ask for the following on any opportunity:

• The numbers (What is the sponsor’s ownership of the property? What is the expected return? What is the minimum investment on the project? What is the projected income on the property?)

• Financing (How much debt + equity does the project require? What is the acquisition cost?)

• Timeline (What is the expected time to return on investment? If it is a rehab, what is the construction timeline?)

• Market Overview (What makes this area unique? How is the current state of the market? How do similar properties compare?)

• The Sponsor (What is the team’s experience? Have they done projects like this before? What were the returns on past projects?)

Have you ever participating in a real estate syndication project? If so, what was your experience?