Xem thêm

Where To Find The Best Real Estate Syndication Deals

CEO Khai Intela
Real estate is a lucrative asset class for building long-term wealth. Unlike stocks, real estate doesn't vanish overnight during an economic downturn. Finding great real estate syndication deals may require some time, but they do...

Real estate is a lucrative asset class for building long-term wealth. Unlike stocks, real estate doesn't vanish overnight during an economic downturn. Finding great real estate syndication deals may require some time, but they do exist, thanks to the emergence of online real estate crowdfunding platforms.

Unlike other investments, real estate offers stable cash flow through rental income. Rental agreements often remain intact even during a downturn due to long-term leases or tenants who are unwilling to renegotiate downward. Additionally, with interest rates at historic lows, the value of cash flow from rents has skyrocketed. This means that it now takes a significant amount of capital to generate the same level of risk-adjusted income.

Sophisticated investors are turning to real estate syndication deals as a way to earn passive returns without the hassle of managing physical properties. In my own experience, after selling my San Francisco rental home in 2017, I reinvested $550,000 of the proceeds in several real estate syndication deals.

As a new father with limited time and high property prices in San Francisco, I sought to reinvest in more affordable markets like Austin, Texas, and Charleston, South Carolina, where rental yields are much higher. While San Francisco offered cap rates as low as 2.5%, these other markets boasted cap rates of 8% or higher. Let's delve into the world of real estate syndication and explore how to invest in these opportunities.

What Is A Real Estate Syndication Deal?

A real estate syndicate involves a group of investors, known as limited partners, pooling their money into a real estate transaction organized by a sponsor. To participate in a real estate syndication, several requirements must be met:

  1. Accredited Investor: You need to earn more than $250,000 as an individual or $300,000 as a married couple, or have at least $1 million in assets outside your primary residence.
  2. Connections: To invest in a syndication, you either need to know the sponsor or receive an invitation from a limited partner.
  3. Fundamental Understanding: Never invest in something you don't understand. You must comprehend the type of real estate investments being made, the timeline, and the return objectives.

In a real estate syndication, investors contribute capital, and the sponsor brings their operational expertise, know-how, and often their own capital as a demonstration of their commitment to the project. It is essential that the sponsor has a personal stake in the investment to align their incentives with the limited partners.

Real Estate Syndication Structures

Real estate syndication deals are typically structured as Limited Liability Companies (LLCs) or Limited Partnerships (LPs). With an LP structure, the sponsor serves as the General Partner/Manager, while the investors become limited partners or passive members.

The syndication structure is formalized through operating agreements (LLCs) or partnership agreements (LPs). These documents detail how distributions are paid out, establish voting rights, and outline any fees the sponsor receives before distributions. It is crucial to carefully read and understand these agreements, as they contain all the pertinent information for the investment.

Certain syndication deals employ a "waterfall structure" where some limited partners receive payment priority over others. For instance:

  • First, Class A Investors receive an 8% preferred return on their contributions.
  • Following that, Class A Investors are distributed 70% of the remaining cash flow.
  • Finally, Class B Members (Sponsors) receive 30% of the distributable cash.

These structures are detailed in the operating agreement and dictate how investors receive payments based on performance.

The primary purpose of forming an LLC is to protect the sponsor, not the investor, from potential liabilities arising from the investment. If the deal goes sour, the sponsor is shielded from investors pursuing their other assets.

Real Estate Investment Return Metrics

Understanding the key investment return metrics is crucial when evaluating a real estate syndication opportunity. The five main metrics are:

  1. Return of Investor's Capital: This metric outlines how and when your capital will be returned. Often, investors are paid back first before sponsors.
  2. Preferred Return: The preferred return represents the percentage paid to investors before any profit is distributed. In the example above, the preferred return is 8%.
  3. Catch-Up Clause: If present, the catch-up clause allows the sponsor to receive 100% of distributions before the carried interest kicks in. However, in the example provided, there is no catch-up clause.
  4. Carried Interest: This is how the profit is split between investors and sponsors once all other payments have been made. In the example, the split is 70/30.
  5. Internal Rate Of Return (IRR): The IRR is the estimated rate of return for the life of the project. Investors should exercise caution with overly optimistic IRR assumptions and consider adjusting them to be more conservative.

Real Estate Syndication Fees

Investors must be aware of the fees associated with real estate syndication deals, as they can eat into investment returns. It is important to request transparency from the sponsor regarding their fees and inquire about the expected IRR net of fees. Some common fees include:

  • Acquisition Fee: This fee covers the costs associated with closing the fundraising, including finding the deal, organizing the transaction, and purchasing the property.
  • Financing Fee: In cases where financing is involved, this fee covers the acquisition loan procurement.
  • Management Fee: The sponsor receives this fee for managing the assets of the company.
  • Property Management Fee: This fee compensates the sponsor for managing the property.
  • Disposition Fee: This fee is paid to the sponsor when the property is sold.

To maximize investment returns, it is essential to select opportunities with lower fees and higher potential returns.

Easiest Way To Invest In A Real Estate Syndication

Even if you are an accredited investor, gaining access to real estate syndication deals can be challenging without the right connections. This is where real estate crowdfunding platforms come into play.

Since the passage of the 2012 JOBS Act, real estate crowdfunding marketplaces have emerged, allowing both accredited and non-accredited investors to participate in real estate syndications. These platforms analyze deals before presenting them to investors, offering a valuable service for those who are unsure where to start. Furthermore, these platforms are incentivized to showcase only the most promising projects to ensure investor satisfaction.

Two leading real estate crowdfunding platforms today are:

  1. CrowdStreet: Based in Austin, CrowdStreet connects accredited investors with a diverse range of debt and equity commercial real estate investments. Their focus on secondary cities with lower valuations, higher net rental yields, and growth potential sets them apart. They also occasionally offer funds.
  2. Fundrise: Founded in 2012, Fundrise is open to both accredited and non-accredited investors. They are the pioneers of private eREITs, or private real estate funds. Fundrise impresses with their innovative approach and strong track record.

Both of these platforms have established marketplaces and rigorous underwriting processes. Signing up is free, so I encourage you to explore their offerings.

As always, conduct your own due diligence and only invest in what you understand. Personally, I have invested $810,000 across 18 different commercial real estate projects nationwide. Since the end of 2016, my current internal rate of return is approximately 12%. Diversifying my real estate holdings and earning passive income has been incredibly rewarding, especially since I am a busy full-time father of two young children.

About the Author: Sam started Financial Samurai in 2009 as a way to navigate the financial crisis. He has since spent 13 years working at Goldman Sachs and Credit Suisse after attending The College of William & Mary and UC Berkeley for b-school. Sam owns properties in San Francisco, Lake Tahoe, and Honolulu, with a total of $810,000 invested in real estate crowdfunding.

Retiring at the age of 34, Sam's investments currently generate around $220,000 per year in passive income. In his free time, he enjoys playing tennis, spending time with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.

For more in-depth personal finance content, join over 100,000 readers and sign up for the free Financial Samurai newsletter. Financial Samurai, established in 2009, is one of the largest independently-owned personal finance sites, providing firsthand experience-based insights.