When you invest with a private real estate syndication, you are pooling your capital with that of other qualified investors for the purpose of investing in larger and more lucrative real estate projects.
This affords the lone investor an opportunity to participate with an organized group of like-minded investors in the ownership of a piece of income producing property that is too much to handle individually from a financial or risk aversion stand point.
Real estate syndicates own income-generating residential or commercial real estate and are secured by these tangible and quantifiable assets as collateral. This characteristic is untrue of many other investment vehicles and provides added security for your investment. Additionally, investing in private real estate syndicated deals gives the individual investor the ability to achieve extraordinary profits, generally, with no liability for debt.
Although the legal structure of a syndication can take many forms, it is generally accepted that a Limited Partnership (LP) or Limited Liability Company (LLC) is one of the best forms of group ownership of real estate investments. It offers all of the financial rewards and tax benefits of individual ownership without the burden of management responsibilities, liability for principal debt (in many cases), or large individual cash investments.
Real Estate Syndication in a nutshell
A Limited Partnership or Limited Liability company is formed by a group of investors to purchase and control a specific property. Each investor contributes what he or she wishes toward the purchase, usually in easy-to-divide units, such as 10% percent.
If the structure of the syndication is that of a limited partnership, then one of the members of the group, normally the developer or the investor who put the deal together, becomes the General Partner for the group and the investment.
The General Partner is granted all decision-making powers for the investment. This includes management, though he may hire a professional management company rather than handle it himself.
Everything that happens to the investment is at the sole discretion of the General Partner. He decides when major expenditures are needed, but will usually attempt to get a group opinion first. He determines the optimum time to sell or trade, and establishes the selling price. A good General Partner must always keep the goals of the group in mind and always act in the best interest of the other investors.
A General Partner also assumes total liability for the investment. Were a property to get into major financial difficulties, the cost (or loss) is his responsibility. The remaining partners in the group are Limited Partners. Their financial obligation is limited only to their initial investment. If the whole investment goes bad, the most they stand to lose is their initial investment.
Now you might be thinking, “Why would anyone in their right mind want to be the General Partner?”
The reality is that, if each investment is acquired with a strict set of investment standards, thorough due diligence is completed, and the property is managed properly, then the likelihood of a property going bad, is GREATLY reduced.
Although there are cases of this happening in today’s current economic environment, most of these toxic assets were caused by greed and not fundamental investment principles.
Additionally, the General Partner is usually paid for his services, and also has an interest in the income and future appreciation of the property, therefore, it is in his best interest to make the venture as profitable as possible.
Hopefully you were able to get a better understanding of real estate syndication and how they operate. If you have questions or if I failed to mention something in the post, please let me know in the comments below.
Better yet, let me know your thoughts regardless, leave a comment below and let me know what you think.
Comments are always welcomed and encouraged! Let me know your thoughts below in the comment section and feel free to retweet this post on Twitter.
You know of any good books on RE syndication ?
Hi Richard,
A few of the Real Estate Syndication books I have read are:
1.) Priciples of Real Estate Syndication by Samuel Freshman
2.) How to Put Together a Real Estate Syndicate or Joint Venture by Daniel S. Berman
3.) How to Play the New Real Estate Syndication Game by Richard R. Solem and Roger J. McClure
4.) Limited Liability Company for Group Investments by Fred Crane
5.) It’s a Whole New Business by Gene Trowbridge ( I haven’t personally read this one, but it consistently gets great reviews)
Hope this helps.
Thanks for the great post. I’d say that participating in a group of like-minded investors would make things easier for anyone who’s either a newbie or a pro in the business. The collaboration with the fellow investors could be a great opportunity to learn tips and strategies that can be very helpful in buying or selling properties.
Thanks for the info. I understand all of the responsibilities that you mentioned of the General Partner however need some clarification. You state that he is liable if the property goes bad. What exactly do you mean by that? Are you saying that if for some reason the property needs new roofing and new plumbing and that was not introduced when the deal was structured than he is responsible for paying for such repairs? Aside from that I think its pretty cut and dry. Find the deal, find financing, and operate it to the maximum of its ability. Thanks for your input and thoroughness as always.
The Trowbridge book is excellent. I attended one of his seminars and he is comprehensive in approach, personable in his delivery and enthusiastic about the topic. The book explains and outlines everything necessary to get started and to prosper in the syndication ‘game’…..
I am a licensed Realtor interested in multifamily R/E. I would like to organize a syndication to purchase multifamily R/E. My plan includes locating property and managing the property as a General Partner. Furthermore, I understand the quantitative aspect of determining whether or not the propose property is low or high risk. Can you recommend a good starting point?
Hey Itzik,
The general partner is generally responsible for any financial liabilities that are associated with the property as in defaulted mortgage loans, lawsuits, and things of that nature. In the event that the property needs new roofing or new plumbing, the general partner is responsible for ensuring that this work gets completed, but a good general partner would have already accounted for these capital expenditures in advance.
Yes, Gene is definitely is a great resource when it comes to real estate syndication.
Greg,
You best starting point is to get your investment criteria down on paper. If you understand the quantitative aspect of determining whether a property is a good deal, then you need to be able to explain your philosophy to potential investors. Create a nice simple brochure talking about you, your company, and your investment strategy and use this as a tool to meet potential investors. Once you have a feel for the investment returns that investors are looking for, you need to go put a deal together. Whatever you do, please do not talk about potential investment returns in your brochure. Keep all of the information very “general”.
I am planning to build the largest mall in the Bay Area with 12 andbuildings,combination of Condo Units,Office Tower and 60 Storey 5-6 Star Hotel, Resort and Card Club exclusively for the Hotel Guests only.How can this be possibble to be a Reality?
Great posting Khary.Indeed, collaborating with fellow investors would be a great start for anybody who’s new in this kind of business, and it would be just as great for the professionals as well because they can better come up with great ideas for either buying or selling homes and other kinds of properties.
All of the information I read thus far has been very helpful. My question is, how helpful are the bootcamps given by “gurus” or your local REIA chapters? Is it worth making the investment to attend?
What, in your opinion, is a reasonable number of partners that should be in the syndication?
Your input is appreciated.
Thanks!
Hey JR,
This is a very vague question. Do you already have plans designed? Have you gone through the approval process with the local planning board officials? Let me know where you are in the process.
Absolutely, collaboration is the key to success in this market especially in order to limit your potential risk.
In terms of bootcamps, you are gonna get hit with a lot of sales “pitches” and the information that MOST provide does not justify the cost in my opinion. What are you attempting to learn more about? Maybe I can point you in the right direction.
As far as the number of partners, it really depends on how much money you are attempting to raise. If you are raising a large amount of money and your minimum investment is relatively low, you may have a large number of investors. In general it is easier to manage a smaller amount of investors, so if you are just started out you might want to keep the number to less than 5, but it really depends on the deal.