Ever wonder how someone can afford an apartment complex with hundreds of units or a towering skyscraper? The answer is through combining capital from multiple investors, often through a real estate syndication.
Most people are not familiar with this concept so let’s unpack it further by answering some key questions:
1. What is a real estate syndication?
At its most basic level, a real estate syndication is a group of investors that pool their money together to buy real estate. Rather than each individual purchasing smaller properties for themselves, the group of investors can combine their expertise and capital to buy a larger asset, such as a multi-family apartment building. These larger assets offer scale and efficiencies which increases the return for investors. Unlike publicly traded REITs (Real Estate Investment Trusts), real estate syndications offer significant tax benefits through direct ownership of the investment property.
2. What are the key roles in a real estate syndication?
There are two main roles involved in a real estate syndication: general partners (GPs) and limited partners (LPs). The GPs (also referred to as a “sponsor”) oversees the sourcing, acquisition, operation, and sale of the property. These are the people doing all of the work to create and execute on the business plan for the real estate investment property.
The LPs on the other hand, are the investors who simply contribute their capital to the investment, without any of the day-to-day responsibilities of managing the property. This means that the LPs are passive, hands off investors who will receive regular cash flow and equity from their real estate investment while avoiding the hassle of the 3 T’s (tenants, toilets and termites) that give landlords nightmares.
3. What types of real estate does a syndication invest in?
Because syndications are able to pool capital together to purchase large assets, investors are able to evaluate different types of real estate and choose which best align with their goals. The most popular type of asset for real estate syndications are multi-family apartment complexes as they are a great source of income and growth potential. While multi-family apartments are the most popular, GPs also evaluate other asset classes such as mobile home parks or self storage units. These diverse asset classes enable GPs to create different types of investment structures giving investors more choice and flexibility depending on their investment goals.