Investment property syndication involves pooling resources to purchase and manage real estate projects for profit. Investment syndications can invest in properties that are already under contract, buy and hold residential rental properties, or even make loans to real estate investors. Each investment property syndication model has its own specific benefits and risks, but they all share similar elements including: a corporate structure, legal compliance with securities laws, and an active general partner (syndicator).
Most syndicates are set up as limited partnerships or LLCs. The type of partnership you choose will have a big impact on your ability to attract passive investors and the amount of money you can raise. You should always meet with an attorney and do your research before choosing a legal structure for your syndicate. More info https://www.illinoisrealestatebuyersinc.com/we-buy-houses-wheeling-il/
During the due diligence process you should carefully consider your target market and what type of investment property you want to syndicate. For example, if you are planning to invest in a new construction project then a preferred return or waterfall structure will likely be the best fit for you since these structures offer ongoing cash flow returns throughout the project’s lifespan. On the other hand, if you are looking for an end sale then a straight-split structure may be better since this design offers a greater profit at the time of the property’s end sale.
Once you have identified and negotiated your investment property, it’s time to close the deal. This includes signing contracts, transferring property ownership, and funding the syndicated investment. After closing, the property management team takes over and handles all aspects of day-to-day operations and investor distributions as outlined in your syndication agreement.
There are different syndication fees and compensation that need to be considered as well. For instance, it could take years for a commercial development property to generate enough distributable cash to pay the investors’ preferred return and leave room for the syndicator to be paid in a promote (also known as carried interest).
Another issue is that your performance is tied to the performance of just one asset. This is a big risk factor because it means that you will only receive returns if the property performs as expected.
Finally, it is important to remember that despite the often rosy pro-formas that GPs use to attract investors, real estate investments are illiquid and highly leveraged. This combination of factors makes them much more volatile than other types of investments. As a result, it is very common for syndicated investments to underperform the GP’s projections. Moreover, it is also common for syndicated investments to produce a loss of capital, especially when run poorly. Therefore, it’s crucial to invest in a variety of syndicated deals and to carefully evaluate any newer syndicators until they have proven their mettle through several successful projects.