Traditional real estate investing is very demanding; 24/7 property management, third party vendors, corporations, mortgages, insurance policies, taxes, tenant turnover, leasing, evictions, rent collection, capital improvements, along with federal, state and local laws to abide by.
Typically, new real estate investors will start with a small building. These properties are generally the most difficult to manage. They are not big enough to profitably hire a 24/7 management company and as soon as one tenant moves out; their cash flow decreases and frequently turns negative. The investor has essentially purchased a business that is open 24 hours a day.
Syndication provides investors with all of the benefits of real estate, without all of the responsibilities; truly making real estate a lucrative, passive investment.
A primary benefit of investing with a syndicate is the expert knowledge and skills gained by partnering with several real estate professionals. Instead of relying solely on one individual investor’s expertise; syndicate investors are able to leverage the intelligence of an experienced team. This is perfect for the busy professional that is time-constrained and unable to learn all the facets of real estate investing.
Similar to other industries and businesses; when you purchase in bulk, your cost is reduced. The decrease in cost is realized across the board; from your management company, to your landscaping contractors, to your cost of capital; consequently increasing the property’s net operating income.
Traditionally, when economies of scale are discussed, the benefits are purely financial. An additional and commonly overlooked advantage, possessed by syndicates, is their relationship with; vendors, brokers, lenders and managers. A broker who consistently sells a syndicator, multi-million dollar complexes, will spend considerably more time finding them great deals while also providing valuable market insight. The broker will send the syndicator; off market deals, profitable value-add deals and will practically become a member of the syndicator’s acquisition team. An amenity that is unavailable to new or smaller investors.
Syndication allows individual investors to easily diversify among a number of different properties, in different markets. Diversification is ordinarily very difficult with direct real estate investments, however; syndication makes diversification extremely easy.
Investors are capable of diversifying their real estate holdings between different markets and property classes. The ability to effortlessly participate in syndications for; apartment buildings, high-end commercial buildings, office space, self-storage, mixed-use properties etc. are one of the allures of property syndicates.
Direct real estate investors are customarily unable to partake in choice properties because of their high sale prices. Typically, a real estate investor will be required to invest 30% (25% for the down payment and 5% for the closing costs) of the sale price in order to purchase a commercial property; plus show proof of additional liquid assets (an additional 10% of the purchase price). This 40% constricts the direct investor’s purchasing power. These investors are usually left purchasing small C and D class properties with minimal appreciation and maximum headaches.
Since real estate syndications pool the funds of many investors; it allows individual investors access to large, high-quality properties. Instead of providing a 30% down payment themselves; the syndicate might be offering individual shares of the investment for only 1%-2% of the purchase price. The syndicator will also handle the loan approval process; including signing on the loan. A $20 million property might now be accessible to an individual investor for $25,000 per share. The majority of commercial real estate transactions are completed using some form of syndication.
Minimizing risk is easily accomplished with real estate syndications, coinciding with the diversification benefit. Instead of investing 100% of your capital into a single investment, an investor is able to easily spread their capital over several separate investments.
Syndicate investors are “limited partners” while the “syndicator” is the “general partner.” A limited partner’s risk ends after they have made their investment. A limited partner has no exposure or liability for any; lawsuits against the property, mortgages on the property, liens etc. The limited partner simply invests a set amount of money without any other responsibility or obligation including; personal liability or credit risk.
Real estate, in general, has always been an excellent inflation hedge, however; cash flowing, commercial real estate, with long-term, fixed debt, provides the highest returns in its property class. The limited supply and high demand of apartments, along with other commercial properties, continually outpaces the rise in inflation. A cash flowing, commercial property that is properly leveraged will significantly outperform other asset classes during any inflationary period.
Real estate syndication provides investors with ownership in actual tangible, hard assets. These tangible assets continually carry an economic value and their values minimally fluctuate, unlike stocks. Gold and silver are other hard assets but they do not provide any type of quarterly return, along with the fact that if you purchased gold in 1980 and held it to today, you would have actually lost money to inflation.
Real estate syndicates allow an investor, a limited partner, to be 100% passive in their investment, with no other responsibilities. The syndicator sends monthly updates and quarterly reports along with quarterly distributions that are directly deposited into the limited partner’s bank account.
We previously outlined all of the benefits of commercial real estate, but unlike other asset classes; commercial real estate pays consistent quarterly distributions, while also providing consistent appreciation. Over the past 90+ years, the S&P 500 has had 28 down years, 3x-4x more down years than commercial real estate. An excellent example why you cannot borrow money from banks to buy stocks but, you can borrow money from banks to purchase cash flowing real estate.