Real Estate Syndications
UPDATED: September 23, 2013
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A real estate syndication establishes, sells, buys, and operates real estate investments. Typical forms for a real estate syndication are corporations, limited liability companies, and full or limited partnerships. A real estate syndication was a favored tax shelter in the 1980’s, but changes under Internal Revenue Service guidelines and the downturn in the real estate market caused this financial device to lose its popularity.
Understanding the Real Estate Syndicate
In its simplest form, a real estate syndicate is simply the pooling of money from numerous investors and organizing these funds as a whole into real estate projects. The moneys contributed can be used as an equity investment to a real estate project in addition to a commercial loan secured by a mortgage or trust deed to fund the bulk of the cost and development of the project. Investing in a real estate syndicate is essentially investing in a commercial real estate venture. Common examples would be the purchase of land to develop a residential apartment complex or an industrial park for small scale manufacturing of items.
Investing in a Real Estate Syndicate
Investing in a real estate syndicate requires due diligence in looking into the pros and cons of the potential investment. There are never any guarantees that the venture will be profitable. As such, it is highly recommended that individuals considering investing in a real estate syndication do a thorough background search of the individuals involved in getting the project off the ground, and consult with their financial advisors as to the merits of the investment and inherent risks. The benefits of investing in a real estate syndication is that a person can end up owning a small percentage in the real property being offered without having to be involved in the day-to-day management of the project.
How a Real Estate Syndication Makes Money
The person who desires to create a real estate syndication must comply with the laws of the state where the real estate syndication is to be created and operated. The syndicator of such a venture usually receives compensation for locating the property to be purchased, doing the due diligence for its acquisition and intended development, and getting the purchase to close. Investors in the transaction typically pay the syndicator’s fee based upon a percentage of the costs of the transaction when the targeted property is acquired. The syndicator also receives a management fee, typically based upon a percentage of gross revenue on a yearly basis. For instance, if there has been an apartment complex constructed and owned by the syndication, the gross profits for management of the apartment complex would be paid to the syndicator for collecting rental money, maintaining the complex, paying insurance, taxes, and making repairs.
A person can also make money through a real estate syndicate by investing in the project itself, which is typically the case. The investor typically receives a high rate of interest paid quarterly on his investment (7% to 9% per annum), besides maintaining an ownership interest in the syndicated project. Many investors also have the opportunity to sell their interest in any real estate syndication to a willing buyer or even to the syndicator.
Concerns About a Real Estate Syndication
In most states, the Department of Corporations oversees real estate syndications to protect the public as well as potential investors, requiring yearly reporting by the syndicator for each real estate syndication. In the past, many fraudulent syndication projects appeared, where investors lost significant sums of money by investing in purported reputable syndication projects. Investing in a real estate syndication should be done only after a thorough investigation of the people heading the syndication and the project itself. Many real estate syndications over the past four to five years have failed as a result of this country’s poor economy and real estate market.