What is a real estate syndicate? It’s when two or more people come together to make a real estate investment. In this type of a formation, one person takes an active part in management and operations of the investment while the others are generally passive investors. Most of the capital required is raised from these passive investors. Although, the syndicator also invests capital as the investors want to see skin in the game from the manager. The manager also receives other forms of compensation in addition to the return on invested capital in the form of management fee. We will discuss this later.
A real estate syndication is not a form of legal structure. It’s just a word used to describe the group. Some of the legal structures are: Limited Liability Company, Join Venture, Tenancy in Common, Corporation, Investment Association, Real Estate Investment Trust, General Partnership, Limited Partnership
There are many reasons people chose to invest in a syndicate. At the top of the pyramid is free cash flow from operations. This is the cash that is generated from operations of the asset and left over after paying expenses and servicing the debt on the asset. This return is typically quoted as return on invested capital. Most syndicates return 10-12% per annum in the form of equal quarterly distributions.
Another reason is to control more real estate through the use of leverage. Leverage is when you purchase a property worth several times the owners equity. Speculation on the value of the property or the land is also one reason people choose to invest. Although one must not enter into a real estate deal purely for this reason as cash flow is king. The appreciation achieved on resale is a bonus. Most syndicates have a hold period of 5-7 years, so one needs to be aware that their capital will be locked up for that long.
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