Many physicians are looking for alternative sources of income and are looking for ways to diversify their investment portfolio from the volatility of the stock market. Some have heard of real estate syndications, but what exactly is a syndication? For those who have not heard of it, real estate syndications can be an attractive investment vehicle for busy professionals who do not have the time or experience to actively manage real estate. As an investor in a syndication, you can put your capital to work for you, leveraging the benefits of investing in real estate that can provide passive income independent of your time.
In this post, we provide an overview of syndications so you can better understand and assess if syndications are a good fit for your portfolio.
Purpose
The syndication structure allows for individuals to pool their resources together to purchase an asset. By combining each individual’s knowledge, experience, time, and capital, everyone is contributing into the project and sharing in the risks as well as the returns. Without pooling resources together, it would otherwise be impossible to complete the transaction on an individual basis. Typically, syndications are used for commercial real estate transactions which include, but are not limited to: multifamily apartments, self-storage facilities and manufactured home parks.
Players
The syndication is often completed through a limited liability company (LLC). The LLC is typically composed of general partners and limited partners. The general partner (GP) is also referred to as a syndicator or sponsor. They are responsible for overseeing and managing the entire project and have unlimited liability. The limited partners (LP), also known as passive investors, contribute a portion of the equity investment and have limited liability to the extent of their share of ownership. The GP is the active partner that manages and operates the property so you don’t have to. It is important to learn how to vet a sponsor.
Profits
Each syndication has its own unique structure in terms of how profits are distributed amongst the partners. Investors will typically see an 80/20 or 70/30 distribution (LP/GP): 80% of profit distributed to LPs and 20% distributed to GP. There are variations across this spectrum from 50/50 to 90/10, though typically most deals are 80/20 or 70/30 distribution. When evaluating opportunities, it is important to ask and know how the structure is set up and to see if there is alignment of the GP with the LPs.
Process
- Investors will typically receive an email which includes the investment summary and investor webinar to review the opportunity.
- If you are interested in investing into the opportunity, you will need to place a “soft reserve” to communicate to the sponsor that you intend to invest. Investment spots are first-come, first-serve.
- You will need to complete and sign the investor documents, also known as the Private Placement Memorandum (PPM), which is a legal document as you are purchasing equity ownership in an LLC.
- After you complete the PPM, you will send in your funds to complete your subscription.
- After the property closes, you should receive regular (monthly or quarterly) updates and financials on the investment.
- Investors will also receive an annual K1 form to file with IRS along with their tax returns.
Philosophy
Does the syndication structure fit within your defined investment philosophy? The structure is set up in such a way to favor the passive investor with limited liability, which is why many prefer investing through syndications, but it may not be a good fit for the active investor who prefers to have more control.
Portfolio
When considering commercial real estate syndications, understanding the structure and process discussed above can help you determine if it is a good fit for your portfolio.
Cherry Chen is an internal medicine physician and founder, The Real Estate Physician.
Image credit: Shutterstock.com
