Looking to invest in real estate but don’t know where to start? Have you considered syndication? Real estate syndication is one of the best and most secure ways to get into the market. It enables investors to get the benefits of owning an investment property without dealing with the hassles or stress of being a property owner.
Before venturing into real estate syndication, you need to have a business plan to avoid getting lost. This blog post will discuss what syndication is, how it works, and how to create a business plan for 2022. So, whether you’re a new investor or already experienced, read on for everything you need to know about real estate syndication!
What Is Real Estate Syndication
The term “real estate syndication” refers to an organization or group of investors pooling funds to invest in real estate. It’s simply a mechanism for investors to pool their funds to purchase more significant and stable assets than they could invest in individually.
Real estate syndication enables private funds for investment in real estate enterprises when no other financing is feasible or available. It’s long been a popular means of financing, purchasing, and selling higher-priced real estate.
The Key Players Involved in Real Estate Syndications
Because real estate syndications are an investment offering, the Securities and Exchange Commission (SEC) regulates them, and the SEC requires documentation and reports for each offering. Some investment opportunities available through real estate syndication include apartment buildings, mobile home parks, land, self-storage units, and other real estate assets.
The syndicators and the passive investors are two crucial players in real estate investments. Let’s have a look at each of their roles below:
1. The Real Estate Syndicator
The real estate syndicators are responsible for finding real estate syndication deals. The organization’s structure dictates the syndicator’s responsibility, obligation, and relationship to the investment group and the investors’ relationships with each other.
Syndicators’ primary responsibilities include handling the first deal, finding investors and properties, conducting the transaction, developing a real estate syndication business plan, raising funds, and managing the asset. In essence, the syndicator’s job is to execute the business plan and provide substantial returns to the passive real estate investors.
2. The Passive Real Estate Investor
In real estate syndications, the passive investor’s job is to provide a fraction of the funds required to purchase the property, otherwise known as the real estate syndicate. Passive investors obtain ownership shares in the property in exchange for their money.
These stakeholders also receive monthly passive income distributions from the asset and a return on their investment when they sell it.
The Benefits of Real Estate Syndications
Several benefits come with investing in real estate syndications. Let’s have a look at them below:
- Passive Income: Investors get passive income payments monthly or weekly.
- Hassle-Free: Participants can invest without worrying about managing their assets
- Tax Benefits: If you own a piece of real estate, you’ll receive tax benefits via your K-1 tax filings.
- Appreciation: Your property’s worth should improve steadily over time, increasing the return on investments, as in any other real estate sector.
- Control Over Assets: Unlike real estate investment trusts or crowdfunding platforms, you have the option to invest in specific properties, giving you optimum control over your investments.
- Diversification: It also gives you the option of spreading your capital across various syndications.
The Challenges of Real Estate Syndications
Despite the multiple benefits you can derive from investing in real estate syndications, it has risks.
When you invest your money, it’s essential to know the risks of syndication. You may not receive returns as predicted by a given group, and there is always some risk of losing all or part of your investment!
Another risk is losing your legal protection as a passive investor, therefore never take an active position in asset management. Finally, avoid ambiguity by speaking with the syndicator before investing and determining how frequently and in what manner they will keep you informed about your investment.
Eliminating these concerns will result in a more profitable investment. Before investing, be sure you’re working with a reputable and knowledgeable real estate syndicator. When looking for a real estate syndication company, it’s crucial to assess them before finalizing your investment.
Eligibility Requirements for Real Estate Syndication Investing
Passive investors must meet stringent eligibility conditions before venturing into real estate investing. Generally, you must be an accredited or sophisticated investor to participate in real estate syndications.
To be considered part of accredited investors, you must have an annual income of at least $200,000, or $300,000 if you have a spouse. On the other hand, sophisticated investors must have at least $1,000,000 to qualify.
Likewise, they must have extensive knowledge and expertise to be eligible.
Real Estate Syndication Fees
Real estate syndication fees are often an unavoidable cost of doing business in the real estate market. The individuals managing an investment’s finances and legal requirements are compensated with these charges – which is why you need them! Here are the different types of real estate syndications fees:
- Acquisition Fee: Typically 1-3 percent of the asset’s purchase price, it covers the costs of the sponsor’s efforts and due diligence in acquiring the asset.
- Asset Management Fee: This fee, which ranges from 1-2 percent of predicted gross income or capital invested, covers continuous bookkeeping, coordination, and communication required to manage the asset and execute the business strategy successfully.
- Equity Placement Fee: A fee imposed upfront by a real estate broker to cover the costs of finding investors and limited partners, as well as marketing, coordination, and behind-the-scenes communication and documentation. This fee, also known as the equity origination fee, is typically 1-2 percent of the funds contributed.
- Loan fee: This fee pays the sponsor for their efforts in getting the required finance. Typically, a loan fee is 1 percent of the total loan amount.
- Deposition Fee: Usually imposed to cover marketing expenditures and asset sales after business plan implementation. Typically, this fee is around 1-2 percent of the asset’s sale price.
How to Invest in Real Estate Syndications
Knowing the eligibility requirements for real estate investing, you should have a basic idea of how to invest wisely in real estate syndication deals.
For starters, ensure you’re actively collaborating with other passive investors, preferably those interested in the same asset class. Developing contacts with like-minded investors will assist you in providing suggestions for reputable real estate syndication companies with a proven track record in the sector.
Meeting other investors, expanding your expertise, and finally finding your first deal may all be accomplished through attending events, interacting in Facebook groups, and attending real estate conferences.
As previously said, a real estate syndicator will handle the majority of the heavy lifting, including sourcing the deal, establishing the syndication, and executing the business strategy. Your primary responsibility as a passive investor is to search for a reputable real estate syndicator for collaboration. Make sure to verify the syndicator’s credentials.
The Basic Business Plans Required to Start a Real Estate Syndication Company
Having talked about the basics of real estate syndication, let’s dive into an overview of the primary components of the business plans you’d need to start a real estate syndication company below:
1. Define Your Target Market
Understanding your business is the first step to starting a successful syndication company. You need an idea of who you’re looking for, their needs, and how they interact with property ownership or rental agreements to put together this vital part of a real estate investment!
Every player in the sector is primarily involved in acquiring, building, remodeling, and renovating the interiors and exteriors of residential buildings before selling them.
2. Research the Market and Execute Feasibility Studies
Thorough market research and feasibility studies are significant components of your real estate syndication business plan. The truth is, a broad spectrum of clients are available to acquire, lease, or rent properties.
In other words, your target market cannot be limited to only households in your area. Include all businesses in and surrounding the city where you have a presence.
3. Identify the Major Competitors in the Industry
It is crucial to identify the major competitors in your industry so you can see who’s ahead and try not to imitate them. Some brands are consistently better than others for a reason, like their long history of success or how smoothly they run things with positive outcomes delivered on time every month!
4. Choose Between Buying a Franchise and Starting From Scratch
If you want to start a real estate syndication company, you might have to start from scratch because a franchise could be challenging to acquire. Besides, launching a real estate syndication firm from scratch is less stressful than starting other small-scale enterprises, which typically require extensive preparation before launch time.
5. Be Aware of the Risks and Challenges You May Face
One of the significant hurdles you’ll likely face if you decide to start your own real estate syndication company is the presence of established companies and other players in the real estate industry. Only by creating your market will you be able to eradicate this challenge.
An economic slump is another obstacle that you will almost certainly face. With a terrible economy, businesses and other players in the real estate market often have a hard time keeping their existing clients or even attracting new ones.
Unfavorable government policies can also hinder your company’s growth. In essence, you have no choice but to be optimistic that things will turn out well for you.
6. Select the Most Appropriate Legal Entity
The legal entity you choose will significantly impact how big your company can become. Some real estate syndication companies tailor their services to the local market, while others use franchising to reach out to the national market.
You can choose between a general partnership and a limited liability company when starting a real estate syndication company. A limited liability company (LLC) safeguards you from personal liability. Only the funds you put in the limited liability corporation will be at risk if something goes wrong in the firm.
However, for general partnerships, that’s not the case. Generally, limited liability corporations are easier to run and more flexible, as they don’t require a board of directors, shareholder meetings, or other managerial formalities.
7. Coin a Catchy Business Name
How would you like your company to be perceived? The right name is half the battle, so think outside the box. Think of it this way: the words you choose for a company are like an identity card that tells people what they’ll experience when interacting with YOU and YOUR services!
8. Consult Reputable Real Estate Brokers to Find Out Which Insurance Policies Are Best for You
You can’t conduct a business in the United States or other developed countries without having some fundamental insurance coverage required by the industry in which you intend to operate.
Therefore, it’s imperative to set aside money for insurance and potentially speak with an insurance broker to help you select the best and most appropriate policies for your real estate syndication business.
8. Get the Appropriate Professional Certifications
Professional certification is one of the key reasons most real estate syndication companies stand out, aside from the positive outcomes they generate. If you want to positively impact the real estate sector, strive to get all of the necessary qualifications in your field.
Certification verifies your ability and demonstrates that you are highly skilled, dedicated to your profession, and current in this competitive industry.
10. Gather the Legal Documents You Need to Run Your Business
In the United States and other developed countries, you cannot run a profitable business without appropriate documentation. It won’t be long before the law catches up with you if you do.
11. Raise the Required Startup Capital
Even if you want to start small, starting a real estate syndication business requires a significant amount of capital. If you’re going to establish a bigger firm, you’ll need to search for sufficient money to fund it. A regular large-scale real estate syndication business is expensive to start.
When looking for startup funds for your real estate syndication business, you may want to consider the following options:
- Raise money from personal savings, sell stocks or multifamily properties.
- Obtain funds through cash flow and equity investment.
- Receive funds from passive investors and business associates.
- Sell shares to interested investors.
- Apply for a bank loan.
- Collect low-interest loans from families and friends.
12. Select an Appropriate Location for Your Business
Your business’ location is critical to its success. Most entrepreneurs rent or lease a facility in a visible neighborhood with substantial real estate activity and households with the requisite purchasing power and lifestyle.
Don’t rent or lease an office property for your real estate syndication company in a less prominent or unknown area because it is less expensive. If you do you can expect to spend more on marketing the company.
So, before deciding on a location for your real estate project, make sure you undertake rigorous market research.
13. Hire Employees to Help With Technical and Workforce Issues
Go for the right employees, build good relationships with potential team members, and market your properties using every marketing tool at your disposal, particularly the Internet.
The right addition to your team can make all of the difference. Make sure you stay within budget when hiring and take advantage by enlisting financial advisors for their expertise.
14. Establish a Fair Price for Your Services and Products
One crucial component that will assist you in selling/renting/leasing your properties at a premium is to get your initial capital from sources that won’t put you under any strain or charge you a high-interest rate. It helps if you also bought your properties directly from property owners rather than third-party vendors.
Another method that can help you get the best pricing is to keep your operational expenditures to a bare minimum, focusing your efforts on marketing and boosting your brand name. This method will help you save capital and help you establish the best price for your services.
15. Create a Corporate Identity and Develop Strategies to Increase Brand Awareness
One of the secrets of larger firms is their willingness to spend vast sums of money to increase brand awareness.
Marketing and advertising are critical if you want to go beyond the city where your business will be operating and become a global brand. You need money for this investment, of course!
To stay on top of the market, you need a solid and consistent brand that will keep your target audience interested.
It’s time to stop dreaming and start doing. You have the power within you, now take it! We hope this ultimate guide has given you some insights into launching your own syndication business in 2022.
Now is the perfect time to get started. Holdfolio can help make it easy for anyone with a smartphone to become an entrepreneur. Ready? Let’s do this!