how to start a real estate syndication

Real estate syndication involves a group of investors who collectively raise capital to purchase commercial real estate or build a new property. 

Real estate syndication can be a profitable strategy to get into the real estate investment market. Real estate syndication allows you to own a part of investment properties while reaping the benefits of passive income, tax breaks, and property appreciation. You also save the inconvenience and bother of being a landlord.

There are two parts to a real estate syndication:

1. The Sponsor or General Partner

2. The investors

The sponsor or General Partner oversees the physical aspects of property management. They may also invest their money in the syndication. They source the property, secure funding, and design the syndication agreement for their investors.

The investors put their money into the syndication. They are referred to as "passive investors" because, unlike syndicators, they do not actively manage their properties.

Choosing an investment strategy and a target market for the syndicate entails doing market research and examining the regional real estate industry to find possibilities and trends. These are the initial steps in establishing a real estate syndicate. You can start looking for a good investment property that fits with these objectives once you have determined your target market and investing approach. 

Any possible properties should be thoroughly investigated to make sure they satisfy the requirements of the investment plan and appeal to possible buyers.

Hiring an experienced real estate fund consultant, like Frank Nagy Financial Services, will greatly reduce the burden of setting up your real estate fund. A good consultant will help you formulate your real estate syndicate documents with the assistance of experienced attorneys and help you fund and manage your first real estate syndication.

It's time to do the math after finding possible investment properties. The only way to stand a chance of drawing investors to your syndicate is to take this step. Remember that the sole goal of passive investing is to generate returns on capital. 

Cash-on-cash return is a common metric that passive investors use to calculate ROI. Here is a simple way to calculate potential ROI on an investment property:

[annual cash flow] ÷ [cash invested] = cash-on-cash return

Another number to look at is the cap rate. To calculate the cap rate you take the 

NET yearly income ÷ the purchase price. 

Just a side note, if you intend on borrowing money from the bank, make sure that your cap rate is at least 2% above your loan rate.

The next stage in establishing real estate syndication is to record everything in writing. A real estate syndicate can be structured in two ways: as a limited partnership or as a Limited Liability Company. A typical real estate syndication structure pays out 75% to investors and 25% to sponsors.

You can even give your investors a preferred rate of return say 5%. This means that your investors will have a minimum annual return of 5% of their investment before any other profits can be distributed.

The last steps in syndicating a real estate venture include signing contracts, paying the investment, and transferring property ownership. You have to go through all of the typical stages to conclude a real estate transaction. In addition, you must form a partnership, secure funding from investors, and verify that all legal documentation are in place. 

Contact us to learn more about starting a real estate syndication.