How to Do Real Estate Syndication: 7 Steps to Get Started

Real estate investing has long been a key strategy for entrepreneurs looking to build their wealth portfolio. From houses and office buildings to factories and hotels, owning properties can be highly profitable. 

Now, if your last name happens to be Zuckerberg, Gates, or Musk, you’re probably out there buying skyscrapers like it’s a game of Monopoly. However, for most of us who aren’t in the billionaire bracket, such investments aren’t as accessible.

If you are interested in growing your real estate portfolio but have limited funds, exploring how to do real estate syndication could be your best bet. I first dipped my toe into syndication back in 2019 when I partnered with other investors to acquire a hotel. I wasn’t new to real estate investing, but it was my first experience pooling funds together to make a larger real estate purchase possible.

In this article, we will talk about real estate syndication, what it is, and how you can get started as a sponsor.

Let’s dive in and learn how to make these big property deals work for you!

What is Real Estate Syndications

Real estate syndication is a type of investment that allows multiple investors to pool their funds to purchase and manage a property they might not be able to afford individually. 

The structure of a real estate syndication typically involves two key roles: the syndicator (or sponsor) and the accredited investors. 

The syndicator, or general partner (GP), is the person or entity responsible for finding, acquiring, and managing the property. They bring the expertise, handle day-to-day operations, and manage the property. However, their primary role is more managerial and operational. 

Understanding the role of the GP vs LP is key in property syndication. Passive investors are also called limited partners (LP) and provide most of the capital. They rely on the sponsor to make the property profitable.

Syndicators and investors who want to be part of the syndicate will enter a real estate syndication deal. Everyone must do preliminary due diligence when entering this deal.

Investments in real estate syndication are often made through limited partnerships (LPs) or limited liability companies (LLCs). These structures protect investors by limiting their liability to their invested amount. 

Returns on investment can come from rental income, property appreciation, or a combination of both. Investors usually receive a regular income stream from the property. If the property is sold, they get a share of the profits relative to their investment.

What are the Roles of the Syndicator

At the heart of a real estate syndication lies the many important roles of the syndicator.

Their job starts with finding good real estate deals, negotiating to buy these properties, and bringing together a group of investors to fund the purchase.

But their role doesn’t stop there. They also have to look after the property, which means everything from fixing things when they break to making sure the finances are in order.

The syndicator also closely monitors the property and real estate market to ensure the investment is doing well. They stay in touch with the investors, giving them regular updates and ensuring the project is on track according to what was agreed.

Raising Funds

Raising the money for these real estate projects is a big part of what the syndicator does. 

They share their plan with potential investors, explaining why the property is a good buy and how they’ll manage it. They prepare an important document called a private placement memorandum or offering memorandum (OM) that outlines all the details, like the investment terms and what investors should expect in return.

The syndicator must follow the rules set by the Securities and Exchange Commission (SEC) to ensure everything is fair and above board.

The syndicator also decides how profits will be shared among investors. They use data and market research to back up their plans and show investors their strategy makes sense.

Managing the investment

Making money is just one part of the job for a syndicator. They also have to make sure that the property they manage does well.

The syndicator must handle all the details, like paying bills and fixing things when they break. They work hard to keep the property nice, so it makes money over time.

The syndicator tracks how much money comes in and goes out, takes care of any problems with tenants, and plans ways to make even more money from the property in future years.

How syndicators make money

While it’s true that syndicators shoulder many responsibilities, they also stand to gain a significant portion of the profits.

Primarily, they benefit from two key sources: acquisition fees and a share in the property’s profits.

When a property is purchased, syndicators often receive an acquisition fee, typically a percentage of the purchase price. This fee compensates them for the effort involved in identifying, evaluating, and securing the property.

Another significant source of income for syndicators is through profit sharing, like the rental income or profits from property sales.

Additionally, syndicators may earn a property management fee if they take on the responsibility of managing the property’s day-to-day operations.

In some arrangements, syndicators also benefit from a performance-based incentive, known as a carried interest or promote.

It’s important to note that the income of a syndicator is closely tied to the success of the project. If the property makes money from things like rent or selling it for more than they bought it, the profits are shared among the investors and the syndicator.

But remember, if things go south, the losses are shared, too.

How to Start Your Own Real Estate Syndicate: 7 Steps

Starting your own syndicate might seem confusing and overwhelming, but with the right strategy, it can be manageable.

To help you out, we’ve created a step-by-step guide that will break down the process for you.

1. Find and Assess the Property

You want to get into real estate syndication. Picking the right property is where you begin.

Here are the essential steps to guide you:

• Set clear investment goals: Choose a property that fits what you and your investors hope to achieve. If you’re after quick income, seek out commercial property that can start making money soon.

• Understand your market: Start by getting a clear picture of the market you’re interested in. Look at factors like location, property values, and market trends.

• Know the area: Research places with strong growth or high demand for rentals. A good location means a better chance for more people wanting your property.

• Conduct thorough due diligence: Before making a decision, thoroughly inspect the rental property and review all relevant documents, such as title deeds and zoning regulations.

• Check the numbers: Before saying yes, make sure the price of the property makes sense with your budget and future plans. Look at the cost of buying it and any repairs needed. Also, review the expected IRR and other analyses like cash on cash return.

• Consult with experts: Get advice from professionals, like other real estate developers, agents, brokers, and lawyers. They can provide valuable insights and help you avoid pitfalls.

2. Financial Analysis

The best syndicators excel by making informed decisions based on thorough financial analysis.

Assuming you have already found your property — this means you have done your homework in evaluating the property’s current income and expenses.

The next thing to look at is the future cash flows.

This means estimating the potential income growth, considering market trends, and forecasting future expenses. 

This projection helps in assessing the property’s ability to generate sufficient cash flow to provide returns to the investors and cover any debt service if the property is financed through a loan.

In addition, a comprehensive financial analysis will also include calculating various investment metrics such as the capitalization rate (cap rate), internal rate of return (IRR),cash-on-cash return, and break-even ratio. 

These metrics provide a deeper understanding of the investment’s profitability and risk profile.

3. Assemble a Team

The next step is to assemble your team.

This team is your support network that will provide expertise, advice, and services that are essential for a successful real estate venture.

First, find a real estate attorney who will help you deal with the legal intricacies of real estate transactions. They’re crucial for drafting and reviewing contracts, dealing with property titles, and handling any legal issues that arise.

Next, you will also need an accountant or financial advisor to manage the financial aspects of the syndication, including structuring the investment, tax planning, and financial reporting. Their expertise ensures that the financials of your investment are sound, compliant, and optimized for the best returns.

A real estate broker or agent is also important. They bring in-depth knowledge of the real estate market, help find potential investment properties, and assist in negotiating deals.

You might also want to include a property manager, especially if you’re not planning to manage the property yourself. They take care of the day-to-day operations of the property, from tenant management to maintenance.

In some cases, especially for larger or more complex projects, you might need the expertise of other professionals like architects, construction managers, or marketing specialists. They can help with property development, renovations, or filling the property with tenants.

4. Look for Potential Investors

Let’s talk about how to find those key players who share your real estate investment goals and who will help you raise money for your real estate investments.

Start by identifying your target private money investors. Look for people who are interested in real estate investments. You may also do the following:

• Attend local real estate events and meetups where you can meet private investors and real estate developers.

• Connect with others on real estate forums and social media groups. 

• Ask your personal network for referrals. Often, the best partners come recommended by people you trust.

• Explore partnerships with experienced investors. They can bring skills and money to the table.

• Consider real estate crowdfunding platforms as a modern way to raise money from lots of small investors.

Next, prepare a compelling investment proposition. Once you’ve identified your potential investors, the next step is to prepare a document called Private Placement Memorandum (PPM) or Offering Memorandum. This document contains detailed information about the investment strategy plan and outlines the potential benefits and risks of the investment.

When you approach potential investors, present your investment plan clearly and professionally. Be prepared to answer questions and provide additional information. Transparency and honesty are critical — be upfront about the potential risks as well as the opportunities.

Finally, follow-up and relationship-building are important. Keep in touch with potential investors, provide updates on the investment opportunity, and build a rapport.

Remember, investment decisions often take time, and trust plays a big role. Building and maintaining strong relationships can lead to successful investment partnerships.

5. Negotiate the Deal

When you’re pooling resources to raise capital from different investors, you need to make sure everyone’s on the same page. Negotiating the terms helps align everyone’s interests, goals, and expectations.

Also, be aware of what you’re willing to compromise on. It’s essential to be clear and transparent about your expectations while also being receptive to the perspectives of others.

Remember, these investment opportunities and ventures are more than just financial transactions; they’re about building and maintaining relationships.

Establishing a positive rapport with your fellow investors can significantly ease the negotiation process.

6. Structure the Deal

After negotiating the deal, it’s time to structure and finalize the real estate deal.

This involves selecting a deal structure, drafting partnership agreements, and creating investment contracts.

The two most common types of deal structures are Limited Liability Companies (LLCs) and Limited Partnerships (LPs), with LLCs being popular for their flexibility and personal liability protection for members.

With the help of your lawyers, draft a detailed partnership agreement and investment contracts. These documents outline the partnership terms, roles, responsibilities, profit sharing, and decision-making procedures.

7. Close the Deal

Finally, it’s time to close the deal.

Once you have raised the necessary capital and have chosen the property, you’ll enter into a purchase agreement with the seller of the property.

Conduct a final review of all relevant documents and ensure that there are no outstanding issues that could affect the property or the syndication.

When everything is finalized, all relevant parties sign off on the necessary legal and financial documents to complete the transaction.

After closing the deal, the syndicator will typically distribute copies of all relevant documents to the investors and prepare to take over the management of the property.

This marks the beginning of the next phase in the syndication process: managing the property and working towards achieving the investment goals set out in your investment strategy.

Using an investor portal or real estate syndication software can help you manage investor communications, updates, and distributions to your investors.

Wrapping Up

Success in real estate syndication isn’t guaranteed, but it’s achievable through diligent research, careful planning, and collaboration.

As with all real estate investing, the risks involved are real, but so are the rewards.

Remember that every successful syndication starts with a vision, a team, and a solid strategy.

How To Do Real Estate Syndication: FAQs

Do syndicators always receive the largest share of profits?

No, syndicators don’t always receive the largest share of profits. Profit distribution is based on the agreement among all parties.

Syndicators earn fees for managing the syndicate and may get a share of the profits (carried interest) after investors receive their predetermined returns. This structure ensures investors’ returns are prioritized, and the syndicator’s profit is typically contingent on the success of the investment.

Are real estate syndicates profitable?

Real estate syndicates can be highly profitable, but like any investment, they come with risks. The profitability depends on factors like property selection, market conditions, and management efficiency.

What are the common risks involved in syndicating a real estate?

As a real estate syndicator, you mainly face financial risks from large upfront investments, management risks in handling the property, legal risks from complex real estate laws, reputational risks affecting future ventures, and market risks due to economic fluctuations. Each of these can impact the success of your project.

What is real estate crowdfunding?

Real estate crowdfunding is a way to pool money from multiple investors to finance a real estate project. It’s typically done online and allows investors to fund property developments or buy into existing properties for a share of the profits.