If you want to invest in real estate but you don’t want to be a landlord, you can do so by becoming a passive investor through a strategy called real estate syndication. Real estate syndication is a way for multiple investors to pool their money to purchase larger properties – like residential buildings or commercial spaces – that might be out of reach for a lone buyer.
In this article, we’ll define real estate syndication, how it works and offer pros and cons for passive investors.
Key Takeaways:
- Real estate syndication allows investors to earn passive income by pooling money to invest in properties.
- Being a part of a real estate syndication makes buying larger properties more accessible to individuals with smaller budgets.
- There are two key roles in a real estate syndication: sponsors (who manage the deal) and investors (who provide capital and earn returns).
What Is Real Estate Syndication?
Real estate syndication refers to a system where a group of people pool their money to invest in property – large apartment buildings, vacation rentals or even shopping centers. These deals are usually organized by an individual sponsor (or a team of sponsors) who plans the deal, from finding the property, securing financing, managing the investment and running day-to-day operations.
After the sponsor lines up a property, they invite others — the passive investors, who may be referred to as limited partners — to invest. The syndication is usually set up as a legal business (like an LLC), and everyone involved owns a fraction of the property based on how much they invested.
Being a passive investor is like being a silent partner. You simply invest your money, and the sponsor handles the rest. In return, you earn a share of the rental income, and if the property is sold for a profit, you also get a cut of those earnings.
There are different types of real estate syndications, depending on what kinds of properties are involved. Some common ones include:
- Affordable housing syndicates: Affordable housing units.
- Residential property syndicates: Single-family homes, apartment complexes and short-term stay rentals.
- Commercial real estate syndicates: Office buildings, malls and hotels.
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How Real Estate Syndication Works
When you invest in real estate via syndication, you don’t have to purchase physical homes or buildings on your own. In syndication, the sponsor or sponsors handle securing and managing a property. The sponsors find passive investors (limited partners) to pay for any remaining portion of the real estate investment. When you invest in a real estate syndicate, you’ll earn a percentage of the property’s profits — typically a portion of the annual rental income and a share of the profit when the property is sold.
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What is Crowdfunding?
Crowdfunding is a technology-driven way to get involved in passive real estate investing. Here’s how it works: crowdfunding platforms connect online investors with sponsors and operators — the professionals who manage and execute real estate projects — allowing people to invest in these properties. One advantage is that crowdfunding opens the door for investors (as opposed to high-net-worth individuals) with modest funds to own a fraction of a property using the platform.
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Is Crowdfunding The Same As Real Estate Syndication?.
No, they are not the same thing. A real estate syndication is a structure where a sponsor (or sponsor team) raises capital directly from investors to acquire and manage a specific property or multiple properties. In a real estate syndication, passive investors pool their money, and the sponsor handles the daily operations.
These deals often have higher minimum investments and are frequently limited to accredited investors. These are individuals who meet certain financial or professional qualifications, such as having a high net worth, a substantial annual income or certain financial licenses and certifications—indicating they have experience in handling higher-risk, private investments.
Real estate crowdfunding enables individuals to pool their money online and invest in property deals managed by professional syndicators. Traditional real estate syndication is usually limited to accredited investors—people with high income or net worth—and often requires large minimum investments. Crowdfunding platforms are passive opportunities that may let almost anyone invest, sometimes with as little as a few hundred dollars. The platform operators handle deal sourcing, sponsor vetting, and ensuring compliance with the law.
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Who Can Become A Passive Investor?
Anyone with funds can become a passive investor, depending on what you can afford. Real estate syndications may require large minimum investments and may rely on private networks, making them less accessible for some individuals.
However, real estate crowdfunding differs from traditional syndication. Instead of investors joining a deal directly through a sponsor, crowdfunding platforms list real estate investments online and allow individuals to invest smaller amounts.
This means you can contribute a few hundred or a few thousand dollars using a crowdfunding platform compared to tens of thousands in many traditional syndications. Crowdfunding platform operators handle administrative tasks, provide deal access, and communicate with investors, making the process more accessible and streamlined—and allowing more investors to passively access real estate.
Role Of Sponsors Vs. Passive Investors in Real Estate Syndication
Sponsor, syndicator or project leader: Generally refers to the person who is responsible for securing financing for the real estate venture and then managing the property, including daily operations.
Limited partner or passive investor: This person provides some capital to fund the property but is a hands-off silent partner. Partners don’t manage or get involved in the operations of the building, but they receive cash returns on their investments and may qualify for tax benefits.
If a sponsor or syndicator plans on selling an investment property, for example, you may receive money from the sale, but you likely could not stop the sale from happening as a passive investor.
Should You Become A Passive Investor In Real Estate Syndication?
If you want to invest in real estate but don’t want to do the work associated with owning a building, real estate syndication may be a good option. When you invest in a real estate syndication as a passive investor, you’re responsible only for providing money toward the property that the sponsor has purchased; this means no landlord duties. Plus, there are many kinds of properties you can invest in via the syndication route. It is a way for investors to earn a steady stream of passive income without any hands-on involvement.
Pros And Cons Of Being A Passive Investor In Real Estate Syndication
There are advantages and disadvantages to being a passive investor in a real estate syndication investment.
Pros
- You invest the money and collect a percentage of the rent or sale, all without the hassle of management.
- You can access larger real estate deals than a single home investment.
- Syndications can provide rental income distributions and potential appreciation from property value increases.
Cons
- You cannot pull your money out at any time when you invest in a real estate syndication.
- The simplicity of the deal rests solely with the sponsor or sponsors, leaving passive investors a lack of control.
- Like any investment, there are risks involved in real estate.
- Investors need to have at least $25,000 in cash available to invest; in some cases, you need at least $50,000 or up to $250,000.
Questions To Ask Before Investing Passively In A Real Estate Syndication
If you have sufficient funds plus a long-term outlook to invest in real estate and syndication appeals to you, there are some questions you should ask:
- Who is the sponsor or group of sponsors, and what is their experience in the real estate market? (For instance, how many deals and what kinds of deals have they done? Residential or commercial?)
- Do they have experience in handling a real estate marketing downturn?
- What is the projected return on investment for passive investors?
- How long does the sponsor plan on holding onto the asset before they sell it?
- Can the sponsor share past performance history and references?
Real Estate Syndication Vs. REITs
Real estate syndication isn’t the only option if you’re interested in passive ways to earn money from real estate.
If you can’t afford to invest in real estate syndication or you need more liquidity flexibility in your portfolio, you could consider a real estate investment trust (REIT). This type of investment allows you to buy shares in a company that owns and operates real estate assets. Investment companies sell shares of stock and issue bonds using the revenue to buy multiple investment properties – leasing the buildings, offices, apartments or homes. REITs have to share at least 90% of their profits in the form of dividends, which is how investors make money.
If your investments are managed by the REIT companies, the income you earn is passive. But unlike investing in a real estate syndication, you can sell your shares, as long as the REITs you invest in are traded on the open market. There is still a level of risk, so make sure to talk to your financial advisor before investing in any form of real estate.
FAQ
The Bottom Line: Real Estate Syndication Can Be A Beneficial Investment for Passive Investors
Real estate syndications allow investors to take part in larger real estate ventures in a passive way. If you are interested in larger-scale real estate investments, such as commercial ventures or large apartment complexes, a syndication may provide access.
The potential benefits include passive income with minimal effort, tax benefits and added diversification to your investment portfolio. There are risks, so it pays for you to do your due diligence when researching sponsors and opportunities. If real estate syndication feels too expensive or complex, consider the alternative of buying public shares in REITs.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
