How Much Does it Cost to Set up a Syndication?
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While real estate investors know that investing in real estate can be lucrative, they are also aware that it not only requires a large capital but also demands a significant amount of your time. In this regard, you may have already heard of real estate syndication: a way for passive investors to participate in real estate without becoming a landlord.
Real estate syndication is often exclusive to accredited investors: those who have a large enough annual income and net worth to access these syndication deals. Thanks to their level of financial sophistication and investing experience, they are able to make better investment decisions. The US Securities and Exchange Commission (SEC) therefore allows them to invest in unregistered securities.
If you are an accredited investor, real estate syndication can help you avoid all of the headaches associated with being a landlord and running your own multifamily property like an apartment complex. For those who do not have experience dealing with tenants, collecting rent, and managing a property, this can prove to be a demanding endeavor. But with syndication, you can get around all of these challenges.
Here we are going to discuss how real estate syndications work, how much it costs to set up your own syndication, and the syndication fees that go with this type of deal. This way, you can join a syndication deal instead of spending all your precious time running an apartment complex and trying to make sure it is profitable.
Real Estate Investing: What is Multifamily Syndication?
A syndication deal in real estate is when multiple investors pool their resources together to buy and manage a single real estate property. The transaction is put together by a syndicator, also known as the sponsor. The sponsor’s job is to look for the investment deal, coordinate the transaction, look for real estate investors who will participate, and manage the property once the deal is in place. [1]
Syndication deals can be made with just about any type of real estate property. In fact there’s commercial real estate syndication, as well as syndication deals for single family properties. However, multifamily properties are the most common for several reasons.
For starters, multifamily properties like apartment buildings and condominiums are expensive and require a huge amount of capital to purchase. A large apartment complex can easily cost millions. Even accredited investors may not be interested in putting that much money in a single real estate property because of the inherent risks.
However, with a syndication deal, you can partially own a multifamily property without having to spend as much capital.
Once you own a multifamily property, you get to reap its benefits, including a strong and stable cash flow. Unlike single family properties that only have one unit, multifamily real estate properties have several units that can produce rental income. Therefore it is mostly unaffected by vacancies. You can continue to earn money from it, thanks to the other occupied units.
Through multifamily syndication, individual investors can participate in a larger, more lucrative investment opportunity that they may not pursue on their own. [1]
The real estate syndicator serves as the general partner (GP) who operates the syndication and underwrites the deal. They also perform due diligence on the property, negotiate with the seller, and handle property management. [2]
The syndicator also provides regular updates and financial reports to the passive investors. This is to keep them informed about the property’s performance.
Multiple investors provide a share of the capital. In exchange, they earn a share of the monthly cash flow from the rental income which is given monthly or quarterly. Investors may also earn a percentage of the equity upon resale, depending on the deal structure. The syndication agreement will detail how profits will be split. Every syndication deal is unique. [3]
In terms of property management, they will either hire a third party property management company, or in the case of vertically integrated companies like BAM Capital, they will handle it themselves.
With multifamily syndication, investors can just sit back, relax, and enjoy their cash flow without worrying about tenant concerns and emergencies. And because people always need a place to live, there will always be a demand for it.
Syndication deals are typically structured as limited liability companies (LLCs) or limited partnerships (LPs).
Overall, multifamily syndication is considered one of the safest forms of real estate investments. Investors are able to participate in deals that they normally couldn’t. The risks are also lower compared to buying and spending a huge capital on a multifamily property all on your own. With syndication, investors only have to worry about the risk associated with their share of the capital.
If you are an accredited investor who wants to participate in real estate investing, but do not have the time to manage an apartment complex by yourself, you should look into real estate syndication deals. For those who are looking for a real estate investment that does not require a hands-on approach, multifamily syndication may be the right investment strategy for you.
How Much Does it Cost to Set up a Syndication?
It is generally not recommended for investors to start their own real estate syndication, especially if you have no experience. Real estate syndication is a great source of passive income, and starting your own syndication will involve more work than necessary.
The legal and accounting fees can also rack up quickly when starting your own real estate syndication. Attorney fees typically range from $450 to $1,000 per hour to set up a real estate syndication. In fact, it is common to exceed $20,000 in legal fees alone. This is just the paperwork that forms the syndication. There are more ongoing legal fees that syndicators have to pay for on a regular basis. [4]
So generally, starting your own syndication is more trouble than it is worth. Investors are better off working with well-established syndicators that have spent years honing their craft. BAM Capital, for example, is now an industry leader in real estate syndication, and accredited investors would benefit greatly from working with this reliable company.
Asset Management Fee, Acquisition Fee, and Other Real Estate Syndication Fees
Syndication fees are payments that are made to the real estate syndicator or sponsor who put the syndication deal together. This serves as compensation for acquiring, financing, and even managing the real estate asset, among other things. While some of these syndication fees are recurring, others are paid out as a one-time fee. [5]
It is important to remember that syndication fees are supposed to cover the costs of managing the asset, including the administrative expenses and personnel costs. These fees help keep the internal operations going, and are therefore necessary. Investors should even think twice when a sponsor is not taking the fees that are considered standard practice. This may imply that the sponsor is trying to find other means of paying themselves. This is another reason to work with a trustworthy sponsor that details what all the fees are for. [5]
There is also a misconception among passive investors that syndication fees can further reduce their net return projections. When an investor is evaluating a real estate syndication deal, they should remember that the projected return is a net projection that has already factored in these fees.
The most common fees in real estate syndication include: acquisition fees, property management fee, loan guarantor fee, refinance fee, construction management fee, and disposition fee.
Take note that property management fees are not an earned fee for the real estate syndication company. They are considered an operating expense earned by the property manager for collecting more rent. [5]
Let us briefly discuss each of these fees so that you know what they are for.
Once the deal for the syndication is closed, there is a one-time fee called an acquisition fee that is given to the real estate syndicator. It may range from 1% to 5% of the property’s value or purchase price. This is payment for the sponsor’s due diligence and for providing the opportunity for investors. [5]
The property or asset management fee also compensates the real estate syndicators for managing the property’s day to day operations. At the same time, this ongoing fee covers the administrative costs of running the multifamily property. The fee may range from 1% to 3% of the property’s gross operating income.
The loan guarantor fee is paid when a loan guarantor is brought in to help secure better financing terms. The loan guarantor, also known as a key principal, signs on the loan along with the sponsor team. The fee may range from 1% to 3% of the loan amount. [5]
If there is a refinance involved in the deal, there may be a refinance fee ranging from 0.5% to 2% of the refinance loan amount.
There is also an additional fee if there is a plan to renovate the property to increase its value. The construction management fee may range from 5% to 10% of the total renovation budget.
Finally, the disposition fee is typically issued to cover the costs of marketing, travel, and time-related expenses that are meant to help the property sell for top dollar. It typically ranges from 1% to 2% of the sales price. [5]
Remember that you should be able to review these fees in the Private Placement Memorandum (PPM) before you invest your money. The PPM is a legal disclosure that discloses all the fees and risks associated with the investment.
Work with BAM Capital for Multifamily Real Estate Syndication
Real estate syndication is often regarded as one of the safest sources of passive income in real estate. Multifamily properties in particular are a great source of reliable and strong cash flow. Working with a trustworthy syndicator is a much easier way to access these benefits.
Work with BAM Capital. This is an Indianapolis-based real estate syndicator with a strong Midwest focus that has established itself as a leader in its field. It is trusted by accredited investors because BAM Capital prioritizes high quality multifamily properties that are Class A, A-, and B++. [6]
BAM Capital goes for properties that have in-place cash flow and proven upside potential. They then use their award-winning strategy to mitigate investor risk while also creating forced appreciation.
In fact, BAM Capital now has over $700 million AUM and 5,000+ units. [6]
You will also be pleased to know that this syndicator is a vertically integrated company, meaning they can handle and guide you through every step of the syndication process. BAM Capital will handle everything from acquiring the property to managing it.
No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.
For accredited investors who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, schedule a call with BAM Capital and invest today.
