What Are the Pros and Cons of Real Estate Syndication?
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There are many reasons why real estate is such a popular choice among investors. It offers a tangible and physical asset, which tends to appreciate over time, and with the right strategy, could offer stability and profitability.
Unlike stocks or bonds that can fluctuate based on market conditions, real estate often exhibits more stable, long-term growth. One of the key benefits of real estate investing is its ability to generate cash flow. In many cases, cash flow strengthens over time as the investor pays down their mortgage and builds up their equity. Buying properties to rent out can generate regular cash flow, making it an attractive option for those seeking steady returns on their investments. [1]
The demand for housing and commercial spaces also remains relatively consistent. As populations grow, the need for properties increases.
Real estate investors can even take advantage of numerous tax breaks and deductions that can save money at tax time. [1]
However, real estate investing can be time-consuming. Managing a property all on your own can be very challenging, especially if you have no experience being a landlord. This is why real estate syndication has grown in popularity as an alternative investment strategy. Here we will discuss the various real estate syndication pros and cons, specifically the benefits of multifamily syndication.
Before you can decide whether or not this investment strategy is for you, you need to take a look at its benefits and drawbacks.
What is Real Estate Syndication?
Real estate syndication is a method used by real estate investors wherein they pool their resources together to purchase a single real estate property. This can include anything from purchasing a single family real estate property to developing a large commercial complex. Keep in mind that most of these deals are only accessible to accredited investors.
This strategy is often led by a sponsor or a syndicator, who identifies and manages the investment opportunity. The syndicator is responsible for sourcing the deals, conducting due diligence, acquiring the property, and looking for investors to participate in the syndication. In a syndication deal, the syndicator takes on most of the responsibilities from formulating the business plan to executing it. [2]
Because the syndicator is also in charge of overseeing the property’s management or development, this is a true passive investment in real estate.
Investors contribute capital to the syndication in exchange for a share of the property’s income, appreciation, or both. This depends on the deal structure. Investors should remember that every syndication deal is different.
The sponsor will create a private placement memorandum (PPM) that outlines the details of the investment opportunity, including the expected returns, risks, and terms. It will also detail how profits will be split. Some syndication deals distribute the monthly rental income among investors on a monthly basis while others do so on a quarterly basis.
Once enough investors have committed to the project, the sponsor forms a legal entity, such as a limited liability company (LLC) or a limited partnership (LP), to hold the investment.
In any case, the passive investors only have to provide a portion of the capital needed to acquire the property. Beyond that, they don’t have any other responsibilities or liabilities in the syndication deal. They may have to pay certain fees to help keep the property running, but this will also be in the PPM or syndication agreement. [2]
The Pros of Real Estate Syndication
Real estate syndication, particularly multifamily syndication, offers several benefits for real estate investors looking to participate in larger property investments.
Syndication deals foster collaboration among investors and syndicators. Real estate investors can benefit from the knowledge and experience of seasoned sponsors or partners leading the syndicate. This aspect of syndication reduces risk, especially if you work with a syndicator with a consistent track record.
Here are some of the pros of this investment strategy.
Access to Larger Projects
Generally speaking, real estate properties are expensive. Multifamily properties such as apartment communities can easily cost millions. But by allowing investors to pool their resources, real estate syndication reduces individual financial burdens. It allows investors to access higher-value properties that might otherwise be beyond their reach.
By spreading the investment across multiple parties, syndication lowers the barrier to entry for lucrative real estate deals, providing opportunities for potentially higher returns. [3]
Investors can engage in projects that require substantial capital, such as large-scale developments, commercial properties, or multifamily communities.
Multifamily properties are known for their strong and consistent cash flow, but they are also harder to obtain for a lone investor. This is why multifamily syndication is the most popular version even though real estate syndication can be done with any type of real estate.
Syndicators have plenty of real estate knowledge and expertise, which allows them to identify, acquire, and manage these larger ventures. Their involvement often serves as a reassurance for investors, providing guidance throughout the investment process. Since this is pretty much a hands-free investment strategy, syndicators will just give investors updates on the investment property every now and then.
Diversification
With access to larger deals like multifamily real estate properties comes diversification. Investors can spread their capital across multiple real estate syndications. [2]
It is also much easier to participate in multifamily syndication and gain access to multiple units rather than try to purchase multiple single-family properties one by one.
Multifamily properties are not impacted by vacancies the way single-family real estate properties are. If a single-family property becomes vacant, it stops producing income. However, this is not the case for apartment communities. The remaining units can still generate income even if one or two tenants leave. This means the investment does not depend on a single unit, and that is something that investors can enjoy when they participate in multifamily syndication.
Passive Income
Speaking of income, syndication deals are a good source of passive income in real estate. Because the syndicator takes care of everything, including the day-to-day management of the project, the investors can just wait for their share of the monthly cash flow without really doing anything. It’s a good way to put your money to work.
If you are familiar with real estate investing, you will know that there are very few ways to earn passive income here. Real estate investing is usually time-consuming as you have to manage the property yourself. But in multifamily syndication, investors can avoid all the usual headaches that go with owning a property.
Here, you still own a share of the investment property, but the sponsor takes care of all the details.
The syndicator will either handle property management themselves or hire a third-party property management company. Either way, it is out of the investors’ hands.
Overall, multifamily syndication is an ideal long-term strategy for those who want to participate in real estate investing. While not entirely risk-free, it is still a great way to protect yourself from the usual downturns that stocks and bonds see on a daily basis. [3]
With multifamily syndication, accredited investors can just sit back, relax, and enjoy the fruits of their investment.
Reduced Risk
No investment is completely risk-free, but multifamily syndication offers reduced risk compared to other real estate investments. Real estate syndication offers this through several mechanisms like diversification and pooled resources.
It allows investors to spread their capital across multiple properties or projects within a syndication. This diversification minimizes the impact of a potential loss from any single property, mitigating the risk inherent in real estate investments.
There’s also the fact that they are pooling their resources with multiple investors. This is much less risky compared to purchasing a multifamily property all by yourself. Here, you only have to worry about potential losses based on how much capital you put in, rather than having to think about the cost of the entire property.
You will also be working with a syndicator who hopefully has enough experience and knowledge in the real estate industry to navigate the challenges that an investor might not be able to handle on their own. This expertise can include market analysis, property selection, efficient management practices, and proactive risk management strategies, all of which collectively work to lower the overall risk exposure for investors participating in the syndication.
Professional Management
Speaking of being experienced and knowledgeable, sponsors are typically experts in the field of real estate. This means that investors can rely on them when it comes to property management.
These professionals bring in-depth knowledge of the market, property maintenance, tenant relations, financial analysis, and regulatory compliance, ensuring efficient operations while potentially maximizing returns.
Their focus on specialized management functions ensures properties are well-maintained, vacancies are minimized, and investment objectives are met. Syndication offers a level of professional management that may not be economically feasible for a small investor. Professional management, at the end of the day, is a basic commodity that is crucial to successful syndication. [4]
If you are a real estate investor looking for a passive investment, multifamily syndication may be the perfect investment strategy for you.
The Cons of Real Estate Syndication
While real estate syndication offers numerous benefits, it is not without its drawbacks.
One significant downside is the lack of control, which some investors do not appreciate. When you invest in a real estate syndication, you’re a passive investor entrusting the decision-making to the sponsor or the syndicator. This is why one of the most crucial decisions you will have to make is choosing the right syndicator to work with. [2]
This lack of control means you might not have a say in crucial decisions, such as property management strategies, timing of property sale, or major financial choices. If the syndication’s goals diverge from your own or if decisions are made that you disagree with, it can lead to frustration and dissatisfaction.
This is why it is essential to work with a syndicator you trust, and one whose strategies and investment philosophies align with your own. It is also important to do your due diligence and analyze the syndication deal before participating.
Another drawback is the inherent illiquidity of real estate investments. Unlike stocks or other highly liquid assets, real estate often requires a long-term commitment. The same applies to real estate syndications.
Syndications typically have lock-up periods during which investors cannot easily liquidate their holdings. If unexpected financial needs arise or if the investment doesn’t perform as anticipated, this lack of liquidity can pose challenges. Exiting a real estate syndication prematurely might come with penalties or difficulties in finding buyers for your share, leaving you tied to the investment longer than desired.
Real estate syndication deals also require a high minimum investment, which can be a barrier for some investors. This means that only high net worth individuals and accredited investors may be able to participate in these opportunities. Learn how to become an accredited investor.
These cons underscore the importance of thoroughly researching syndication opportunities, understanding the terms, the sponsor’s track record, and having a clear grasp of your own investment goals and risk tolerance before committing funds to a real estate syndication.
Work With BAM Capital for the Best Multifamily Real Estate Syndication Deals
Look no further than BAM Capital if you are in need of a syndicator with a strong Midwest focus and a track record for excellence. Accredited investors love working with BAM Capital because it is considered an industry leader in the world of real estate syndication.
This Indianapolis-based syndicator only goes for high quality multifamily real estate properties with in-place cash flow and proven upside potential. Specifically, BAM Capital prioritizes Class A, A-, and B++ multifamily properties. They then use their award-winning investment strategy to create forced appreciation while mitigating investor risk. [5]
BAM Capital is also a vertically-integrated company. This means they can handle every step of the syndication process, from acquisition to property management to renovations. In fact, BAM Capital now has over $700 million AUM and 5,000+ units. [5]
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.
