The Pros and Cons of Real Estate Syndication
Table of Contents
Many investors turn to real estate investing for stable, long-term returns. Unlike more volatile investment options like stocks and bonds, real estate is typically more reliable. They can appreciate over time, generate passive income, and even offer a hedge against inflation. Investors are also drawn to the tangible nature of property.
However, real estate investing is not for everyone. This investment strategy demands a unique set of skills that may not align with every investor’s strengths and preferences. For example, real estate investing often requires a considerable financial commitment, which can be a barrier for some.
If you intend to buy a real estate property for the purpose of renting it out, you have to take on the responsibilities of being a landlord. Successful real estate investing requires a keen understanding of market trends, property management, and legalities. This is something that does not always resonate with people’s interests and expertise.
Being a landlord can eat up a significant portion of your time and energy. So while real estate can offer significant rewards, it is not the best choice for everyone. This is why real estate syndication has risen in popularity in recent years.
Real estate syndication is a way for investors to pool their resources and invest in larger real estate projects. This unique approach solves a lot of the problems that come with traditional real estate investing.
Still, you need to know how this investment approach works and why accredited investors are participating in it. Here we will discuss the pros and cons of this particular strategy.
What is Real Estate Syndication?
Real estate syndication is a way for multiple investors to pool their resources and invest in a larger real estate project. This can include anything from apartment communities and commercial properties to single-family homes and land development. A syndication deal can be done for any type of real estate, but multifamily syndication is the most popular type due to the innate benefits of multifamily properties. Apartment communities, for example, are associated with strong and consistent cash flow due to their multiple units. [1]
Multifamily syndication is ideal for investors who want to enjoy the benefits of real estate without the headaches that come with being a landlord.
The syndication is typically led by a sponsor, who is responsible for finding and managing the investment opportunity. Also known as the syndicator, the sponsor is responsible for putting the deal together, creating and executing the business plan, and finding investors who will provide most of the capital needed to acquire the property. As the general partner (GP) in the syndication, sponsors take on a more active role in the investment process. [1]
Meanwhile, investors in the syndication deal are limited partners (LPs), meaning they have limited liabilities and responsibilities in the investment. They just invest their money and pay some fees to get the syndication deal going. They then receive a share of the monthly cash flow from the property’s rental income.
Because the syndicator also handles property management once the deal is in place, this can be considered a passive investment in real estate. Investors have little to no involvement in the day-to-day operations of the project.
Syndication deals are typically structured as limited liability companies (LLC) or limited partnerships (LP). Keep in mind that a lot of these syndication deals are exclusive to accredited investors, meaning those who meet certain qualifications set by the US Securities and Exchange Commission (SEC). [1]
The Benefits of Real Estate Syndication
Participating in real estate syndication can bring investors several benefits. A syndication deal can be a pathway to diversification, allowing investors to spread their capital across various properties and markets.
By participating in a syndication, investors can access a range of real estate investment opportunities that might otherwise be inaccessible due to high costs or limited resources.
Real estate syndication lets investors acquire different types of properties—residential, commercial, or mixed-use—across diverse geographic locations. This approach mitigates the risk associated with investing in a single property or market.
Even if you just participate in one syndication deal, multifamily syndication lets you diversify your portfolio faster. Instead of trying to purchase multiple single family properties, you can acquire multiple units in a single multifamily property through real estate syndication. This approach therefore allows you to diversify your investment portfolio while generating regular cash flow. [2]
Syndication deals also solve one of the biggest problems investors have with real estate investing: the fact that a lot of multifamily properties are too expensive for the lone investor.
Even high-net-worth individuals (HNWIs) sometimes think twice about buying these larger properties by themselves because of the huge risk involved. With real estate syndication, there are multiple investors splitting the risk amongst themselves and providing only a portion of the capital needed. [1]
This gives real estate investors access to larger projects that might be out of reach or impractical for a lone investor. By pooling resources, multiple investors can combine their capital and tackle sizable ventures that require substantial funding.
Not only does it give access to more expensive investment properties, it also lets investors participate in new and unique investment opportunities that they may not have extensive knowledge of. [3]
Another reason to pursue real estate syndication, especially multifamily syndication, is its high return potential.
Investors who want passive income in real estate should look into this strategy. Multifamily properties can generate a strong, consistent, and reliable cash flow thanks to their multiple units. Add on the fact that a sponsor handles everything from property management to tenant concerns, and this becomes one of the best passive investments in real estate. [3]
The passive nature of this investment model allows accredited investors to enjoy consistent cash flow from rental incomes without having to spend all of their time handling emergencies, repairs, and rent collection.
Seasoned syndicators bring specialized knowledge, experience, and expertise to these syndication deals. They can navigate complex market dynamics and make the best decisions for the investment property. So while a true passive investment in real estate may be rare, multifamily syndication can definitely be considered one of them.
The Drawbacks of Real Estate Syndication
While there are many benefits to real estate syndication, there are also some drawbacks to consider. For starters, some investors may not like the lack of control over the project. The syndicator is responsible for making decisions and managing the investment property, which means investors may not have a say in how it is managed.
In a syndication deal, you will have to rely on the sponsor’s expertise and choices regarding property management, financial strategies, and exit plans. This lack of autonomy might not sit well with investors who prefer hands-on involvement or have specific preferences for property management approaches.
Disagreements or differences in vision between investors and sponsors could lead to conflicts or investor dissatisfaction. If you wish for more direct control over an investment property, then this might not be the ideal approach.
With that said, the business plan will be put into detail along with the exit strategy and the profit split in the syndication agreement or private placement memorandum (PPM). Investors will know how the syndicator intends to approach the investment before they even agree to participate in the deal.
Another potential drawback of real estate syndication is the high minimum investment. While real estate syndication does make larger properties more accessible, it still requires a significant amount of capital to participate. These minimum thresholds can range from tens to hundreds of thousands of dollars.
Still, a syndication deal is cheaper than trying to purchase an apartment community all by yourself. It is easier than trying to take on a multifamily investment property on your own. [2]
Additionally, real estate investments are generally not as liquid as other types of investments, meaning it can be challenging to sell your shares in a syndication if you need to access your funds quickly. If you participate in a syndication deal, you should be prepared to lose access to your funds for several years. A syndicated real estate deal is typically illiquid for the entire holding period. [3]
The illiquid nature of these investments means investors might encounter challenges if they need to access their funds urgently or wish to exit the investment before the property is sold or the syndication term ends.
These are some of the reasons why a lot of syndication deals are exclusive to accredited investors. Accredited investors have the net worth and income to protect themselves in case an investment does not work out. And because no investment is without risk, we should mention that even syndication deals have the potential to fail. Not all deals work out. [3]
As with any investment, there is always a risk of loss. If the project does not perform as expected, investors may lose some or all of their investment. Market fluctuations, unexpected expenses, or changes in local regulations can adversely affect the property’s performance.
Since syndication involves multiple investors, an unforeseen issue could lead to financial losses that impact everyone involved. Then again, the risk is still significantly lower than taking on a multifamily investment alone. With real estate syndication, you only have to worry about losses concerning your share of the capital rather than the entire investment property.
Multifamily syndication can be a lucrative investment strategy, providing the opportunity for higher returns and access to larger projects. However, it’s important to carefully consider the pros and cons before deciding if it’s the right investment for you. As a responsible real estate investor, you still need to perform your due diligence before joining a syndication deal.
Work With BAM Capital for the Best Multifamily Real Estate Syndication Deals
For accredited investors who want to own multifamily real estate but do not have the time or energy to manage multiple tenants, multifamily syndication is the best investment approach. Through multifamily syndication, you can enjoy all the benefits of real estate investing without having to handle the daily responsibilities of property management.
This is a passive investment, meaning the syndicator will handle rent collection, repairs, maintenance, tenant concerns, etc. But because they are in charge of making all the important decisions in the syndication deal, investors must focus on finding a syndicator that they trust.
You need to work with a reliable syndicator with a consistent track record. Due diligence is still necessary despite the fact that this is a lower risk investment. Work with BAM Capital if you want a syndicator with a track record for excellence.
This Indianapolis-based syndicator has a strong Midwest focus, prioritizing Class A, A-, and B++ multifamily real estate properties. BAM Capital is trusted by accredited investors because of their high quality real estate investment properties with in-place cash flow and proven upside potential. [4]
BAM Capital is also a vertically-integrated company, meaning they can handle every step of the syndication process. They can guide you through the whole thing: from property acquisition to management to renovations. You will see how they use an award-winning strategy that creates forced appreciation while mitigating investor risk. In fact, because of this approach, BAM Capital now has over $700 million AUM and 5,000+ units. [4]
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.
