What Are the Three Phases of Real Estate Syndication?
Table of Contents
The Three Phases of Real Estate Syndication Are:
- Deal Sourcing
- Property Acquisition
- Asset Management
Real estate syndication is a popular investment strategy because it gives multiple investors access to real estate deals that are larger and normally difficult to access.
In a syndication deal, multiple real estate investors pool their resources together to buy and manage a single real estate investment property. This is the perfect strategy for investors who want a passive investment in real estate. [1]
The most popular version of this deal is multifamily syndication. Despite the fact that a real estate syndication can be formed for any type of real estate, multifamily properties are known for their strong and predictable cash flow, thanks to their multiple units. Even if one or two tenants leave, the cash flow does not completely stop, unlike with single family rentals. Apartment communities and condominiums have plenty of units and tenants to provide monthly rental income.
Multifamily syndication is also appealing to investors because of how difficult it is to purchase a multifamily property as a lone investor. A lone investor faces significant risk if they acquire a large multifamily real estate property because of the cost and maintenance demands of the investment.
Because these properties can easily cost millions of dollars, even accredited investors and high net worth individuals (HNWIs) may hesitate to purchase these alone. But through multifamily syndication, the risk is far more manageable since it involves splitting the capital among multiple investors.
So what exactly does the process of real estate syndication entail? In this article, we will break down the three phases of real estate syndication and explain how each one plays a role in the success of a syndicated deal. Read this article about understanding the structure of multifamily syndication.
Phase 1: Deal Sourcing
Before we begin discussing the different real estate syndication phases, we should note that there is no official way to classify the various stages of a syndication deal. But these phases are based on how most real estate syndication deals happen.
The first phase of real estate syndication is deal sourcing. This involves finding and evaluating potential investment opportunities. It is one of the many responsibilities of the syndicator, also known as the sponsor, who serves as the general partner (GP) in the syndication deal and puts everything together. [1]
The syndicator is an experienced real estate professional or company whose job is to identify the investment property, put the deal together, and execute the business plan. Deal sourcing is one of their most important tasks, as the success of the syndication deal heavily relies on the quality of the investment opportunity.
A skilled syndicator can identify the best potential real estate investments in a certain area, so investors should consider working with a trustworthy company with a reliable track record.
Once potential deals have been identified, the syndicator will evaluate them and conduct their due diligence. The syndicator will analyze the property’s financials, assess market trends, and identify potential risks. They will thoroughly examine the deal before bringing investors into it.
Phase 2: Property Acquisition
After a deal has been thoroughly evaluated and deemed a good investment opportunity, the next step is to negotiate and secure it. This still falls under the syndicator’s list of responsibilities. They will negotiate the terms of the purchase, consider different financing options, and secure the loan.
This second phase involves the actual purchase of the property, and it’s where investors come in.
Before the property can be acquired, the syndicate must raise the necessary capital. It is the syndicator’s job to look for investors who will participate in the syndication deal. [1]
To acquire the property, investors will provide most of the capital needed. Syndicators may also provide some of the remaining capital. Each deal is different. But generally speaking, investors have a limited role in the syndication deal. They will provide the capital and pay the fees needed to run the property, but beyond that, no further input is required. This is what makes it a passive investment.
As limited partners (LPs) in the deal, investors take on a passive role in the investment. They contribute the bulk of the capital that is required for the syndication deal, but they are not legally liable for the investment property itself. [2]
This second phase is where the syndicate’s investment capital is put to use and the deal is officially closed. The syndicator will finalize all the legal documents, transferring ownership of the property, and paying any closing costs.
With the deal closed, the third phase begins, and it’s all about managing the multifamily asset that was acquired through the syndication.
Phase 3: Asset Management
The final phase of real estate syndication is asset management, which involves maximizing the value of the property and overseeing its day-to-day operations. The goal of the syndicator is to make the syndication deal profitable, and there are several strategies they may use to accomplish it. However, working with a reliable syndicator is important because not all syndication deals work out. Investors should prioritize working with syndicators who can bring results. [3]
Asset management involves active decision-making from the syndicator. This phase is where investors sit back, relax, and enjoy the benefits of their passive investment. They can avoid the usual headaches of owning a real estate property since they don’t have to take on the responsibilities of a landlord.
The syndicator will take care of rent collection, tenant concerns, emergencies, repairs, maintenance, etc. They will either handle property management on their own or hire a third party property management company to take care of it. Either way, investors don’t have to worry about who is running the investment property. [1]
Asset management is not just about running the property. Syndicators often see it as an opportunity to increase the value of the property. They can do this by making various improvements and renovations or implementing cost-saving measures.
The syndicator must continuously monitor the property’s performance and make strategic decisions to potentially increase its value. They will also keep investors updated on the investment property’s performance as well as any important developments.
Because of their investment, investors receive a share of the profits generated by the property. The syndicator is also in charge of distributing the profits. The profits are distributed based on each investor’s ownership percentage in the property. This will be done on a monthly or quarterly basis. The details of the profit split should be reviewed by investors before participating in the real estate syndication deal. [1]
Aside from the monthly cash flow, they may also earn a share of the equity upon resale, depending on the deal structure. Remember that every syndication deal is different. It is important for investors to do their due diligence and analyze the syndication agreement before agreeing to participate in the syndication deal.
Syndication deals last for several years, so investors should be comfortable with a bit of illiquidity. Once the deal is done, the final step in this phase is exiting the investment. This typically involves selling the property and distributing the remaining profits to investors. [3]
The syndicator should have an exit strategy in place, which should be detailed in the syndication agreement or the private placement memorandum (PPM).
Because of the fact that the syndicator handles everything from the beginning and also takes care of asset management, multifamily syndication is considered a true passive investment in real estate. It is the perfect investment strategy for investors who want passive income while diversifying their investment portfolio.
Benefits of Real Estate Syndication
Each of the three phases of syndication plays a crucial role to its success. Most of it will fall on the shoulders of the syndicator. But a successful syndication deal can bring you plenty of benefits, which is why choosing the right deal is important.
One of the most appealing benefits of real estate syndication—particularly multifamily syndication—is the potential for strong passive income generation.
Passive investors in a syndication typically enjoy the benefits of rental income and property appreciation without the need for direct involvement in property management. This passive income stream gives investors the opportunity to reap the rewards of real estate ownership without the active engagement required in traditional property management. [3]
If you want to grow your wealth without having to be a landlord, this is a great option for you.
Property Management
The passive nature of multifamily syndication can be attributed to the fact that the investment property is managed by the syndicator. The distinct advantage of professional management is a key benefit that attracts investors who are looking for a hands-off investment in real estate. Not everyone has the time or energy to run an entire multifamily property like an apartment community. That can be especially difficult if you have no experience dealing with tenants.
Syndication investors don’t have to worry about this. They can benefit from the expertise of professional sponsors who know how to run large multifamily properties. They will take on the day-to-day responsibilities of property management, including tenant relations, property maintenance, and rent collection. [3]
By relieving investors of these burdens, they are able to focus on other priorities and enjoy some peace of mind while still capitalizing on the potential for lucrative returns in the real estate market.
Portfolio Diversification
Through syndication, investors can participate in a variety of real estate projects. Since syndication can be done with any type of real estate, they can potentially acquire residential, commercial, and industrial properties by joining different syndications. [3]
This diversification helps spread risk across multiple investments, reducing the impact of any investment that does not work out. Adding real estate to your investment portfolio provides stability as this asset class is not as volatile as stocks and bonds.
Additionally, it is much easier to acquire multiple units in one building through multifamily syndication than it is to acquire multiple single family properties in different locations.
Access to Larger Investment Opportunities
Real estate syndication offers investors the unique advantage of accessing larger investment opportunities that might otherwise be out of reach for them.
As we all know, large multifamily properties are more expensive. This is one of the biggest barriers to entry when it comes to multifamily real estate investing. But by pooling your financial resources with other investors, it is much easier to own a multifamily property without actually buying it on your own. This is also a much safer approach as you only have to worry about your portion of the capital rather than the entire property. [3]
No investment is perfect, however, and that also applies to real estate syndication deals.
Because of the fact that these syndication deals last for several years, investors need to be comfortable with not having access to their funds. Just like other real estate investments, multifamily syndication is illiquid. This is why most syndication deals are only accessible to accredited investors.
Accredited investors are those who fit certain criteria set by the US Securities and Exchange Commission (SEC). They have the net worth, annual income, or professional qualifications needed to participate in unregistered securities and investment opportunities. Accredited investors are known to have the financial sophistication to assess these deals properly. They also have a big enough financial safety net to protect them in case a deal does not work out. [1]
If you are an accredited investor and your goal is to generate passive income in real estate without the headaches of being a landlord, multifamily syndication may be the right choice for you.
Work With BAM Capital for the Best Multifamily Real Estate Syndication Deals
One of the things accredited investors can properly assess is the quality of a syndicator. Finding a trustworthy syndicator with a consistent track record is necessary since they will be the one to make all the decisions moving forward in the syndication deal.
Accredited investors know not to just look at the investment properties being offered, but also to look into the track record of the syndicators offering them. This is why accredited investors love working with BAM Capital.
BAM Capital is an Indianapolis-based syndicator. More importantly, they are known for their consistent track record of excellence and their reputation as a leader in their industry. In fact, BAM Capital now has over $700 million AUM and 5,000+ units. [4]
BAM Capital focuses on multifamily properties that are Class A, A-, and B++. They then use their award-winning strategy to create forced appreciation while mitigating investor risk. This vertically-integrated syndicator can guide you through every step of the syndication process, from acquiring high quality properties with in-place cash flow and proven upside potential, to managing and renovating them. [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.
