A syndication is the structure or relationship between a sponsor and multiple investors who pool their money to fund a real estate acquisition or other venture. Investing in a real estate syndication means investing passively, alongside multiple other passive investors, with one person or company in charge of buying, operating, and ultimately selling the property. That person or company is also responsible for many other things, such as accounting, tax returns, and making distributions to the investors. In essence, you invest your money, and a real estate expert does all the work.
Syndications are often referred to as “passive real estate offerings,” “private offerings,” “private placements,” and, incorrectly, “crowdfunding deals” (which are just syndications advertised online). In this book I’ll use the terms “private offerings” and “syndications” interchangeably.
I suppose it’s obvious that a syndicator would be someone who arranges a syndication. You will often see a syndicator referred to as a sponsor, and in some cases, an operator or operating partner, or even as a GP or general partner, which is a carryover from the days when limited partnerships were the preferred entity structure for private offerings. In this book I’ll refer to this role as the sponsor or the syndicator, and sometimes as the operator.
Syndicators have a variety of motivations for sponsoring a syndication. Some don’t have money of their own to invest in real estate, so they use investors’ money instead. Others are leveraging their own money with money from others, which boosts the yield on the sponsor’s capital. And others have built a brand as a financial services business to serve their clients’ needs for alternative investments, just as a bank or financial advisory business serves its clients’ needs for conventional investments.
Merriam-Webster’s online dictionary has another definition for a syndicate, “a loose association of racketeers in control of organized crime.”1 As a syndicator myself, I think this is pretty funny. But investors in private offerings might see this definition as far less humorous and even a bit scary (rightfully so).
The potential remains for investment sponsors to throw morals out the window, of course, but more common than fraud and theft is incompetence: sponsors who get in over their heads, take improper risks, have insufficient analytical tools, or don’t manage assets properly. Any of these can result in getting into a bad deal or totally screwing up a perfectly good one.
This underscores the importance of properly screening the investment sponsors you will entrust with your valued capital. Many people who invest in syndications don’t know what questions to ask, how to recognize a properly underwritten acquisition, or how to properly compare one opportunity to another.
Real estate is a low-barrier-to-entry investment. If you have the down payment and can get the financing, you can buy real estate. So why would anyone invest in a syndication instead of just buying property directly? Let’s run through the most common reasons.
Dealing with tenants can be challenging and time-consuming, and everyone has heard landlord horror stories of 2 a.m. clogged toilet calls or rogue tenants that trash the place. There are ways to mitigate these annoyances, but many people stay away from real estate because of these issues alone.
If you have the cash to invest in real estate, you probably earned it by doing something you’re really good at, and whatever that is probably takes up a lot of your time. Or maybe you have enough wealth that you don’t need to work. Instead, you choose to spend your time traveling, golfing, sailing—whatever makes you happy. Trekking around looking at real estate isn’t how you would choose to spend your time, or perhaps you have no extra time to do it even if you wanted to. Let’s not forget that looking at property is only the beginning. Getting financing takes time. Managing properties, or managing your property manager, takes time. Refinancing, reading management reports, responding to maintenance decisions, filing insurance claims, selling the property—all these things take time.
Expensive markets aren’t the only ones presenting problems. What if you live in a stagnant market, where homes are cheap but don’t appreciate much? If houses in your area sell for $50,000 and you have that same $200,000 for a real estate investment, you’ll have to buy several houses, increasing the management burden, which, if you lack time, could be an issue. You could buy a larger property, such as a small apartment complex, but you’d be doing so in a stagnant market, remember? Perhaps that’s not the best choice, especially if you could invest in a syndication that gives economy of scale on a larger property located in an emerging or strong market.
There are a couple of subcategories of diversification that syndications can help you accomplish. Portfolio diversification means that you are just looking to add real estate to your investment portfolio, and are doing it through syndications in large part due to one or more of the reasons listed above. Geographic and asset class diversification are major reasons for investing in syndications, since you can invest smaller amounts of money in several assets in different areas and in different property types, versus investing a large sum in one single property that you own directly. Sponsor diversification means that you can invest with several different sponsors, which helps to mitigate sponsor risk by not over-allocating to any one group.