Should Real Estate Syndication Be Part Of Your Investment Strategy?

Real estate has long been an attractive investment asset class for many investors. It is a tangible asset that has the potential to generate steady income and significant capital appreciation over time. However, real estate investments also require a substantial capital outlay and ongoing management and maintenance. Real estate syndication may be an appealing option for investors looking to invest in real estate without the responsibility of directly owning and managing properties.

Understand How Syndication Works

A real estate syndication is a way for multiple investors to pool their funds to invest in property they otherwise could not afford or manage independently. An indicator, typically a real estate firm, secures a large commercial property with the intention of raising funds from private investors to complete the purchase and provide capital for any renovations. The syndicator then takes on the responsibility of managing the property and operations. The syndicator earns fees and shares of profits for their role in acquiring and managing real estate. Investors make a portion of the rental income, profits, and capital appreciation in the property.

The Benefits Of Real Estate Syndication

There are several benefits to investing in a real estate syndication over directly acquiring investment property:

Diversification

Syndication allows investors to invest in large-scale properties, even with a small amount of capital. This provides more diversity to an investment portfolio.

Professional Management

Syndicators are experienced real estate firms that have the knowledge and resources to adeptly manage the property. Investors benefit from the syndicator’s expertise without having the responsibility of hands-on management.  

Minimize Risks

Real estate syndication spreads the risks across multiple investors.

And with the syndicator conducting proper due diligence on properties before the acquisition, the risks of property issues or decreased valuations are minimized.

Tax Benefits

Investors in syndication may be able to claim tax deductions related to depreciation, mortgage interest, and other expenses. The syndicator will provide investors with the necessary reporting for tax filings.

Opportunity for Higher Returns

The potential to earn higher and more passive returns compared to other investments is a significant incentive for many real estate syndication investors. Strong cash flow from rent payments and property appreciation can result in double-digit annual returns.

Consider the Drawbacks

While real estate syndication has its advantages, there are some potential drawbacks to keep in mind:

Loss of Control

Investors relinquish a significant amount of control in the investment to the syndicator.

The success or failure of the investment depends on the syndicator’s abilities.  

Long Investment Period

Most syndications have a multi-year investment lockup period, typically 3-5 years or more. Investors’ capital will be tied up for that duration.

Fees

Syndicators typically charge fees including acquisition fees, management fees, and performance fees. These fees reduce investors’ overall returns.

No Guarantee of Returns

Although syndication offers the potential for attractive returns, there is an inherent risk in real estate investing. The performance of the investment and returns to investors are not guaranteed.

Weigh Your Options Carefully

Real estate syndication provides an opportunity for investors to gain exposure to real estate in a more passive manner. However, investors must weigh the pros and cons carefully based on their own financial situation and investment objectives. For those willing to sacrifice control and access to funds for the potential to earn higher returns from a professionally-managed real estate portfolio, real estate syndication could be a rewarding part of an investment strategy. But for those who prefer more control and liquidity, direct real estate investing or other investment strategies may be better options. With many choices available, consulting a financial advisor could help determine if real estate syndication is right for you.