Generally speaking, syndication is the process of forming a group of individuals or organizations to take on a project together. Syndicated real estate describes properties that a group of individuals or organizations will purchase.
Real estate syndications can provide investors with the benefits of owning an investment property without the responsibilities of being a landlord.
Syndication in Real Estate
A real estate syndicate is a group of investors who pool their capital to jointly purchase a real estate property. The involved parties fall into two groups:
- Syndicators: Real estate syndicators — also called general partners (GPs) — are responsible for structuring and performing the syndication. They handle everything from finding the investment property to executing a business plan that delivers strong returns to the passive investors in the syndicate.
- Passive investors: The passive investor in a real estate syndicate provides a portion of the capital needed to acquire the property. In exchange, this party receives ownership shares.
You must be an accredited and sophisticated investor to be eligible for participation in a real estate syndicate. An accredited investor must have an annual income of at least $200,000 — or $300,000 with a spouse — and an individual or joint net worth of over $1 million — excluding their primary residence — to meet the financial threshold for investment.
Real estate syndications are available to sophisticated investors with in-depth investment knowledge and experience. If you intend to be a candidate for participation in one of these entities, you must understand the risk you are accepting and how to navigate complex investments.
Syndication in a 1031 Exchange
A real estate syndication can be an alternative to a traditional 1031 exchange. In a syndicated 1031 exchange, investors replace their investment real estate with syndicated real estate.
A Delaware Statutory Trust (DST) is an entity that can syndicate real estate. When a DST acquires a real estate asset, accredited investors can purchase shares of interest in the DST. These investors become beneficiaries of the DST and partial owners of the real estate asset. As partial owners, they have rights to a portion of the income the syndicated property produces.
Benefits of Syndication
Syndicated real estate can offer investors potential benefits like:
- Higher-value investment opportunities: Syndication allows investors to purchase interest shares in high-value properties they may not be able to afford on their own.
- Passive income: Investors can receive monthly or quarterly income distributions from the real estate asset that reflect their partial ownership.
- Tax advantages: Within DSTs, tax benefits are passed down to contributing investors within a real estate syndicate.
- Hassle-free: Investors can purchase shares in syndicated real estate without the stress of performing landlord duties or taking on full liability.
- Diversification: Investors can spread their capital across several syndicated real estate investments rather than investing in a single property.
- Appreciation: The property value could gradually increase over time, resulting in a greater return on investment (ROI).
Challenges of Syndication
Like all investments, participating in syndication can have risks. Aside from potential management challenges, you may experience:
- Lack of control: Since you share ownership with multiple entities, you will not have as much control as a sole landlord. You will have to discuss any major changes you want to make to the property with other syndicate members and agree on the best option.
- Market fluctuation and depreciation: As the market changes, so will your property's value. Your building's value will also change as it depreciates.
- Occupancy challenges: Your syndicate members may have different criteria that constitute their ideal occupant. These discrepancies may lead to tenants with unexpected needs.
Consider all your options carefully to decide whether syndication is a suitable investment option for you.
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1031 Crowdfunding is a premier real estate investment platform for 1031 exchanges, real estate syndication and other investment vehicles. Create an investor account today to view our current investment opportunities. You can also contact us at 844-533-1031 to speak with one of our friendly, knowledgeable team members and get expert advice on real estate syndicates.