What Is Syndication?

By Wade Curtis, MBA | February 26, 2024

While researching your next investment opportunity, you may have encountered some terms you’re not familiar with. Between 1031 exchanges, Delaware Statutory Trusts (DSTs), and real estate investment trusts (REITs), hundreds of key terms are involved, such as real estate syndication. This post clarifies the real estate syndication structure and how it relates to other investments so you can better understand your options.

What Is Syndication?

Today, we seek to answer the question: What is syndication? As generally defined, syndication is the process of forming a group of individuals or organizations for the purpose of jointly undertaking a project that requires significant capital.

The syndicate is the group of individuals and organizations that are working together for a common purpose. Syndicate, as a verb, is the act of selling a product to a group of individuals or organizations. Syndicated, as an adjective, describes the product that has been prepared to be sold to a group of individuals or organizations.

What Is Syndication in Real Estate?

In terms of real estate, therefore, syndication refers to investors pooling their financial resources to acquire one or more real estate assets. Practically, syndication is the selling and issuing of ownership interests in a partnership or trust that owns rights to a real estate asset or a portfolio of real estate assets.

Investing in syndicated real estate contrasts investing in real estate as the sole owner. With both types of investing, the investor directly owns the real estate assets. The difference occurs with how much of the real estate asset is directly owned by the investor.

When investing in syndicated real estate, the investor contributes enough to purchase, own, and profit from a portion of the real estate asset, while other investors purchase, own, and profit from the remainder of the asset. When investing in syndicated real estate, investors take ownership of the investment property proportional to their capital contribution.

When investing in syndicated real estate, investors take ownership of the investment property to their capital contribution.

For example, suppose a syndicator approaches you with an opportunity to invest in a fix and flip property. Including the purchase price and renovation costs, the property is $125,000 in total. As an individual investor, you might not have the funds to purchase the entire property and complete the construction yourself, but you have enough to invest 20%, or $25,000.

After doing your due diligence on the property and local area, you decide to go ahead with the investment. Now, you own 20% of the property, meaning you’re entitled to 20% of the profits.

Once the rehab is complete, the property sells for $300,000. Factoring in agent fees and closing costs, let’s assume the property nets $275,000. As you invested 20% into the property, you would be entitled to $55,000. Factoring in your original investment of $25,000, you would have earned $30,000 in passive income or profit.

Benefits of Syndication in Real Estate

Real estate syndication is beneficial for many reasons that may vary depending on the type of investment you pursue. 

First of all, it gives investors an opportunity to invest in higher-valued properties that they potentially could not afford on their own. This enables investors to use their capital to acquire more properties, invest in properties in better locations with the potential for higher profits, and diversify their real estate portfolios. Diversification adds a further advantage in balancing out an investor’s assets and helping to mitigate risk.

Secondly, investors can earn passive income from real estate syndications, commonly in the form of rental income, equity appreciation, or a property sale.

Thirdly, it reduces any one investor’s liability for the property and often eliminates the liability for the individual investors altogether because the partnership or trust takes on all property liability. The same benefit can apply to management responsibilities of the properties. Investors may have the funds to purchase a certain property but don’t have the landlord experience or time to manage it, making syndication an appealing option.

For example, in a REIT or DST, investors do not directly manage real estate. Instead, the trust typically hires managers to operate the properties, including renting the property, screening tenants, and performing maintenance and repairs.

Investors may have the funds to purchase a certain property but don't have the landlord experience or time to manage it, making syndication an appealing option.

Real Estate Syndication in 1031 Exchanges and DSTs

We often refer to syndication as an alternative to traditional 1031 exchanging. A traditional 1031 exchange involves an individual or a single organization exchanging investment real estate of which they are the sole owner with replacement investment real estate of which they will be the sole owner. A syndicated 1031 exchange differs from a traditional exchange because the investor replaces their investment real estate with syndicated real estate.

A Delaware Statutory Trust, or DST, is one such entity that can syndicate real estate. Once it acquires real estate assets, the DST then allows beneficial shares of interest to be sold to investors. The investors then become beneficiaries of the DST and direct partial owners of the real estate asset with rights to their fraction of the income produced by the asset. A DST is one example of real estate syndication and the most common type of real estate syndication related to 1031 Crowdfunding.

Real Estate Syndication vs. REIT

At first glance, real estate investment trusts (REITs) and real estate syndications may appear to have many similarities. Both rely on a pool of investor funds to acquire income-producing properties and give investors distributions.

However, these investments operate quite differently. A REIT is a company that uses funding from investors to purchase, operate, or finance income-producing properties. In a REIT, investors are not actually investing in physical properties, only in shares of the REIT that owns the properties.

Alternatively, a real estate syndication refers to investors pooling their capital together with a sponsor or lead investor to invest in a real estate project. In a REIT, trustees appoint a manager who is responsible for making investment decisions. In real estate syndication, the investor will have equity in a specified property, where a REIT investor will own a share of the holding company.

Though investors don’t have control over which properties the REIT will invest their money in, assessing the credibility and experience of the company can help make a well-informed decision.

Another difference between REITs and real estate syndications is the capital requirements. Many REITs tend to have a lower monetary barrier to entry, though this is not always the case. 

Some REITS and many real estate syndications are limited to accredited investors, meaning investors must meet the experience, income, sustainability, or net worth standards required to invest.

With publicly-traded REITs, investors may also benefit from increased liquidity as they can buy or sell shares anytime. In a real estate syndication, investors may have to adhere to a holding period.

Learn More About Alternative Investment Strategies With 1031 Crowdfunding

Now that you have a little more background on real estate syndication, DSTs, and REITs, you can begin exploring potential investment opportunities that align with your goals. At 1031 Crowdfunding, we offer an extensive online marketplace of various investments, including the largest inventory of DST investments.

Whether you’re considering performing a 1031 exchange with a current investment property or investing in a DST or REIT, we’re here to assist you in your due diligence so you can make an informed investment decision. To learn more about how we help our clients register for an investor account today.

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This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements is speculative in nature and involves a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC Member FINRA, SIPC.

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