Passive Real Estate Investing: Giving You the Freedom to Live Abundantly!

Syndication is a partnership between several investors. Real estate syndication deals can be a practical option for passive investors to create a varied and comprehensive investment portfolio with continuous and reliable cash flow streams. 

A real estate syndication occurs when groups of investors combine resources, skills, finances, and capital to purchase/manage properties that would otherwise be difficult or impossible to obtain on their own.

What Are the Parties Involved In Real Estate Syndication?

There are usually two key roles in property syndication: syndicator and investor. The syndicator is also known as the sponsor, operator, active investor, and general partner (GP). The GP is responsible for managing the day-to-day operations of a property. As the syndication owner, they have unlimited liability and are accountable for executing the business plan.

General partners locate the asset, conduct the underwriting and due diligence, secure equity investors, obtain debt financing, take all steps necessary to complete the acquisition, and oversee the ongoing property management through disposition. General partners often invest their own money, too.

The other party is the investor, also known as a limited partner (LP), passive income investor, or equity investor. In syndication, the LP is a passive investor who provides a portion of the capital necessary to purchase a property.

In return for their investment, limited partners receive an equity share in the syndication in addition to cash flow distributions and profits. Their liability is limited to their share of ownership in the project. These are skills, amount of available capital, abilities, and capacities that determine which role an individual is best suited for.

How Is Real Estate Syndication Legally Structured?

Like many investments, syndication deals can be risky and complicated. Equity investors join a limited liability company (LLC) or a limited partnership to reduce complications. 

The financial management for both limited partners and general partners plus the detailed structure and operation of the syndication is defined and determined in what is referred to as a private placement memorandum (PPM). 

PPM is a legal document required by the Securities and Exchange Commission (SEC) outlining the risks, objectives, and terms of making a particular investment. This document is prepared by an attorney that specializes in syndications and private placements. The rules and regulations protect both the limited partners and sponsor if the deal goes sideways.

Why Is Syndicated Passive Real Investing Great for Investors?

There are some pretty standard advantages for passive real estate syndication investing, including: 

• Tax advantages (syndication investments offer many tax exemptions. They are superior to just about any other investment vehicle in this aspect).
• No tenant or management hassles (the GP syndicator takes care of all tenant and maintenance issues).
• Liability protection (they are structured so that the limited partners are protected from external liability).
• No banks to deal with (an experienced syndication management team will be the one dealing with a real estate debt lender). 
• Scalability (in terms of scaling, syndication surpasses other real estate deals). 
• It provides the opportunity to connect with high-quality real estate syndication operators.
• It helps investors grow wealth and develop financial freedom without interrupting their career or lifestyle.  
• The flexibility offered to investors (due to the flexibility offered to syndication investors, there are variations on the degree of passivity. The degree of passive or active involvement is not just left to chance. It is established upfront before any money exchanges hands. The level of involvement ranges from an absolutely passive investor to being 100% actively involved in the day-to-day management and acquisition.)

How Does Syndication Work?

Both passive and active investors play a part in real estate syndication. As a manager, the sponsor invests the sweat equity, does all the work, provides the expertise, and makes all management decisions. They receive dividends and a portion of the final pay-off for their efforts.

On the other hand, passive investors inject most of the financial equity with their capital investment. Limited partners often receive preferred status and thus are the first to receive profit distributions and returns on investment. 

Active investors are largely responsible for investing about 5-20% of the total required equity capital. Passive investors put in between 80-95% of the total. The more the sponsor invests in the deal, the better it is for the investor. 

Although this description is simplified for clarity, it provides an overview of syndication. It illustrates the various roles between passive and active investors. 

A passive income stream developed through syndication is an amazingly realistic avenue to grow investors’ wealth. It also helps investors attain financial and time freedom while continuing in the profession.

What Is the Difference between Real Estate Syndication & Crowdfunding?

Crowdfunding is a money/capital gathering method, and syndication refers to the funding relationship between the fund and its funders. In other words, crowdfunding is a type of cooperation between parties in investment deals.

Syndication is an equity-based, long-term collaboration that includes several investors. Crowdfunding is a loan and equity-based fund-raising method (involving a very temporary relationship).

What Is the Difference Between Syndication & REITs?

When individuals invest in REITs, they buy shares in a company, just as when they buy stocks. When individuals invest in a group investment or syndication, they invest directly in a specific property. In other words, they will own the entity (usually an LLC) that holds the asset together with other limited investor partners and general partners. Hence, they have direct ownership. 

When people invest in real estate syndication, they invest directly in a real piece of property. When people invest in a REIT, they invest in the company and not directly in property, so the tax benefits are a bit less exciting.