Listen to this article on Real Estate Syndication and takeaways for self-directed investors:
Real Estate Syndication Definition
A real estate syndication is a partnership between a group of investors pooling their resources into a single investment. This structure of investment typically involves GP and LP investors. GPs and LPs possess rights and return potential in accordance with their relative liability, effort, and capital commitment in the investment.
As many experienced investors know, real estate investing can potentially be profitable and diversified, delivering returns that are typically less correlated with the stock market. According to a recent survey inquiring about the best method for building personal wealth, 23% of adults cited investing in real estate, ahead of investing in stocks at 16%, starting one’s own business at 15%, and obtaining a second job or side gig at 12%.
That said, property management and the legal details of transactions may not sound like fun for everyone. What’s more, a complex commercial real estate investment — the kind that can yield outsized returns — is nearly impossible for an individual investor to carry out on their own. Thankfully, real estate syndications mitigate most of these problems. “Syndicates” are structures that allow for “fractionally” participating in complex, multi-tenant property investments. By teaming up with other real estate investors in the form of a syndication, you can sit back, relax, and invest passively.
Real estate syndications, which are effectively legal partnerships of real estate investors, can be a viable way for multiple investors to pool their resources together to fund a transaction or real estate project. And, in so doing, for investors to participate fractionally in the investment. Such partnerships can also open the door to larger investment opportunities like multifamily properties or industrial real estate.
Real estate syndications allow for passive investing by individuals, with the upside of removing liability and day-to-day maintenance.
There are several ways to get involved with a real estate syndication, from turning to a real estate crowdfunding platform to creating your own syndication agreement. We’ll be overviewing both of those options and then some in this accredited investor’s guide to real estate syndication.
Reflections on the New Phase of the Market Cycle
Real estate syndication has continued to move online. The “real estate crowdfunding” space is estimated at over $10B in transaction volume worldwide, and online real estate syndications remain a well-established means of accessing private real estate markets. During times of public market volatility, this form of real estate investing may be worth considering.
The commercial real estate landscape has shifted meaningfully since the challenging period of 2023. Following the Fed’s series of rate cuts in late 2024, market dynamics are showing signs of positive change. While previous rate hikes corresponded to declines in CRE values of around 20%, improving liquidity conditions and stabilizing valuations — particularly in major markets like Los Angeles, New York, and San Francisco — suggest we may be entering a more favorable phase for real estate investment. Going into 2025, our thesis remains that private-market real estate can provide strong risk-adjusted returns in any market environment, though careful vetting of syndication partners is imperative.
Lower interest rates potentially benefit business across sectors, therefore positively impacting tenants and operators across a range of CRE sectors. For example, industrial tenants with capital-intensive operations may adopt an expansionary mindset, putting upward demand pressure on industrial real estate. Again, we do not know what specific dynamics will follow in this phase of the business cycle. EquityMultiple’s current live investments span six different CRE asset classes, allowing you to potentially tap into the breadth of new opportunity in the economy.
Real Estate Syndication History
Joint venture projects like real estate syndications have been around for decades. Moreover, Congress has been passing laws since the early 20th century aimed at regulating sophisticated real estate investments. Here are a couple of examples:
- The Securities Act of 1933 curtailed the legal feasibility of the concept. In other words, all new private real estate offerings were newly required to be registered with the Securities and Exchange Commission (SEC).
- There are two notable exemptions for registration requirements: 506(b), which requires a “substantive, pre-existing relationship” with prospective investors, and 506(c), which allows companies to broadly advertise specific securities so long as they take “reasonable steps” to confirm that each participating investor is accredited. Both of these exemptions stave off the trouble of a time-consuming and costly registration process.
- The JOBS Act 2012 welcomed accredited investors to participate. This piece of legislation opened the gates for modern crowdfunding platforms to begin offering privately listed real estate to individual investors.
- Two major components of this law, Title II and Title III, effectively gave rise to the real estate crowdfunding industry. Title II of the JOBS Act allows investment companies to employ “general solicitation” to market securities offerings. Starting in mid-2016, Title III opened up crowdfunding to all investors, including those without accreditation, under certain rules: businesses may raise no more than $1 million within a twelve-month period, and non-accredited investors are subject to investment caps based on their annual income.
Accredited investors are able to take the most advantage of what real estate syndication (a.k.a. property syndication) has to offer since, per the SEC, they have the funds to back up these large investments. Note that there are a range of investment profiles available via EquityMultiple and other real estate crowdfunding platforms. Debt and equity-based real estate syndications, for example, may offer quite different risk/return profiles.
Did You Know?
The concept of including individual investors in large-scale ventures as part of a limited partnership structure dates to ancient civilizations. As early as 1800 BC in the Mesopotamian city of Ur, entrepreneurs supplemented debt capital with investments from citizens (often small contributions such as a bracelet or two) to help fund ventures like maritime expeditions and palatial construction. Tablets excavated from the time period indicate that profits were shared pro rata among investors, and that GP/LP relationships were established, with the risk-taking entrepreneur entitled to a higher proportion of profits while the LP investors were protected from liability and benefitted from the expertise and motivation of the GP.
Real Estate Syndication Structures
Passive investors in a syndication are grouped into a distinct legal entity known as a “special purpose vehicle” (or SPV). While several legal structures are viable, LLC formations are the most common way to structure a real estate syndication; however, this type of organization isn’t a requirement by the SEC. It is also common practice to have the following five members involved:
- Real estate syndicators (sponsors or general partners), responsible for strategizing real estate investments and securing financing from passive individual investors.
- Passive individual investors supply as much capital as they are comfortable with and work with general partners (GPs) and limited partners (LPs) to understand the health of their investment.
- Limited partner investors are less liable counterparts to GP investors and are consequently entitled to a smaller share of the cash returns.
- Managing entities act as a liaison between party members and can offer private access to investment opportunities, asset managers, and guidance.
- Joint venture partners are separate entities who only carry liability for their specific role within the investment partnership.
When investors participate in real estate syndication at crowdfunding platforms like EquityMultiple, the managing entity will typically be on the same platform.
Real-life examples of real estate syndication investments available on EquityMultiple.
How To Invest in a Real Estate Syndication
Real estate syndications were once coordinated in smoky backrooms and on golf courses. Since the JOBS Act opened the door for real estate crowdfunding, numerous digital platforms have moved in to “disrupt” the traditional paradigm. EquityMultiple, for example, uses a sophisticated SPV structure and technology to allow individual investors to tap into real estate syndications at a significantly lower barrier to entry.
Depending on the type of real estate investment, member relationships, and current market conditions, the returns earned from the real estate investment can be used to fuel another venture within the syndication; alternatively, the syndication can disband entirely. The important thing to know is that individual investors may have varying degrees of representation within a syndication. In EquityMultiple’s model, our legal structure — and middle layer of vetting — help ensure individual investor interests are well-represented.
Types of Syndications in Real Estate
Although real estate syndication agreements can vary a great deal, their core principles are typically the same. In general, real estate syndication partners enter into a limited liability company (LLC) or form their own syndication agreement.
Syndication members can share capital, resources, and industry connections to invest in real estate. An agreement will also normally include the following key elements:
Real Estate Syndication Checklist | |
|---|---|
| Communication Practices | When, where, and how syndications will meet to discuss their partnership and investment decisions moving forward |
| Profit-Sharing Procedures | A detailed agreement of how the profits will be shared between syndication members |
| Voting Rights | Specific rhetoric aimed at how the syndication will vote on matters that currently fall outside the syndication agreement. In the case of most syndications, the legal entity (LLC) will be investing passively as a limited partner (LP) and thus have little or no voting rights. |
Real estate syndication sponsors will lead the group by applying their investment experience to secure capital and strategize other financing initiatives, allowing passive investors like you to focus on other assets in your portfolio.
Depending on the syndication agreement, limited partners will also potentially play a less liable role in capital acquisition. Managing entities can then help facilitate communication between joint venture partners and other syndication members.
A hierarchy of wealth distribution may also be included in a real estate syndication, often including a preferred return hurdle, an equity waterfall, and a sponsor promotion. These elements dictate how profits are split between syndication members, other equity investors, and the sponsor (GP) upon exit of the investment. Finally, more elements can be incorporated into the real estate syndication agreement to ensure that the contract is tailored to the investment goals of its members. For instance, an agreement may be more detailed if the syndication decides to invest in properties that require more investment capital, such as commercial real estate.
Commercial Real Estate Syndication
Given the vast scale of commercial real estate, it’s often more difficult to finance as an individual investor. This is one of the many sectors where syndications play a crucial role in helping multiple investors tap into new market opportunities.
The Securities Act of 1933 also helped to restore investor trust in the securities market by increasing transparency. Companies required to register under this act must release data about their position in the market. Though commercial real estate crowdfunding companies are a relatively recent form of real estate syndication, they are nonetheless still required to share pertinent information in an effort to boost investor confidence.
Don’t let one bad investment experience deter you from your overall financial goals; just learn from it. If you’re considering working with a syndication, look at its performance history and the levels of expertise on the team.
– Ellie Perlman, Founder and CEO of Blue Lake Capital LLC
Equity Real Estate Syndication
Passive investors looking for someone to actively manage their real estate investment might be interested in working with a sponsor, also known as a real estate syndicator or general partner. Accredited investors may also be interested in participating in online real estate syndications through a platform like EquityMultiple. This online investing experience is streamlined with low investment minimums, various options (different syndications), and active asset management on the investor’s behalf.
Once a GP is part of your real estate syndication agreement, they’re able to tap into a greater diversity of even more passive capital like preferred equity. They can also potentially secure the rest of the capital stack financing needed to acquire an investment.
Real Estate Debt Syndication
A syndicated real estate debt financing structure, on the other hand, is defined as the fractional offering of an existing private loan to a group of network investors. In this scenario, lenders are potentially able to recuperate their capital while passing along an attractive rate of return to participants in the syndicated loan.
Real estate debt syndications can be used to finance large-scale commercial real estate due to its leverage on debt within the capital stack. At EquityMultiple, this means that investors are allowed to tap into the attractive fixed rates of return that short-term commercial loans offer.
Benefits of Real Estate Syndication
For individual investors, some of the benefits of real estate syndication include:
- Tax benefits: Real estate syndication offers significant tax advantages. According to the Internal Revenue Service, real estate investors may deduct a portion of a property’s value each year through depreciation. This decreases the investors’ taxable income. Additionally, real estate owners can deduct expenses related to operating, managing, and maintaining their real estate holdings. Such deductible expenses include property taxes, insurance premiums, mortgage interest payments, management fees, and repair costs.
- Lower minimum investments: Instead of acquiring and managing a property on their own, individual investors can participate in the same class of properties at a small fraction of the capital outlay. Platforms like EquityMultiple have lowered the minimum entry point even further, with a minimum check size as low as $5,000.
- Diversification: With a lower per-investment minimum, investors are able to spread their real estate portfolio among a greater number of projects across markets, risk/return profiles, and property types.
- Passively investing: As opposed to direct real estate ownership — wherein an investor must manage the acquisition, operations, and sale of a property — investing as part of the LP allows the individual investor to benefit from the expertise and motivation of the GP (sponsor) without having to expend time and energy on managing a property.
- Less liability: Because individual investors participate through a limited liability entity, they are shielded from the majority of the risk that the GP assumes in undertaking the project.
All of these factors work together to lower the barrier of entry and allow individual investors to tap into professionally managed real estate.
Disadvantages of Real Estate Syndication
In order to make a well-rounded decision, it’s important to understand the disadvantages of real estate syndication just as well as its benefits. These include the following:
- Sponsors can profit if partners don’t: Syndicators (sponsors) can potentially make money even if investors do not, primarily through acquisition and asset management fees. However, if the managing partner has negotiated with the sponsor effectively, this risk should be mitigated.
- Investors relinquish control: Investors lose almost all control over this asset as a trade-off for being able to invest passively and assume a less liable position within the syndication.
- Relative illiquidity: Like most real estate investment opportunities, real estate syndication investment portfolios are relatively illiquid, meaning it will take time and money to revert the group’s investment into cash.
Individual investors like you can potentially assume fewer associated risks when investing through real estate syndications. However, this forces you to leave decision-making power in the hands of investment partners and managing entities so that you can continue to invest passively. As such, it’s crucial to get comfortable with the sponsor and their track record before committing to their syndication.
What Type of Returns Can I Expect?
Typical returns for LP investors in a syndication depend heavily on the type of project and the capital position. Investors in syndicated debt can expect to see an 8-12% annual rate of return target, whereas LP investors in an equity real estate investment can expect to see a total return target (IRR) of 15% or more, sometimes much more in the case of a more speculative, opportunistic investment like a ground-up development. The actual return value for investors depends also on the profit-sharing protocols stipulated in the real estate syndication agreement. The sponsor — the GP or manager in a real estate syndication — is typically entitled to a “promote” upon exit. The promote, an outsized share of profits if the project performs well, incentivizes the sponsor to deliver strong returns.
Investors can generally expect larger returns on joint venture commercial investments due to the larger amount of initial capital required to invest in the commercial real estate sector.
What to Watch Out For in Real Estate Syndications
How can you tap into the benefits of real estate syndication while avoiding the risks? The bottom line is that you can’t avoid risk entirely, as with any investment. A key principle is diversification — if you’re going to participate passively in real estate syndications, it’s best to pursue as many as you can given your capital availability. A platform like EquityMultiple can help facilitate diversification through relatively low minimums and a breadth of offerings.
While the passive nature of real estate syndications is a major benefit, you may want to pay specific attention to the following when evaluating these opportunities:
- Overall platform track record, if investing through an online platform such as EquityMultiple. Our track record is freely available once you create an account.
- The track record of the individual sponsor or operator (the GP on the investment).
- The term and contractual obligations of the GP to you as the LP. Given your liquidity needs, it is important to understand what timeframe you can expect your capital to be locked up for.
Real Estate Syndications in Today’s Market
Our position is that private-market real estate investments are a good idea in any market. Some current considerations:
- With interest rates potentially poised to drop gradually, investors in syndications could benefit from “cap rate compression,” i.e. valuations improving relative to cash flow by virtue of capital markets dynamics.
- With a new administration in Washington, many CRE sectors potentially stand to gain from reduced regulation and a friendlier tax code. However, markets and sectors may not benefit uniformly, as the legislative priorities are not yet fully clear. Hence, diversification across markets and sectors is imperative.
- The top-heaviness of the stock market potentially creates a need for illiquid alternatives to counterbalance portfolios. You can read more about this interplay in our article on the 60/40 portfolio
Is This a Good Type of Investment for Me?
All investments entail risk. Because real estate syndications are passive and operated by one or multiple third parties, an investor should understand the risks they assume by participating. Real estate syndications typically refer to JV equity investments, though other positions in the capital stack may also be called “syndications.” When participating in a real estate syndication through an online platform, like EquityMultiple, bear in mind that not all platforms practice the same degree of due diligence or asset management. Don’t be afraid to ask questions and get comfortable with the people who will be managing your investment.
Real estate syndications can deliver attractive risk-adjusted returns. However, virtually all real estate syndications are illiquid and involve tying up your capital for some period of time. Be sure that you understand the distribution timing and what legal entitlements you have to cashflow, if any.
How do investors actually approach real estate syndications and diversify among them? Hear it from Dr. Zaslau, a many-time EquityMultiple investor.
Real Estate Syndication FAQs
What are the risks associated?
Real estate syndication is a specialized form of investing, in that it involves pooling funds from multiple investors to invest in a real estate project. Just like any investment, however, there are several associated risks:
- Market risk: Real estate values can fluctuate based on changes in the local or national economy, interest rates, and other factors outside of the syndicate’s control.
- Operational risk: The success of the investment can be influenced by the ability of the syndicator to properly manage the property, attract tenants, and maintain the property.
- Legal risk: Real estate syndications are subject to federal and state securities laws, and non-compliance can result in penalties and legal action.
- Liquidity risk: Real estate syndications typically involve a long-term investment, and there may not be a ready market to sell the investment if needed.
- Other risks: Other risks may include construction delays, unforeseen expenses, and natural disasters.
How do you determine the potential returns of a syndication?
The potential returns of a real estate syndication investment can vary depending on the investment strategy, the property type, and other factors. Typically, the syndicator will provide potential investors with a private placement memorandum (PPM) that outlines the investment structure, potential returns, and associated risks. Investors can review this document and consider factors such as the projected cash flow, potential for appreciation, and tax benefits to determine the potential returns of the investment.
How do investors decide which real estate syndication to enter into?
There is no universally “best” type of real estate syndication — the ideal option will vary for each investor based on their specific goals, risk tolerance, and overall investment strategy. Fortunately, the market offers a diverse range of opportunities for different investor preferences. Here are some key factors to consider:
- Investment objectives: Some investors aim for monthly cash flows, while others prioritize long-term wealth accumulation. Retirement planning is also a common goal, with considerations like the investor’s age and ability to recoup losses if things go awry.
- Property type: Investors can choose from residential rentals, commercial properties (offices, retail, industrial), and specialty asset classes like storage facilities. Comfort levels and opinions on the economic viability of different sectors play a role.
- Risk profile: All syndications carry risks, which are typically outlined in the offering documents. Investors must review them and evaluate what level of risk they’re comfortable with.
- Location: Prime urban areas offer resale potential but limited cash flows due to competition, while secondary markets may provide better yields but less appreciation due to a narrower set of demand drivers. Up-and-coming neighborhoods are another popular option.
- Access to capital: Investors must assess their potential need to access invested funds before the expected holding period ends and choose options aligning with their liquidity requirements.
- Minimum investment: Syndication minimums exist, which could limit diversification if the amounts are prohibitively high for the investor’s portfolio size.
In the end, the optimal syndication aligns with the individual investor’s unique objectives, including their risk tolerance and financial situation. There’s a great deal of customization involved in building a strong portfolio.
How do real estate syndications differ from REITs?
Real estate syndications and Real Estate Investment Trusts (REITs) are both investment vehicles used to invest in real estate, but they differ in several ways:
- Ownership: Real estate syndications involve direct ownership of a specific property, while REITs allow investors to own shares in a portfolio of properties.
- Management: In a real estate syndication, the investors typically have a more active role in the management of the property, while in a REIT, the management is handled by the REIT company.
- Liquidity: REIT shares are generally more liquid than real estate syndications, as they can be bought and sold on a public exchange.
- Regulation: Real estate syndications are subject to securities laws and typically require a private placement memorandum, while REITs are regulated by the SEC and must file periodic reports.
What is a real estate syndication?
To recap: real estate syndications are a structure of real estate investment that pools capital and establishes relative liability and return potential according to the level of commitment in executing on the investment.
The Bottom Line
Unique tax deductions and potentially attractive passive income are available for all accredited investors who are interested in participating in a real estate syndication.
Unlike other real estate investment opportunities, syndications involve a team of people, including general partners and managing entities, who potentially come with years of expertise. The track record and project-specific experience of all parties are critical, so be sure to ask questions if you are considering participating in a real estate syndication.
When you and other real estate syndicate members invest in commercial real estate and other alternative investments, you may be able to tap into unique return profiles, and “alpha” — returns driven by skilled management rather than swings in public equities markets.
