Real estate syndication is an old-world concept with a new-world twist. Wealthy, influential investors have been using these types of group agreements to invest for hundreds of years, but it’s only recently been made more widely available thanks to changes in technology and legislation. That has triggered growing interest, but there are still many investors who aren’t familiar with syndication.
So if you’re one of the many investors wondering what is real estate syndication?, we have a comprehensive overview for you.
Real estate syndication definition
Real estate syndication is a partnership formed between multiple property investors and a sponsor to fund a specific development project. The sponsor finds and purchases the property on behalf of the syndication, often managing the investment as well. And the investors all share ownership of the property through the syndication.
Syndication is commonly thought of as crowdfunding because both methods of investing use capital pooled from several investors to fund a specific deal. While this comparison is helpful to new investors who are getting familiar with different investment types, the terms syndication and crowdfunding aren’t exactly interchangeable (as we’ll discuss in a bit).
There are many misconceptions about real estate syndication. This article will address those misconceptions, explain how this arrangement is unique, describe the benefits of a property investment syndicate, show you how it works, and help you confidently decide if this is the right investment vehicle for you.
How is real estate syndication unique?
In this arrangement an entity (typically an LP, LLC, or DST) will be formed for the express purpose of purchasing a single piece of real estate. You as the investor, own shares in the entity that owns the property.
Here’s how syndication compares to similar real estate investment types.
Syndication vs. crowdfunding
Crowdfunding is a broad term that covers any form of sourcing capital from a group of investors. While crowdfunding can use equity funding, in which investors own a stake in the investment, it commonly uses debt funding, in which the investor has a role more like a lender than an owner.
But real estate syndication is a specific term referring to the partnership between the sponsor and the investors, in which the investors will own a share in the entity that owns the subject property for the duration of the project.
Real estate syndication vs. REITs
REITs (Real Estate Investment Trusts) are a common way for the average investor to invest in property without owning it outright. Investors can buy a share of a REIT, which is more similar to investing in the stock market than to investing in property the way you'd usually think of it. Buying a share of a REIT does not give you ownership of the actual properties in the portfolio.
With syndication on the other hand you own part of the LP, LLC, or DST that owns the property, so you do have a stake in the physical real estate.
Another difference is that REITs own large portfolios, so investors have no say in which properties their investment goes toward. In a syndicate model, you get to choose the exact project you want to invest in.
Real estate syndication vs. real estate private equity fund
Syndications and private equity funds can be very similar. They both pool money from multiple investors and allow investors to hold a stake in the underlying property. The key difference is the transparency of real estate syndication.
With private equity funds, the fund manager will take investments before the property is ever decided on. Once enough investors are involved, the fund manager will choose the property. But with syndication, you know exactly which project you’re investing in before you ever transfer funds. You even get an overview of the syndicate sponsor’s plans for the project.
What makes real estate syndication a good investment option?
Consider the difficulties of investing in real estate alone.
- You need enough cash to cover the down payment, closing costs, renovation costs, and mortgage expenses until the property is sold.
- You need experience and skill across multiple disciplines like analysis, finance, design, project management, and marketing.
- You need industry connections to reliable contractors and vendors.
- You need to personally supervise the project or spend more money to hire a professional project manager.
- You need to have the time available to manage all these details.
- And you need a high risk-tolerance when you invest so much capital into a single investment.
Syndication addresses all of these issues.
Here are the highlights that make real estate syndication a good investment option.
Access to Bigger Projects than You Could Finance Alone
Since your project costs will be carried by multiple investors, you can invest in an expensive property for a small amount of money. The minimum investment varies by sponsor, but with Gatsby Investment, for example, you can invest in a $2.5 million property for as little as $25,000.
You will get to choose the project you invest in. This could be:
- a rental property,
- or even luxury real estate.
Each project comes with its own timeline, so you can choose a project that works with your investment timeline, whether that’s six months or five years.
You’ll also enjoy the flexibility of choosing how much to invest. There is no set amount.
It’s a lot more exciting to own an interest in a physical property than it is to own shares in a real estate company or to own debt from a crowdfunding group.
Real estate has a proven track record of providing better returns than the stock market. And since you’re using other investors to leverage your deal, you get to enjoy a share of large projects with higher returns than the average investor.
You don’t need to be a real estate expert to capitalize on the market. Your sponsor will have the skill, knowledge, and experience to successfully manage the project for you. And your sponsor will have the industry connections needed to complete the project. You won't need to lift a finger or invest any of your time.
How does real estate syndication work?
The sponsor will scout locations and acquire a property with solid potential. The sponsor will project costs of renovating, rebuilding, or developing the property to make sure profit margins will be great enough to give investors a strong return on their investment. Once the project has been chosen, the syndicate will be opened to investors, and the work will begin.
As the investor, all you have to do is transfer the initial investment to the syndicate, then watch the progress! Modern real estate companies, like Gatsby Investment, have online platforms from which investors can get updates and even progress photos.
Who can invest in a real estate investment syndicate?
You must be an accredited investor to invest with Gatsby Investment. Accredited investors are individuals or entities who meet the SEC’s requirements to qualify as sophisticated investors.
You can qualify by meeting one of the following criteria:
1. Earning $200,000 or more in income over the past two years (with a reasonable expectation to continue earning as much).
2. Earning $300,000 or more in combined income with your spouse over the past two years (with a reasonable expectation to continue earning as much).
3. Maintaining a personal net worth of $1 million or more (excluding the value of your primary residence).
4. Existing as an entity with at least $5 million in assets, or existing as an entity in which all equity owners are accredited investors.
Let’s look at a few real-world examples.
Example of a real estate syndication for a single-family house flip with Gatsby Investment
In the single-family market, Gatsby Investment focuses on homes under $1,000,000 in Southern California because their high demand makes them a sound investment.
The team of experts scout neighborhoods and find homes with high profitability potential. Our analysts crunch the numbers and work closely with our architecture, design, and construction teams to accurately project costs and maximize profit.
Once the details of the deal are decided on, we open the deal to investors. Minimum investments typically start at $10,000. We do all the work and manage the project from start to finish. Once the house is flipped and sold, we distribute the proceeds to the project’s investors. The entire process takes around 6 - 12 months, depending on the specifics of each unique project.
Example of a real estate syndication for a multi-family development with Gatsby Investment
Gatsby has identified multi-family developments in the Los Angeles area as another sound investment. Because of the California housing shortage, multi-family projects are an easy sell. We focus on developing buildings with fewer units because they allow for shorter turnaround times for our investors.
The process of investing in multi-family development is similar to that of a single-family home flip. We scout neighborhoods and identify ideal properties. In this case, we often purchase single-family properties that can be re-zoned for multi-family. Our expert team coordinates the tear-down of the existing structure and the building of the new structure from the ground up. We work with award-winning architects, renowned designers, and reliable contractors to develop a quality property in a short time frame.
Multi-family developments can be completed in as little as one year, with a minimum investment of just $25,000.
Is a real estate investment syndicate right for me?
If you are an accredited investor looking to leverage funding from multiple other investors to give you access to larger real estate deals than you could obtain on your own than this model is ideal.
With its flexible nature you’re bound to find a project that matches your investment goals and that you’re excited to be involved in. The minimum investments are comparatively low, the turn-around times are comparatively short, and the returns are competitive.
How to get started
Here’s a simple three-step process to help you start investing:
Step 1: Sign up and be verified as an accredited investor
You can sign up with Gatsby Investment online in under two minutes. Then you’ll just need to provide some financial information to our third-party partners, Verify Investor. All of your financial information is used solely to confirm your status, it remains 100 percent confidential and will never be supplied to anyone but Verify Investor.
Step 2: Choose your investment(s)
You can browse our investment opportunities online to find projects that suit your timeframe and estimated return on investment. You aren’t limited to a single investment; if multiple projects work for you, you can diversify your investment across as many projects as you like.
Step 3: Transfer funds
As soon as you have been verified as an Accredited Investor you are able to begin investing. Your investment is safely held in a Delaware Statutory Trust (DST), and you are officially an investor. Once the project is complete and sold to the new owner, proceeds from the sale will be distributed to investors within 30 days.
Why investors are choosing Gatsby Investment
At Gatsby Investment, we believe real estate investing should be low-risk, fun, and profitable. Our model reflects this belief. With Gatsby Investment, you’ll enjoy:
- A team of experienced, knowledgeable, and skilled property experts
- Competitive returns on your investments
- A low minimum investment
- Diverse investment opportunities
- A secure online platform
- Refreshing transparency
We’re excited to give you a stress-free real estate investing experience with the potential for high profit.
Start investing with Gatsby Investment today
Southern California real estate is hot, and property values are growing by the day. You can’t afford to put off your investment. Sign-up with Gatsby Investment and enjoy the benefits today.