All across the nation, individuals have real estate holdings they own and manage themselves. Some succeed, some fail, and others tread water. What separates these people is experience and expertise.
Those with it are far more likely to succeed than those without. Why fail when you can invest alongside real experts? That’s syndication, which we’ll discuss in this brief guide.
We will also touch on real estate wholesaling. Since syndication and wholesaling are very different, we will compare and contrast both in this article.
What is Real Estate Syndication?
Real estate syndication is a real estate partnership. The parties involved in that partnership are the asset manager and the real estate investors.
Asset managers are also called syndicators, sponsors, general partners, managing members, etc. The asset managers are active, and they bring experience and expertise to the project. They are responsible for identifying real estate deals, buying and selling properties, and managing day-to-day operations.
The investors are known as limited partners, fractional investors, or members. They provide the capital required to close on the property and the reserves needed to operate the property responsibly.
How Syndication Differs From Traditional Real Estate Investing
When I think of “traditional” real estate, I think of individuals buying residential properties in their local market and opting for self-management. The problem is that success in this space demands experience and expertise.
For that reason, most new investors should not become landlords. If they do, they are walking a risky path that can sabotage their portfolio. Syndication is the wiser choice for these people as they can invest alongside an experienced asset manager and leverage that expertise without getting their hands dirty.
Entering a Partnership with Several Investors
Fractional investing alongside multiple other investors could be a nightmare if improperly structured. For that reason, Limited Partnerships (LPs) and Limited Liability Companies (LLCs) are frequently utilized.
These should be structured so the managing member or general partner makes all the management decisions. The passive investors should be passive, meaning they have no decision-making duties.
Think twice before investing in a Tenancy in Common (TIC) structure. In this structure, each owner’s share can be sold without the consent of the other shareholders. Each shareholder also has voting rights.
TICs can become messy when multiple shareholders disagree on investment strategy, management, or disposition decisions.
Combining Capital and Resources for a Real Estate Project
When an LLC or LP holds the title in syndication, things tend to be much cleaner. All the investors are putting their faith in the asset management team. Therefore, it’s important to vet them well.
Before 2012 and the Jumpstart Our Business Startups (JOBS) Act, it was much easier to scrutinize syndicators. Securities law banned advertisements. Therefore, sponsors could only grow from word of mouth due to excellent performance.
Like natural selection, the strong companies thrived while the rest struggled to raise money. Unfortunately, the JOBS Act deregulated the real estate investment industry and overturned the ban on advertisement.
Since 2012, it’s been much more challenging for investors to find the top asset managers. Often they are introduced to companies that are top marketers but aren’t necessarily leading real estate operators.
And since it’s harder for investors to find the best people in this deregulated environment, 37th Parallel Properties has created a Private Real Estate Evaluation Framework designed to help you find the sponsor that best fits your goals.
Syndicator (Sponsor) vs. Investor (Limited Partner)
Once you find the right sponsor, it’s essential to understand that this is a partnership. The syndicator has all of the functional management responsibilities. They determine the investment strategy, real estate deals, buy/sell timelines, operating decisions, execute the business plan, distribute profits, etc.
The investors are truly passive. They do their due diligence before investing to know they are with the right partners. As passive investors, they have no management responsibilities. However, they should be entitled to most of the profits, transparent communications, and reporting.
They also have no liability other than their initial capital investment. Most people don’t want to become a landlord and also don’t want any extra liabilities. Passive investing in multifamily real estate funds can be an excellent option for them.
Is Syndication Different Than Wholesale Real Estate?
Before researching this topic, it was hard for me to believe that some people needed clarification on syndication with wholesaling as these are two very different things. We’ve already discussed syndication, so let’s look at wholesale real estate.
Wholesale real estate isn’t about investing. Instead, it’s a business model. Wholesalers look for discounted properties, typically distressed properties, that they can put under contract and sell that contract to an investor before the property closes.
Since wholesalers don’t want to own properties, they need investors to sell to. They make their money by charging the end buyer a finders fee. In a sense, those buyers are the partners of the wholesaler.
Benefits & Drawbacks of Wholesaling Real Estate
Wholesaling real estate requires a source of undervalued properties that can be picked up at a discounted price. It also requires the wholesaler to have investor partners who will pay them a higher price or a fee for passing those properties on to them.
The obvious benefit to the wholesaler is the profits they make by assigning their properties to their partner investors. The investors also benefit because they pick up the properties they desire at a price point that benefits them.
But make no mistake; real estate wholesalers are not investors. They only make profits when they do transactions, and they have to have the expertise to know which properties will do well and which ones won’t.
Like any job, wholesaling real estate has its drawbacks. If the real estate wholesaler stops doing deals, they stop making money. And if they fail to assign the property, they have to close on it or lose their earnest money deposit. It can be time-intensive, market dependent, and difficult to find buyers.
Wholesaling is Less Capital Intensive
Wholesaling is generally less capital-intensive since the wholesaler doesn’t close on the property. This means wholesale investors do not typically need to acquire financing or use their own capital to purchase the property.
Instead, the wholesale investor focuses on building a network of buyers and sellers, often through marketing efforts and networking. They identify motivated sellers willing to sell their properties at a discount, negotiate a purchase price, and then assign the purchase contract to a buyer or bring the potential buyer to the deal. The wholesale investor earns a profit from the difference between the purchase and sale prices.
Faster Entry and Results
An argument can be made that wholesaling real estate has faster entry and results than syndication. However, this is an apples-to-oranges comparison. Syndication is investing, whereas wholesaling is running an active business.
As a wholesaler, you want to get properties under contract and assign them to investors quickly. You hope that timeframe takes days or weeks so that you get paid as soon as possible.
Syndication, on the other hand, is investing. Once you develop passive income streams, you want that to last as long as possible and have the property appreciate over time.
Considerations for Real Estate Beginners
Wholesaling is generally not a great place for beginners. Even though they aren’t operating properties, they must understand the real estate market and submarket conditions. They must also develop relationships on the transaction’s buy and sell side.
Unless they already have a buyer in mind for a property, most real estate professionals tend to look at real estate investments for their long-term potential, rather than seeing a real estate wholesaling opportunity.
If you’re a real estate beginner, your day job is likely more lucrative than what you can create wholesaling houses.
Difficulty Finding End Buyers
Putting properties under contract is risky if you don’t plan on closing. Typically you have to put money down, which may or may not be refundable. So there is a real risk of losing money if you don’t close.
And since wholesalers aren’t operators, closing on the property can be even more disastrous. For those reasons, they must have multiple buyers lined up. Finding those buyers can be challenging. Building these relationships will take significant effort and time if you don’t have these existing relationships with potential buyers from past transactions.
Unpredictability of the Real Estate Market
Like all financial markets, real estate has cycles. Wholesaling works better in some phases of the process than others. If the cycle shifts while you’re in the middle of a transaction, you risk losing money.
Lots of Research & Work
Distressed properties that sell below market value don’t grow on trees. You have to find a great deal. This requires time, energy, and relationships.
Before diving into wholesaling, it is crucial to create a business plan. A fundamental aspect of successful wholesaling is your ability to generate leads. Your business model hinges on your ability to market your properties, attract potential buyers, negotiate effectively, and close real estate transactions.
Wholesale real estate is an active participation job. If you’re looking for a second job and are adept at finding and disposing of properties or have a background as a real estate agent, wholesale real estate may be right for you.
But, if you’re looking for an opportunity to get into real estate as an investor, syndication is probably a better route. Real estate syndication provides investors looking for tax-advantaged income and equity growth an opportunity to fortify their investment portfolio.
37th Parallel is a Trusted Partner for Real Estate Investing
37th Parallel Properties is a private real estate acquisition and asset management company specializing in multifamily real estate.
We’ve been in business since 2008 and have maintained a 100% profitable track record over more than a billion dollars in transaction volume.
We’ve made our investors money in good times and bad, in bull and bear markets, and across multiple recessions. That’s because we know what works and put our investors first. We write articles like this one because it is crucial to help educate current and potential investors about the more nuanced parts of how to invest in real estate.
We Specialize in Evidence-Based Multifamily Property Investing
Just as doctors follow evidence-based medicine to do what is best for their patients, we practice evidence-based investing for the benefit of our clients. A balanced portfolio often includes stocks and bonds, but there is room for real estate.
After all, the research is clear. Over the last twenty years, a portfolio of stocks and bonds did not perform as well as one that included real estate. And with multifamily properties being the best long-term real estate category, it’s undeniable that most people should take a long, hard look at investing in apartments.
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