Should You Join a Syndication to Invest in Real Estate?

October 7, 2021 by DRG

Success in real estate requires knowledge, capital and good planning. It depends on your ability to purchase a property at the right price, in the right location, with the right team executing the right business plan.

Most investors don’t have the time and energy to gain the knowledge, research the markets, build the relationships, find the deals, or execute the business plan necessary to win in real estate. If you want to invest, but aren’t interested in taking on a second job, then joining a syndication might be for you.

Syndications are a group of investors that pool their resources of time, knowledge and money to buy a large asset and split the profits.

Jumbo Jet Investing Strategy

Think about a syndication as a jumbo jet. When you’re flying in an airplane, you’re sitting in a comfortable seat watching a movie in an environment where the only decision you’re expected to make is what to have for dinner. You’re in stress-free state of relaxation, even though you’re hurtling through the sky at high speeds in a vehicle you probably know very little about.

Are you stressed? Perhaps at takeoff and landing, but unless you hit some turbulence, it’s unlikely you’ll worry too much about crashing at any point throughout the flight. That’s the safety, convenience and comfort we’ve come to expect from a jumbo jet.

In the world of real estate, the jumbo jet is a syndication. It’s a group of investors pooling their resources to buy large properties that no single person in the group could have purchased or managed on their own.

Types of Investors in a Syndication

There are two types of investors who participate in a real estate syndication: active and passive.

Active investors are the general partners (a.k.a. the GP, sponsors and operators). They’re responsible for all the things you probably think of when you think about buying real estate. In the jumbo jet analogy, the GP is the group of experts making transcontinental flight possible (pilots, flight attendants, ground control and maintenance crew). This experienced group of operators leverage their unique skills and relationships to safely transport a group of passengers to their destination.

Passive investors are the limited partners (a.k.a. the LP). They are the passengers on the flight. They fund the deal by buying a ticket, and that’s it.

Syndications bring active and passive investors together to fulfill the three core requirements of every deal: time, knowledge and money. The general partners leverage their time and experience to identify viable markets, underwrite deals, secure bank financing, guarantee the loan, execute the business plan, handle investor relations, and oversee the exit of the asset. The limited partners simply bring in the capital.

This cooperation means the group can go further and faster together than any single investor could on their own.

And keep in mind, neither the limited partners nor the general partners actually own the real estate being purchased. They own shares of the company that subsequently owns the real estate. It’s a subtle yet important difference and a key component of the success of syndications.

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