What is Property Syndication and How Does It Work?

Investment in property as a sole owner (or co-owner with your spouse) is a well-known form of investment. But what if you wanted to invest in a much bigger property than you could normally afford or without taking on the full financial burden? This is where property syndication is worth investigating.

So, what is property syndication (also known as a property syndicate)? It is a form of direct property investment that allows a group of investors to combine their resources to purchase larger real estate assets.

These syndicates are especially beneficial if you lack the time, capital, or expertise necessary to invest in such properties on your own.

How Does Property Syndication Work?

Let’s now look further into how property syndication actually works. Fundamentally, it requires investors to pool their funds, each contributing capital towards the purchase of a property. This property purchase is made and the property is subsequently managed by a syndicator (or syndicator team) who oversees the entire process. Each investor’s name is shown on the property title.

Typical examples of property syndication include:

  • Commercial property syndication (also referred to as unlisted property trusts)—This attracts investors interested in acquiring high-value assets like industrial, retail and office real estate.
  • Residential complexes—This type of property syndicate involves investing in property development projects and attracts investors looking for a faster tenancy turnover.

Benefits of Investing in Property Syndicates

Property syndicates offer a multitude of benefits for you as an investor. When you select a syndication run by experienced property professionals, you can take advantage of the following:

  • Premium value real estate—You have access to a stake in larger, higher-value property (with higher potential returns) that would normally be beyond your price range.
  • Diversification—This investment strategy is particularly appealing if you are looking to diversify your portfolio by including various asset classes, like commercial and residential real estate, in addition to traditional investments, such as bonds or shares.
  • Passive income—Investors in a property syndicate earn a passive income from rental yields without having to manage daily administration. That said, you may have more say about decisions involving property management. Over the long term, there is potential for an increase in property value.
  • Property Expertise—From property selection, due diligence, acquisition and management, you can benefit from experienced professionals with expertise in real estate to oversee, administer and manage your investment.
  • Tax advantage—There is also potential for tax advantages such as negative gearing, which should be considered as part of your overall investment portfolio.

 

Risks Associated with Property Syndication

While property syndication offers many advantages, it is important to be aware of the risks involved. These include limitations to liquidity, dependence on the syndicator’s expertise, market risk, and the long-term financial commitment that is typically required.

However, these risks can be managed effectively through due diligence and the careful selection of syndicators by researching their level of knowledge and track record.

 

Types of Real Estate Syndications

The type of property syndication you choose depends on balancing the projected return against the risk profiles of each property type. These can differ between property types and include commercial, residential, and mixed-use properties.

It is important to investigate each of these structures in depth, as each has pros and cons. Then, choose the syndication type that best suits your investment objectives.

 

Property Syndication vs REITs

Property syndication and real estate investment trusts (REITs) are two distinct real estate investments. Each offers unique characteristics that cater to your preferences in terms of investment goals and risk tolerance.

They differ in terms of:

  • Control—A property syndicate arrangement often allows syndicate members greater input in decision-making regarding property management. REIT investments involve purchasing shares in a company that owns and operates a diversified portfolio of real estate assets, so you have little or no control over management decisions.
  • Liquidity—REITs offer greater liquidity than property syndications when it comes to the ability to convert assets into cash.
  • Risk—Typically, property syndications carry a higher risk due to the concentrated focus on the individual property. REITs spread this risk by investing in a much broader range of real estate assets as part of the investment portfolio, potentially providing greater stability.
  • ReturnsProperty syndications may provide potentially higher yields from rental income and property appreciation but higher overall risk as mentioned above. REITs generally provide lower yields but greater stability and more consistent dividend payments over time.

Property syndication may suit you if you are willing to accept higher risks for the potential of greater returns and retain relatively greater control. REITs, on the other hand, could be a better fit for you if you seek greater investment liquidity, relatively wider diversification, and the generation of a relatively more passive form of income.

 

How to Get Started with Property Syndication

The three biggest steps to help you navigate the process of participating in property syndicates are:

1) Finding Opportunities

Research online platforms that specialise in property syndication. These often list current opportunities along with details about the properties and syndicators. Also, consider reaching out to real estate investment advisors who can provide insights and leads.

2) Evaluating the Syndicator’s Track Record

Investigate the syndicator’s background. Ask: How long have they been in the industry? What types of projects have they previously managed? Check their performance history and any reviews. Finally, analyse their team, which should include experienced property managers, legal advisors, and accountants.

3) Understanding Legal Obligations

Carefully review the syndication agreement to understand your rights and obligations fully. Seek specialised legal advice from lawyers specialising in real estate investments to ensure your interests are protected.

Some further tips for success include:

Understanding your risk tolerance and ensuring that the syndicate aligns with your investment goals.

Staying engaged with your investment by keeping up with market trends and the syndicate’s performance updates.

 

FAQs about Property Syndication

How are Returns Distributed in Property Syndication?

Income from the property is usually distributed to investors according to their share in the syndicate. A typical split is 70% to passive investors and 30% to general partners, taking into account regular cash flow from rental yields as well as ultimate profits from the property’s sale.

 

What are the Fees Involved in Property Syndication?

Property syndication attracts a variety of fees, most notably acquisition fees (normally between 1–3% of the purchase price of the property), management fees (typically between 1–2% of gross monthly revenue) and any profit-sharing arrangements you may have with the syndicator.

Other fees that may be associated with property syndication include a construction management fee for development deals, a loan fee, a refinance fee and guarantor fee, and an equity placement (or equity origination) fee charged by a broker for gathering investors, limited partners, and for the overall coordination needed to bring the syndication project into being.

 

Can I Sell My Share in a Property Syndicate?

It is important to know that although shares in a property syndicate can be sold, this type of investment is geared for long-term investment, with considerations such as exit fees to take into account. Also, different syndicates offer differing levels of liquidity, so investigate this aspect prior to investing.

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