Understanding the real estate syndication stages is a critical part of your investment success. Syndicates are the most common method of combining groups of peoples’ funds together that allows investors to buy shares in real estate projects. It’s a great way to generate wealth by investing in properties that are managed by professional real estate companies. Real estate syndication stages include origination, operation, and liquidation. Here we’ll explain what each stage entails so you can understand how your money will be used to earn a profit on your investment and how the lifecycle of an investment will typically look.
What is a Real Estate Syndication?
First and foremost, you cannot understand the real estate syndication stages, without understanding what exactly real estate syndication is.
A real estate syndication is a way to invest in real estate without having to buy the property yourself. Instead, you pool your money with other investors and a sponsor/syndicator—the one who finds all the capital for the deal. Investing in a real estate group like this allows investors to own larger properties than they overwise could have afforded. Investors receive passive income through their share of ownership in the company and can diversify their holdings easily by participating in multiple projects across different locations and property types.
When you invest in a real estate syndication, you don’t have to buy the property yourself. Instead, you pool your money with other investors and give it to a general partner (GP) who then invests it in real estate. You can become an equity partner by contributing cash or cash equivalents into the deal; this will entitle you to receive annual cash flow distributions from the GP as well as a percentage of any profits made at the end of the investment term (the length varies depending on each specific deal).
There are real estate syndicates for every real estate sector, every portfolio type, and for any type of investor, whether accredited or non-accredited. One major perk of real estate syndicates is that limited partner investors will be considered passive investors. Over the entire investment holding period, the GP does the bulk of the work necessary for investing in real estate.
What are the Real Estate Syndication Stages?
Syndication, at a macro-level, is a three-step process that starts with origination, proceeds to operation, and ends with liquidation. The first stage involves finding real estate deals and funding them. The second stage involves managing the property and executing your investment strategy. The last stage is where you sell the property for a profit or loss depending on how well it was managed during operation.
We’ll go into more detail about each of these steps below as well as some best practices for each one so you can start generating wealth through real estate syndication today!
Stage 1 — Syndicate Origination
The first of the real estate syndication stages is the origination phase—the finding and formation of the real estate deal. While there are many steps that go into successful syndicate origination, the GP or sponsor will typically handle all of them. Most often, limited partner investors will not have to do more than move money and sign the essential subscription documents.
Behind the scenes, the syndication sponsor is responsible for finding and analyzing a potential investment. A sponsor will compare investment opportunities and select one that meets its threshold for ROI (return on investment) and criteria for property. The sponsor then puts together a business plan for that individual property and creates an investment thesis based on a specific investment strategy. Once convinced of potential success, a sponsor will then make an offer for the property. Successful investment sponsors will undergo a period of due diligence and financial underwriting to confirm their projections.
The Sponsor then contacts Insurance and Property Management teams who are lined up so that when they start raising capital, they are ready to move forward with minimal delays. For real estate syndicates that focus on equity, the sponsor may need to approach debt service providers for a loan on the property if the investment strategy calls for it. Equity capital is raised through investors who will become LPs once the offering documents have been signed by both parties involved in this stage: GP and LP.
Of all the real estate syndication stages, origination may be the most complicated for the syndicate sponsor, involving the most diverse tasks. With the extensive work continuing over the life of the project, limited partner investors pay for the capital, credit, and expertise of general partners.
The payout structures are laid out in the operating agreement and finally, all GP and LPs sign all the legal documents so that all parties understand their mutual obligations.
Stage 2 — Syndicate Operation
The second stage of real estate syndication is called the operation stage. This is where you make a large chunk of the money, but it’s also where investors can make the most mistakes. The syndication is in the operations stage for as long as management says and this will be the longest stage of the syndication process.
There are two key areas to pay attention to during this stage: construction and management. If you’re property investment strategy requires construction, such as the value-add strategy, then you need to ensure that it has been completed and that there aren’t any problems with the building or land itself (such as flooding). Otherwise, your returns will be minimal until those issues are resolved. Beyond ensuring that everything is built properly, and no major problems exist, there are other tasks during this period like collecting rents from tenants or managing vendors for maintenance services. GPs will also be responsible for the record keeping and accounting of the properties as laid out in the operating agreement.
As an investor in a project through real estate syndication platforms like Eikon Investments, this is when you’ll start receiving income from your investment—and if all goes well, it should continue for years after that too!
Stage 3 — Syndicate Liquidation
The third stage of real estate syndication is liquidation. Once the property has been fully stabilized and the investor’s capital has been repaid, the general partner may decide whether to sell the asset, however, economic factors and the real estate market may play a larger role. While there are numerous project exit strategies, the bulk of exits will be conducted via a full sale of the asset.
If the GP determines that they may want to continue holding the investment, they can exit by buying out the equity stakes of limited partners or bring in new equity partners to buy out the previous group of investors.
- Selling to another investor who wants to join your syndication
- Selling it outright to an outside party in a private sale or public auction.
The liquidation phase may be the most profitable of the real estate syndication stages. During the liquidation of a successful deal, investors’ equity stakes have grown significantly from the appreciation of the project and the buildup of debt service payments. By recapturing equity and exploiting appreciating property value, investors can receive significant sale proceeds as well as the final year’s cash flow and any stockpiled cash reserves.
How Great Sponsors Simplify the Real Estate Syndication Stages
A good real estate syndication sponsor or GP will be worth their weight in gold. There are numerous benefits of investing in real estate, especially when compared with other asset types. However, it is one of the most challenging assets to buy and manage. Real estate investing is more of a business than an investment when you decide to buy and run your own property. By passively investing with a real estate syndication as a limited partner, you can experience all the perks of a professionally run portfolio. While all investments carry risk, an experienced real estate sponsor can minimize risk by helping their investors through the real estate syndication stages through the following:
- Understand the legal and financial aspects of each stage;
- Be aware of the risks associated with each stage;
- Understanding fair property valuation and avoiding overpaying;
- Minimize property expenses through economies of scale;
- Have larger budgets for legal protection of your investment;
- Have ongoing relationships to help your investment potential (lawyer, accountant, real estate brokers);
- Understanding how to manage properties exceptionally well;
- Know how your investors will make money by working with you:
- Navigating the intricacies of the economic cycle to maximize your sale price;
Joining a Real Estate Syndication
The first step to joining a real estate syndicate is finding a syndicator or sponsor. This person will match you with high-quality properties, find capital, and get the legal agreements drafted. They will also help you with getting your mortgage, finding a property manager, and inspecting the property, both physically and financially.
Find a syndicator who is willing to take you on as an investor. The sponsor will share investment opportunities with you, and you should meet with your financial advisor and accountant to determine whether it is right for you. After deciding to invest and putting together enough cash—or as much as possible—the syndicator will have you sign the legal documents and commit a dollar amount for investment. Be sure to take the legal documents to your personal attorney to make sure you understand the contents of the agreements before signing.
Are Real Estate Syndicates for You?
If you are looking for a passive income stream, are interested in real estate, and want to generate wealth through an investment that has a high return on investment (ROI), then real estate syndication may be for you. However, you will need to understand the investment risks and consult with your financial advisors, CPA, and attorney. If they recommend it as a good fit for you, then you can move forward when you are comfortable doing so.
By choosing a competent syndication sponsor who understands the real estate syndication stages, you’ll soon be on your way to generating wealth through this powerful investment vehicle!
If you are eager to experience the perks of investing in a real estate syndication, you can always reach out to us at invest@eikoninvestments.com or register as an investor to start being notified of our investment opportunities.
Happy Growth.
