Real estate investors are often restricted by the hefty property costs, primarily for commercial and rental assets. As the industry continues to evolve, so are the investment schemes in the real estate sector. These days, capitalists who can’t afford to purchase commercial properties on their own can turn to real estate syndication.
As an investor, it pays to do your homework and find out the what, hows, and whys of real estate syndication before diving in. With that being said, we’ve created this article to answer your burning questions.
What Is Real Estate Syndication?
Real estate syndication is a model where investors pool their resources together to purchase large-scale properties. In essence, it works like crowdfunding, but for real estate projects. If you want to know more about this model, click here for in-depth discussions about real estate syndication.
Additionally, this investment scheme has two significant players: the syndicator or sponsor and the investor. A syndicator will perform the heavy lifting, from selecting a potentially lucrative project to identifying potential investors and ensuring that the property stays profitable. Usually, the sponsor likewise hires property managers and establishes smooth investor relations.
On the other hand, investors provide the equity and receive specific and predetermined return rates. There’s no one-size-fits-all distribution rate for revenue sharing, but it’s common for investors to receive 75% of the share and syndicators to earn 25% for doing most of the work.
Why Invest In Real Estate Syndication
By being one of the syndication partners, you can start investing in profitable assets at affordable costs, even if you’re a newbie. These are the most compelling reasons to invest in syndication.
- Less Capital for Large-Scale Projects
In the past, investors couldn’t purchase a commercial asset without owning several million for capital money. However, syndication investors don’t need to shell out this insane amount of cash to start earning. That’s because they can pool their resources alongside other partners.
For instance, a five-million-dollar property may accommodate several syndication partners willing to invest USD$50,000 at the minimum. That said, syndication makes it easier for prospects to set aside investment costs for lucrative properties such as malls, hotels, condominiums, and other commercial assets.
- Enjoy Robust Returns
While investments by nature carry certain risks, commercial and rental properties have shown consistently robust performance for many years, driven by huge demand. According to the National Association of Real Estate Investment Trusts (NAREIT), current rent growth rates for apartments, industrial and retail spaces are at their highest since the pandemic. Conversely, office rental growth rates have yet to recover from their pre-pandemic levels.
While returns from these types of assets vary widely depending on the market movements, property type, and location, industry estimates place investment returns at around 6 to 12% yearly. Nevertheless, it’s safe to say that putting your money on commercial real estate properties, whether through syndication or traditional methods, is a wise move.
- Diversifying Your Portfolio
Beginners and seasoned investors must ensure they’re not ‘putting all the eggs in one basket.’ This means investors ought to diversify their portfolios to minimize the risks involved in investing. For instance, if you’ve placed all your money on the stock market and it crashed, there’s nothing to cushion you from the losses.
Because you don’t need millions to start investing in syndication, you have other investment opportunities elsewhere. For instance, if you managed to set aside USD$200,000 as capital, you can invest in one commercial asset and look for other similarly profitable opportunities. Additionally, you may consider taking on multiple real estate syndication offers to spread your revenues.
- It’s A Great Inflation Hedge
Commercial real estate investments or CRE is a good hedge against inflation. To the uninitiated, an inflation hedge is an investment that safeguards against a currency’s decreased purchasing power due to inflation. Research done by real estate services company Cushman & Wakefield has revealed that real estate investors’ returns increase by 1.1% for every one percent hike in inflation.
Since these property assets are meant to increase or maintain their value over time and typically increase during economic downturns, your syndication investment is protected from losses. According to the National Association of Realtors, the average annual growth rate of the real estate sector has steadied at six percent since 1968, despite several economic disruptions.
- A Perfect Way To Earn Passive Income
Because the sponsor or syndicator does the heavy work, investors don’t have to do anything after signing the syndication agreement. Unlike stock investing, you don’t have to monitor and be updated on the latest market movements and fluctuations in asset values.
Of course, this doesn’t relieve potential equity finders of exercising due diligence, such as inspecting the asset, checking the sponsor’s background, and ensuring that the papers are in order before injecting capital.
Real estate investments are generally considered profitable investments, especially commercial assets. With the current housing and accommodation deficiencies worldwide, rental properties offer the best solution to having a roof on one’s head, resulting in a steady and high demand.
As an investor, you can turn to real estate syndication to minimize investment risks while enjoying robust benefits, as discussed above.