What Is Real Estate Syndication?

Spend any time on any passive income website or facebook group and you are going to hear the term syndication. You might or might not get a definition and if you ask what a syndication is you might not get a good answer. This article is written to help the dentist, doctor, nurse and health care professional to answer the question.

Multifamily real estate syndication is a type of investment vehicle designed to help investors such as dentist acquire larger real estate investments and rely on a team to help manage the property.  Syndication allows smaller dentist investors to participate in large-scale deals that would otherwise be inaccessible due to size and cost constraints. In exchange for their capital (cash), dentist investors receive an ownership stake in the real estate and a share in the profits generated from the venture. By pooling their resources, dentist investors can increase their returns on investment compared to investing in smaller, individual properties. Syndications also allow investors to benefit from the expertise and experience of a larger group of professionals who specialize in real estate investing.

What is a sponsor?

The sponsor is the main driving force behind a multifamily real estate syndication. It is their responsibility to source, analyze and negotiate deals, manage construction and financing, as well as help with marketing and operations. The sponsor will typically act as the general partner in the investment vehicle and receive compensation for their services via equity or management fees.

Roles of a sponsor

The primary role of a multifamily real estate syndication sponsor is to provide the leadership, experience, and resources necessary to successfully acquire and manage multifamily properties. This includes sourcing and negotiating deals, creating investment documents, raising capital from investors, managing the remodeling or renovation process as needed, implementing property management systems, developing marketing strategies for rental units, and optimizing the overall performance of the asset. The sponsor is also responsible for overseeing legal and compliance requirements, such as preparing disclosure documents and filing reports with state and federal agencies. Additionally, sponsors are often involved in creating exit strategies and managing the sale process to maximize returns on the syndicated real estate investment.

By taking an active role in all phases of multifamily real estate syndication, sponsors provide their investors with the knowledge, assurance and peace of mind that their investments are in good hands. Furthermore, experienced real estate syndication sponsors not only protect investor interests but also help to expand investors’ portfolios by introducing them to new markets or investment opportunities. Ultimately, successful multifamily syndication sponsors have the ability to create long-term value for their investors and to ensure a successful syndication exit.

Role of a Limited Partner

A limited partner in a real estate syndication is an investor, such as a dentist, who provides capital for the investment. Limited partners are passive investors, meaning they do not actively participate in running the business or making decisions about it. They rely on the general partner to manage the project and make decisions that will lead to a successful outcome while also limiting their risk exposure. Limited partners provide capital to the project in exchange for a share of any profits generated from the investment. They are not liable for any debts or obligations beyond their initial investment amount and do not take part in day-to-day operations. This is optimal for dentist so they can focus on the operations of their dental practices. Limited partners typically receive periodic updates from the general partner regarding the progress of the project. Ultimately, the limited partner’s role is to provide capital and to receive a return on investment (ROI), which can vary depending on the structure of the syndication.

Real Estate Syndication Deal Structure

The typical structure for real estate syndication splits between the general and limited partners is typically based on the amount of capital contributed. Generally, a higher percentage of profits (70-80%) and cash flow will be allocated to the limited partners, dentists, who invested more capital. This is due to their larger contribution towards financing the investment. The general partner, however, will receive a larger portion of the ownership and control. Usually, the general partner will receive up to 20-30% of profits and cash flow, as well as a management fee for their overseeing role in the syndication.

Common Real Estate Syndication Offerings – 506(b) and 506(c)

506(b) and 506(c) real estate syndications are two different types of capital raising strategies used by real estate investors. A 506(b) and (c) offering are private placement syndications that allow an issuer to offer securities without registering with the Securities and Exchange Commission (SEC). It uses “accredited investors” as defined by the SEC who must have a net worth of over $1 million or an annual income of over $200,000 (if filing single). 

The primary difference between the two types of offerings is how investors are solicited. With a 506(b) offering, the issuer can only solicit investments from potential investors that they have pre-existing relationships. In a 506(b) offering, an investor who does not meet the standard of an “accredited investor” can invest as a non-accredited investor (also called a sophisticated investor) in the offering . A sophisticated investor must have an established relationship with the sponsor prior to the offer. They must have sufficient knowledge and experience in financial and business matters to evaluate the investment. An issuer of a 506(c) offering can advertise their investment opportunity to anyone, as long as all investors are accredited. Additionally, the issuer of a 506(c) offering must take reasonable steps to verify that all investors are accredited at the time they invest in the offering.

The differences between these two structures can be beneficial to real estate syndications depending on their goals and strategies. For example, a 506(b) offering may work best for sponsors that want to fundraise from a smaller, more intimate pool of investors. On the other hand, a 506(c) offering may be better suited for larger real estate syndications that need to access a much broader investor base. Regardless of the type of offering used, real estate syndications can be an effective way for investors to access private capital markets.

10 Benefits of Investing in Real Estate Syndications

  1. Access to long-term, stable cash flow – Investing in multifamily real estate syndications provides investors with access to long-term, stable cash flows which can provide a consistent source of income and wealth accumulation over the longer term. 
  2. Inflation hedge – With inflation slowly rising, investing in multifamily syndications is one way to hedge against inflation and preserve purchasing power.
  3. Tax benefits – Investing in real estate syndications can offer investors more attractive tax benefits than traditional investments, such as depreciation deductions and reduced taxable income.
  4. Diversification – Multifamily syndications provide investors with the opportunity to diversify their portfolio across different asset classes, geographic locations, and types of properties.
  5. Professional expertise and management – By investing in multifamily real estate syndications, investors benefit from having professional expertise and management teams that take care of the day-to-day operations.
  6. Professional networking – Investing in multifamily syndication allows investors to network with other investors, professionals, and advisors in the industry.
  7. Long-term appreciation – Multifamily syndications are generally long-term investments that benefit from potential long-term capital appreciation over time.
  8. Access to deals – Investing in multifamily syndications gives investors access to deals that are not available to the general public, providing them with an edge when it comes to sourcing investments.
  9. Lower risk – The general partners will be held liable legally and fiscally. Limited partners are spared from any legal or financial obligations in the case of a lawsuit or financial catastrophe. In the worst-case scenario, the limited partner can lose their initial investment but nothing more.
Conclusion

In conclusion, multifamily real estate syndication is a type of investment that provides investors such as dentists with the ability to participate in large-scale deals that would otherwise be difficult to participate in while operating a dental practice. Unlike REIT’s that offer shares in the company, a private real estate syndication allows the dentist investor to receive an ownership stake in the real estate and the tax benefits that come along with ownership. Dental investors taking advantage of syndication opportunities have access to long term, stable cash flow, hedge against inflation, tax benefits, diversification, leverage debt and professional expertise and management. Investing in real estate syndications additionally gives dentists the opportunity to network with other investors, increase access to deals, and enjoy long-term appreciation with lower risks.

Why to join the Dentist Drilling For Success circle.

Dentist Drilling For Success is a movement built by a dentist, for dentists. Our goal is to educate dentists, physicians, chiropractors, nurses and other health care workers in order to make well informed decisions when using real estate as an investment vehicle. This education will allow you learn your own risk profile and have the proper tools to do your own due diligence on the most important aspects of an investment such as the team, deal, and location.

Dentist Drilling For Success teams up with experienced military veterans who have over $1 billion in assets under management. They fought hard for your freedom and now fight for your financial freedom through real estate.