Advantages & Disadvantages Of Real Estate Syndication
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Any decision we make has its pros and cons. We always weigh the opinions and then decide whether to go for it or not. When it comes to investing in syndication, the pros and cons list is a great starting point because investors tend to have varying degrees of experience, risk tolerance, and knowledge.
What is real estate syndication?
Real estate syndication means a partnership between two or more two investors. The investors combine their skills, their resources, and the capital to purchase and manage the property that they single-handedly could not afford. There are generally two roles in real estate syndication – syndicator and investor. Syndicators are also known as sponsors.
As investors, there may be a situation wherein your resources are tapped and you have fallen short on capital to grow in your investment. For such situations, real estate syndication may be the answer.
We have all heard of “No risk – No Reward”. So, it is no wonder that sometimes, apprehension and fear slightly accompany an investor into a deal.
Commercial real estate Austin lists some of the main pros and cons associated with real estate syndication.
Pros of Investing in Real Estate Syndications
Tax-Advantaged Income
The main goal of investing in the real estate market is a positive cash flow and utilizing unique tax strategies. This way, the investors can take home a greater share of their income. Multiple tax benefits are available on syndication deals. Many of them are related to depreciation – the decrease in the value of the property based on its wear and tear.
Depreciation means the accounting expense, but it does not represent that the value of the property is decreasing actually. Subtracting depreciation is a common tax strategy; commercial property life spread is over 39 years.
It's a Passive Investment
Real estate syndications are truly one of the best passive investments in today’s market. The primary goal of the syndication is to provide a financial contribution by each syndicator. It is in the investor’s best interest to evaluate the deal thoroughly. The amount of money that is to be invested depends on the size of the deal. However, once the money changes hands, it is the investor’s responsibility to trust the sponsor and patiently wait to collect the returns of the investment.
Passive and residual income
Syndication deals aim at providing financial returns to investors regularly once the commercial properties become profitable. Investors began generating a passive income through a preferred return. This return is generally a percentage of the initial investment. After the investors have received their preferred returns, the remaining profits are split between the sponsors and investors based on the split outlined in the deal. For example, if there is a 70/30 split deal, then 70% of the profits to the investor and the rest 30% to the sponsor. Equity investors can capitalize on the income at the time when the property is sold. Thus, the returns split, and timelines become specific to each deal. The residual income is one of the biggest drivers for investors to take part in real estate syndication.
Professional Management
Sponsors generally have a previous track record of success and they know how to react to various issues that may arise during the investment. Also, they work closely with commercial property management to manage the daily operations of the property. Thus, your investment will be in safe hands. You also will not have to take away extra time from your career or business to go and handle the issues related to the property. Also, the sponsors will provide you complete information on the performance of the property on a monthly and quarterly basis. That way, you can always know how your investment is doing.
Calculated risk
The ability to calculate the risk plays a major role in the investor’s analysis of the investment he has made. Thankfully, real estate syndication risk can be correlated with the sponsor’s experience, the offering, and the market. The higher experience the sponsor has, the more likely they are to execute the deal. Syndications generally involve a large group of investors. Therefore, the risk spread out is among the group rather than one or two individuals, mitigating potential individual losses.
Cons of Investing via Real Estate Syndications
Lack of control
A very important component to understand before investing in syndication is the lack of control the investors have once they have an investment relationship. An investor’s control is limited to their choice of work with particular sponsors. Investors are not involved in the deal, day-to-day operations of the commercial property, or the decision-making. The best investors are the ones who remain interested and yet understand their role and also respect their relationship with the sponsor. On the other hand, an investor who constantly badgers the sponsor about the progress of the deal gains no additional control in the process and may hinder the effectiveness of the sponsor. While the lack of control can be an advantage for some, it can be a significant disadvantage for others.
Holding time
Depending on the market conditions and the investment strategies, the length of the syndication deal can be a disadvantage for some. While the sponsor will share an approximate timeline with investors at the outset, external factors and unexpected circumstances can impact the accuracy of the timeline of the deal. For example – a sponsor who plans on buying and holding an apartment for five years tenure could be prevented from selling the same at the target price due to the market conditions. If it takes approx. 7 years to sell the property, it can be stressful if an investor was banking on using that money for a different investment.
Lack of liquidity
When the investors take part in syndication, they are legally bound to the deal and investments remain liquid until the property is sold and the profits are distributed. Any investor, who needs to exit syndication early, should reach out to the deal sponsor to ask for a potential loan or negotiation on the deal. Even then, your securities will be sold at a discount. Due to the lack of liquidity, it is wise that the investor invests limited cash into the deal.
The bottom line
The advantages and disadvantages of syndication are not limited to the above-mentioned. Commercial real estate Austin advises you to use it as guidance before evaluating any offer. Investors do not have much control when they invest via syndication. But the ones that are smart enough are capable to decide whether they should or should not go for the deal.
If you plan of investing in real estate via syndication, contact GW Partners, a full-service commercial real estate firm in Austin, Texas. With enough experience in predicting the financial benefits and investment security, we plan to make your syndication an attractive vehicle for you. Additionally, we can guide you on whether you must invest in a single-family or a multi-family home for better profits. So, do not wait any further. Contact GW Partners today!