Syndications 101

If you’ve ever found yourself scrolling through your investment portfolio, wondering how you can quantify or minimize your exposure to risk… you should definitely continue reading.

You’re about to learn more about the most low-maintenance and accessible avenue for breaking into the real estate game for high income earners, real estate syndications.

Investing in syndicated deals is a great way to diversify your holdings into the real estate asset class and participate in some of the best tax benefits available to investors.

Real estate syndications are a collaborative effort where multiple investors pool their resources to acquire and manage income-producing properties. It’s like crowdfunding but with a more strategic twist. As an investor, you become a limited partner (LP), allowing you to passively invest in high-quality properties without the hassle of day-to-day management or the risks of direct ownership. On the other side of the coin you have the general partners (GP), and they are the active mastermind behind the deal doing all the dirty work.

Big caveat: Though limited, there are always risks and potential pitfalls no matter how great an investment structure like syndications are. So the best protection strategy is education, preparation, and consulting with your own team of professionals.

Ok so…

In this post, we’ll lay out everything we’ve learned in the last few years investing in real estate. We’ve invested with a wide variety of partners, in active and passive roles, across different asset classes, and in different geographic markets. Our goal here is to save you some trouble. We’ll delve into the intricacies of real estate syndication for FAANGs and other high-income earners, breaking down its processes, benefits, and how it can serve as a powerful vehicle for wealth accumulation and preservation. 

Table of Contents

  • Active vs. Passive Investors
  • The Pros of Syndications
  • The Cons of Syndications
  • LP Requirements
  • LP Expected Returns
  • Legal, Taxes, and Accounting Documents
  • 506(b) vs 506(c)
  • Are Syndications Right For Me?

Active vs. Passive Investors

There are two types of players in the syndication game: the general partners (GPs) and the limited partners (LPs). They’re the active and the passive investors, respectively.

  • General Partners (GP): The mastermind and driving force behind a deal. They’re responsible for sourcing opportunities, performing thorough due diligence, negotiating with sellers, building the rest of the active team, acquiring the asset, placing the right insurance products, securing financing, overseeing property management, raising rents, reducing expenses, and dealing with anything else that may occur during the life of the investment. They bring expertise and industry connections, and assume both the risk of personally guaranteeing the loans and their reputation in front of brokers and sellers..
  • Limited Partners (LP): LPs provide capital to the syndication in exchange for a share of the ownership and profits. They’re expected minimal involvement and are shielded from further repercussions besides their capital if the deal goes south for any reason. While GPs take on the lion’s share of the workload, an LP’s primary role is to bring the equity part of the capital stack while enjoying truly passive income and diversification.

The Pros of Syndications 

Syndications have several benefits, but I’d like to especially mention the following ones as a perspective to consider:

Options – Syndications allow you to cherry-pick your investments from a curated list. By investing directly into syndications, you’re able to confine your investments only to the specific product types, geographic markets, and specific business plans you feel most comfortable with, without needing to know absolutely everything there is about the investment type. For example, if you only want to invest in stabilized industrial properties in the southeastern U.S. market, syndications allow you to do that. If you have a strong belief in where a particular market is headed, this will enable you to take bets that maximize the potential upside.

Taxes – Syndications offer a huge benefit for investors who want to reduce their tax burdens. Generally speaking, by investing in syndication, you’ll be considered a member of an entity that owns a commercial property (unlike REITs). Because of that direct ownership, you get to participate in the tax treatment that comes along with it. As a commercial property owner, you get to deduct depreciation expenses from your share of the income generated by the property. After the Tax Cuts and Jobs Act in 2017, bonus appreciation was introduced into the asset class and tens of thousands of investors have been reducing their tax bills (sometimes completely eliminating it!) with the power of commercial real estate. In the interest of space here, reach out to me if you’d like to learn more on the tax front, and I’ll point you to my top resources. 

Disclaimer: This is not tax advice. Please consult with your legal and accounting teams for general advice on the topic and on a deal-by-deal basis. 

Passivity – Unlike other forms of direct RE ownership, syndications are actually a passive investment vehicle. As a limited partner (LP), you are not going to be the one responsible for acquiring, managing, or transacting your deals. This is especially important if you already have a career you enjoy or are trying to use real estate as a way to free up your time. 

Lower Risk – By investing alongside a group of partners, you also get the opportunity to invest in more professionally managed deals, which can reduce the risks associated with commercial real estate investments and even maximize your potential buyer pool (for an exit) in a variety of different market conditions by leveraging the sponsors’ network.

Bigger Assets with Smaller Capital Requirement – By pooling resources, syndication enables access to more exclusive and lucrative properties and projects that may be beyond the reach of an individual investor. Instead of putting a 25%+ down payment on a $20MM asset, you can just put 1-2% of the same $20MM and still form part of the high returns. The ability to leverage other investors’ capital by co-investing with them ultimately allows you to put out less money from your own pocket and further diversify your exposure and upside potential.  

The Cons of Syndications

Similarly and fairly enough, syndications also have some drawbacks worth mentioning. These are the ones I like to bring to the attention of my investors:

Lack of Control – As a passive investor and limited partner (LP), you won’t have direct control in the big decisions since you’ll be following the GPs business plan. This includes when the asset is refinanced or sold. Less control could become a problem if you’re planning for your real estate portfolio to fund your retirement or lifestyle soon since distributions can change based on market conditions. However, some GPs like to involve their LPs in big decisions like this, so make sure to ask about this before investing.

Fees & Promoted Interest –  Scale doesn’t come for free. GP teams and commercial real estate in general handle a lot of moving parts: traveling to inspect asset sites in person, performing comprehensive due diligence and inspections, retaining attorneys, leveraging commercial lender relationships, and more. All of these items are for the best interest of the deal. While a single-family home (SFH) has an arguably cheaper acquisition process, commercial real estate (CRE) definitely has a higher (cost) barrier of entry to be mindful of. 

Timing and Costs Associated with Filing Taxes – This might be trivial but could become an issue as your portfolio grows over time. By investing in a syndication, you should receive a Schedule K-1 at the beginning of each new year for each deal you form part of. This is required to complete your tax returns. The timing in which you will receive these forms will vary between partnerships, so having a very proactive GP is imperative or you could be forced to file for an extension on your tax return. 

LP Requirements 

Limited partner requirements may vary on a deal-by-deal basis, but there are four considerations that are present in most deals: capital, prior relationship, accreditation status, and due diligence. Place extra attention on this last one.

Capital – As an LP, your primary requirement is capital — typically starting from $25,000 but sometimes $100,000. In terms of your time commitment, syndications offer the ultimate flexibility, which will allow you to reap the rewards of real estate investing without sacrificing your day job or extra curricular activities. 

Prior Relationship – It is worth noting that some syndication deals (506b type) require a prior relationship between LPs and GPs. We will explain this in more detail below. This requirement is in place by the Security and Exchange Commission (SEC) to ensure guidelines adherence. While this may seem like an additional speed bump, it can actually be beneficial for LPs as it allows them to build deeper relationships and gain a better understanding of the deal and the opportunity.

Accreditation Status – Additionally, some syndications (the 506c type) may require accredited investor status, which entails meeting certain income or net worth thresholds set by the Securities and Exchange Commission (SEC). We will dive into these requirements in the sections below.

Due Diligence – It’s highly important to note that you should always conduct thorough due diligence before investing on any deal. Allocate time for research, review legal documents, and understand the investment strategy and risks involved. This isn’t only limited to the market or the deal but also the GP you’re investing with. If interested, we divo into key tips, specific questionnaires, and strategies for this in our newsletter.

LP Expected Returns

Now, let’s talk numbers. 

The potential returns can vary depending on the specific deal and market conditions, but syndications generally offer attractive returns compared to other investment vehicles.

The syndication strategy has the potential to double your money every 4-6 years, while offering consistent cash flow ranging from 6-10% of the contributed capital and the potential for additional profits through property appreciation and value-add strategies. 

To contrast this, at Equis Capital, we’ve consistently achieved 35%+ IRR (internal rate of return) over the last 5 years, which is at least 4 times what the stock market has historically returned to its investors. 

All in all, investors can expect to earn their returns as a combination of regular cash flow distributions, equity appreciation, and tax benefits. The details of how these play into your bottom-line return as an investor vary and will be a topic for another post.

Legal, Taxes, and Accounting

When participating in a syndication deal, you can expect to encounter a variety of legal and tax documents, and it’s helpful to review those with the help of a professional. 

Legal Documents – These include the private placement memorandum (PPM), the operating agreement (OA), the subscription agreement, and the investor questionnaire or accreditation status. These documents outline the terms of the investment, including the rights and responsibilities of both GPs and LPs, as well as the investment strategy, projected returns, and risk factors. 

Tax Documents – Each year, the general partnership is required to prepare and deliver Schedule K-1s to LPs so they can report their share of business income and losses on their individual tax returns.

Accounting Documents – Additionally, as an LP, you may receive regular updates and financial reports on the property’s performance, typically on a quarterly or annual basis.

Syndications often operate under SEC Regulation D exemptions with two common variants: rule 506(b) and rule 506(c). 

506(b) vs. 506(c)

We’ll go very high level over these two in this post, but feel free to shoot us a message if you want more information:

  • Rule 506(b) allows for the partnership to raise an unlimited amount of money and sell securities to an unlimited number of accredited investors. Under this rule, GPs are unable to solicit or advertise their deals. If they’re selling to non-accredited investors, they’re capped at thirty-five. All non-accredited investors must meet these specified legal standards in finance and business in order to be capable of evaluating the merits and risks of the prospective investment.
  • Rule 506(c), in contrast, restricts participation to accredited investors only but allows for general solicitation and advertising, making it easier for GPs to raise capital from a wider pool of investors. Essentially, these are the deals that you would see online on social media or on targeted ads. As of 2024, being accredited in the United States means meeting one of the following two conditions: $200,000+ reported income in the last 2 years (or $300,000+ if married) OR a $1,000,000 net worth excluding the equity in your personal residence. Outside the United States the requirements should be similar, though some countries may slightly modify it.

One thing to note is that 506(b) vs. 506(c) isn’t really better than the other; they essentially qualify you as a limited partner on which deal you can join.

But Are Syndications Right For Me?

If you meet the aforementioned accredited investor status, earn six or more figures, and you pay a big chunk of your yearly earnings in taxes, then syndications are the right structure for you to reach your investment goals. 

Syndications are ideal for the busy professional with a high income and a full-time job – these are software engineers, product managers, C-level suite leaders, tech sales professionals, entrepreneurs, doctors, dentists, lawyers, accountants, and other skilled technicians. 

Whether you’re working your job because you truly love it or whether you dream of exiting the corporate world through the power of passive income, syndications offer an effective way to put your disposable income to work for you behind the scenes.

Syndications provide access to a segment of deals with higher return profiles and a diverse set of asset types that may otherwise be out of reach for individual investors. They allow you to diversify your investment portfolio and build wealth in the most hands-off way possible through real estate. 

But most importantly, and what really matters… syndications will supercharge your ability to start living your best life sooner than you ever thought.

… 

And there’s a mini-crash course in real estate syndications for high-income earners looking to level up their investment game.

I’m a personal believer that the world of CRE syndication offers a unique chance to diversify portfolios, generate passive income, and build long-term wealth. By partnering with an experienced syndicator, whether our group or others out there, you can tap into the expertise, guidance, and resources needed to reach FIRE (financial independence and retire early) sooner.

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