In today’s economy, there are no sure investments. Many investors have been stunned by steep losses in the stock market and real estate and have moved their money to safe investments like CDs and money market accounts.
As the economy begins growing again, many investors will start looking for investments which minimize their risk and chance of loss.
One way to minimize risk and yet still take advantage of the historical trend toward increasing real estate values is by using real estate syndicates to invest in larger properties which spread out risk.
A real estate syndicate is an unofficial term used to describe a pooled real estate investment group.
In a nutshell, it is the process of combining capital from a group of investors to purchase real estate.
Real estate syndication allows a group of individuals to combine private savings to purchase larger real estate investments for which other financing is not available. This method of real estate investing has been a popular method of financing the purchase and sale of commercial properties such as shopping centers, office buildings and warehouses.
Every real estate syndicate is different, and dictated by the terms of the agreement which is drafted to define the purpose and powers of the syndicate. Typically these real estate investment vehicles are structured using some form of partnership agreement or limited liability company (LLC).
These investment vehicles are essentially smaller versions of Real Estate Investment Trusts (REITs), which is a much larger investment vehicle which serves as a conduit for the real estate investments of its shareholders. Because real estate syndicates are not publicly traded, they are less liquid than shares in a REIT.
Advantages of Real Estate Syndicate
Although investing in a real estate syndicates is not for everyone, there are certain distinct advantages compared to direct ownership of real estate. These advantages include:
- Superior Expertise, Discount Price. One of the primary advantages of syndicates is the ability of many investors to leverage expertise. Rather than relying on one person’s knowledge as is the case whenever an individual makes a self-directed investment, a syndicate can bank on the knowledge and skills of numerous real estate professionals. Nonprofessional investors who don’t have the time or inclination to learn every aspect of owning and managing real estate investment can benefit from someone else’s skills and experience negotiating purchase agreements, financing a purchase, negotiating leases and managing the property.
- Cost savings. There are economies of scale to investing with others. By pooling funds, a small real estate syndicate can achieve cost savings as compared to an individual investor. A well-funded syndicate can make a substantial down payment on a property and leverage their capital to create improvements and increase returns.
- Diversification. Another advantage of syndication is that it enables an individual investor with limited funds to diversify among a number of different properties, or to purchase a larger investment with multiple tenants. Diversification helps to safeguard against significant losses in real estate.
- Cash Reserves. Syndication can assure that there is enough cash in reserve to help weather any economic downturns or temporary shortfalls.
First Things First: Beginning Syndication
The first step in forming a real estate syndicate is to identify the type of investment and the market area. Because it is wise to invest close to home, you should first look at investments close by. You should also decide on the scope of the syndicate — how many investors are going to be involved.
A syndicate can consist of as few as 2-3 investors to as many as 50 investors. It can be helpful if all the investors are known personally by the organizer.
In addition, you should be sure the organizer is someone who has knowledge and experience and is capable of handling raising the capital, identifying the right property to purchase, and managing the property.
Additionally, great care must be put into drafting the syndicate agreement. This is the “Constitution” which will guide the investment group no matter what happens in the future. If you are planning on investing a significant sum in this investment vehicle, you should spend a fair amount of time and money on getting legal advice on this foundational document.
Real Estate syndicate investing can be a savvy way to make your money grow, especially in today’s economy. As with any investment however, it is best to proceed with caution and due diligence before acting too quickly.
John Corcoran is an attorney with the Corcoran Law Firm in San Rafael, California, and has served as counsel to Parkway Properties, a real estate brokerage and real estate investment corporation with over 15 years experience forming and managing commercial real estate syndicates throughout the San Francisco Bay Area.