Did you know you can realize many of the benefits of owning investment real estate in a syndication without ever screening a tenant, repairing a leaky roof or collecting rent?
There are several forms of group ownership methods for real estate investing including partnerships, corporations, LLCs (Limited Liability Corporation), and REITs (Real Estate Investment Trusts). These are commonly called a syndication.
A real estate syndication is a group of investors pooling their resources together to purchase, manage and dispose of property they generally could not acquire on their own.
Each form of syndication has its own positive and negative attributes. We are going to examine the LLC form of syndicating.
Why would an investor consider a syndication?
You can invest in bigger deals –
Individual investors usually have limited capital to purchase a property. In pooling funds with other investors, larger properties with greater diversification and potential may be acquired.
Professionally managed real estate –
A team of experienced professionals in commercial real estate actively and directly manage the property.
Property and class diversification –
Each syndication may have a focus based on the management team’s expertise. A syndication could also have several funds for specific property types, but having your funds spread across several properties or even several classes of commercial real estate is beneficial.
An entirely passive investment –
The management team handles all aspects, which allows for a total hands-off investment. There are tax advantages as well stemming from the passive nature of the income.
The potential exists for significant returns –
Much of the success lies in the experience and track record of the management team to find a property with the potential to create sizeable returns. The strategy for the investment is all detailed in the operating agreement and private placement memorandum.
Favorable commercial financing –
Not all syndication groups use financing, but if this is part of the strategy usually more favorable financing can be acquired for larger investments. Additionally, most loans are nonrecourse extending only to the property or LLC and not individual investors.
Asset protection and loss prevention –
Again, having a qualified and experienced management team is the key to the preservation of all aspects of the asset.
Extensive due diligence in acquisition phase –
Not only would the physical attributes of a property be reviewed during the acquisition period, but it is important to consider past, current and future issues.
What about the potential challenges of a syndication?
No control in the investment whatsoever –
You have no input into the operations or management. Other than choosing the initial strategy of the investment pool you have no say in the property acquired.
Lack of liquidity –
Owning real estate is an illiquid investment, whereas being the only owner of a single property gives you the ability to sell whenever you choose.
Potential loss of the capacity to perform a 1031 exchange –
In a syndication, you do not own real estate, but rather shares in an LLC. Depending on the structure of the LLC and how you hold title your ability to perform an exchange could be lost. However, the LLC could still exchange into other holdings.
Burt M. Polson, CCIM, is a local real estate broker specializing in commercial, luxury estates and wineries. Reach him at 707-254-8000, or [email protected] Sign up for his email newsletter at BurtPolson.com.