If you are like a lot of my colleagues you may have heard the word syndication, but you don’t really understand postexactly what it is and how it works. In this post I’ll walk you through exactly what a syndication is and what your role as a passive investor would be.
Real estate syndication is a popular way for doctors to invest in real estate without having to manage the properties themselves. A syndication is a group of individuals or entities that pool their money together to invest in a real estate project. In this article, we will discuss what real estate syndication is, how it works, and why it can be a good investment opportunity for doctors.
What is Real Estate Syndication?
Real estate syndication is a type of investment strategy where multiple investors pool their money together to purchase a property or properties. The investors are typically passive, meaning they do not actively manage the property themselves. Instead, they entrust the management of the property to a syndicator or sponsor who is responsible for overseeing the project.
The syndicator or sponsor is responsible for identifying the investment opportunity, managing the property, and distributing the profits to the investors.
How Does Real Estate Syndication Work?
Real estate syndication involves several different parties, including the syndicator, the investors, and potentially a third-party property management company. Here’s how the process typically works:
- The syndicator identifies a real estate investment opportunity that they believe will provide a good return on investment.
- The syndicator creates a legal entity, usually a limited liability company (LLC), to purchase the property.
- The syndicator solicits investments from a group of investors who are interested in the opportunity. Each investor typically contributes a minimum amount of money, which is pooled together to purchase the property.
- The LLC or partnership formed by the syndicator and investors purchases the property and the syndicator manages the property.
- The syndicator distributes profits to the investors based on their percentage of ownership in the LLC.
- The property may be sold after a certain period of time, and the profits from the sale are distributed to the investors.
Why is Real Estate Syndication a Good Investment Opportunity for Doctors?
Real estate syndication can be a good investment opportunity for doctors for several reasons. Here are some of the key benefits:
- Passive Investment: Real estate syndication allows doctors to invest in real estate without having to manage the property themselves. This is particularly appealing to doctors who are busy with their medical practices and do not have the time to manage a property.
- Diversification: Real estate syndication allows doctors to diversify their investment portfolio. By investing in real estate, doctors can reduce their exposure to stock market fluctuations and potentially earn a steady stream of passive income.
- Potential for Higher Returns: Real estate syndication can offer potentially higher returns than other passive investments, such as stocks or bonds. This is because real estate has the potential to generate both rental income and capital gains.
- Tax Benefits: Real estate syndication can provide doctors with tax benefits, including deductions for mortgage interest, property taxes, and depreciation.
- Benefits from economies of scale by being able to invest in larger properties than you would be able to do by yourself or with a few other partners.
Risks of Real Estate Syndication
While real estate syndication can offer many benefits, it is important to note that there are also risks involved. Here are some of the key risks:
- Lack of Control: Investors in real estate syndication have little to no control over the management of the property. They are relying on the syndicator to make sound decisions and manage the property effectively.
- Illiquidity: Real estate is an illiquid investment, meaning that it cannot be easily bought or sold. Investors in real estate syndication may have to wait several years before they can sell their ownership stake in the property.
- Market Risk: Real estate values can fluctuate depending on the overall economy or specific local market factors.
Who can invest in real estate syndications?
Typically only accredited investors
The term “accredited investor” is defined by the Securities and Exchange Commission (SEC) in the United States. To be considered an accredited investor, an individual must meet at least one of the following criteria:
- Have an annual income of at least $200,000 for the past two years (or $300,000 for married couples) and expect to earn the same or more in the current year.
- Have a net worth of at least $1 million, either individually or jointly with a spouse, excluding the value of their primary residence.
There are certain exceptions for 506B syndications where up to 35 sophisticated investors are allowed to invest that do not have to meet the criteria for accredited investors. According to the SEC a sophisticated investor is someone who has “sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.”