How one can profit from real estate syndication is a topic I hear frequently. Let’s start by defining what we mean by real estate “syndication.”
With the help of “Syndicator” or “sponsor,” a collection of passive investors can pool their funds to buy, manage, and sell real estate for a profit through the use of real estate syndication. Since real estate syndication typically involves the selling of “securities” in the form of “investment contracts,” it is governed by the federal Securities and Exchange Commission or state securities regulators (sometimes both).
Unless exempt, a securities offering must be registered (authorized by the regulatory agencies), which typically necessitates adhering to a tight set of guidelines and filing exemption notices with the relevant securities regulators.
The syndicator will locate an appropriate property (or type of property), establish a real estate investment company to buy it (typically a limited liability company), and then organize a group of investors to provide the company with cash for the purchase price (less any bank loans), closing costs, operating capital, and reserves. Investors will receive a membership or ownership interest in the business in return for their contributions, as well as a return on their investment.
Prior to purchasing the property, the syndicator will perform due diligence on it. Once the property has been acquired, the syndicator will manage the business on behalf of the investors until the property is eventually sold.
The provisions of the offering agreements will determine the precise method of payment for a syndicator. Before making a real estate syndication investment, carefully read the offering documentation.
Here Are 10 Ways To Get Paid As A Real Estate Syndicator:
- Management Fees. Syndicators often charge a management fee, which is a percentage of the property’s gross revenue. This fee is typically used to cover the costs of managing the property, such as property management, accounting, and legal fees.
- Performance Fees. Syndicators may also charge a performance fee, which is a percentage of the property’s profits. This fee is typically paid out only if the property performs well.
- Promote (Profit Interest). The promotion, also known as the profit interest, is a share of the profits that the syndicator receives in addition to the management fee and performance fee. The promotion is typically paid out only if the property performs very well.
- Acquisition Fee. The acquisition fee is a one-time fee that the syndicator charges for finding and acquiring the property. This fee is typically paid out of the proceeds of the offering.
- Refinance Fee. The refinance fee is a one-time fee that the syndicator charges for refinancing the property. This fee is typically paid out of the proceeds of the refinancing.
- Disposition Fee. The disposition fee is a one-time fee that the syndicator charges for selling the property. This fee is typically paid out of the proceeds of the sale.
- Interest On Loans Made To The Company. Syndicators may also charge interest on loans that they make to the company. This interest is typically paid out of the company’s profits.
- Expense Reimbursement. Syndicators may also be reimbursed for expenses that they incur on behalf of the company. These expenses may include travel expenses, marketing expenses, and legal fees.
- Shares Of Stock. In some cases, syndicators may be issued shares of stock in the company. These shares may be sold or held for future appreciation.
- Other Compensation. In addition to the above, syndicators may also be compensated in other ways, such as through bonuses or commissions.
The offering documents must explicitly state the frequency and size of distributions and fees. Syndicators should retain a lawyer with experience in private securities offerings to prepare the offering documentation, submit the necessary exemption notices, and guide them as they think through all possible forms of payment.
As informed investors, we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.
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