Updated: Jan 9
If you’ve participated in a real estate deal as a passive investor, you’ve had the opportunity to gain a first-hand look at how a syndicator, or lead investor, works. They’re the ones who solicit investments from others, research investment opportunities in diverse markets across the U.S., package the deal, acquire financing and manage the property (many times through a property management company).
To become a syndicator, you’ll need to get experience because you’ll find it hard to get deals or raise capital without prior experience, but you will need an investment and capital to get the first deal completed. Basically, you’re dealing here with the “chicken and the egg problem,” and which comes first. However, there are several creative ways to bypass the experience issue.
What is A Syndicator?
The syndicator is the lead investor in a deal. He or she is also often the General Partner in a real estate deal and they bring an investment opportunity to a group of passive investors, which are also called Limited Partners. Syndicators do most of the heavy lifting, as mentioned at the beginning of the article. In exchange for all the hard work and the knowledge that went into the deal, syndicators are being compensated by fees and part of the equity in the deal.
In the most typical syndication deals, the syndicator works out an equity allocation with the limited partners, often 80-20 or 70-30 split. Investors end up earning a preferred return that ranges from 5-10%, with an average return of 8%. Most investors earn money through rental income and property appreciation. A syndicator also earns an average acquisition fee of 2% at the time of closing and 2% of the income per year.
Why Experience Really Matters
The cornerstone of any real estate syndication is money. Without investors coming up with funds, you can’t go to bank or other lender and ask for $10- or $20-million. And without experience, it’s hard to go to potential investors and ask them to help fund your real estate syndication.
Experience is key in finding the right property, in the right market, with the right numbers to justify borrowing large sums of money from a lender. Without experience in knowing how to identify those markets, along with extensive experience in knowing how to evaluate properties, you pretty much are playing a guessing game. And you’re proposing to do it with other people’s money.
It takes both knowledge and experience to look at a property and tell whether or not it can be acquired at a price that will allow it to be renovated or repositioned and turned into a profitable venture. It takes a lot more than looking at a balance sheet and crunching numbers.
You have to understand the market where the property is located, along with the area around the property, whether or not the population is expanding enough to avoid high vacancy rates as well as (hopefully) higher rents once the upgrades to the property are completed. Seasoned syndicators have a track record to fall back on for this knowledge and expertise.