Updated: Jan 9
Passive investors who participate in real estate syndication investments have a pretty clear picture of what a syndicator does. After all, they’re witnessing first-hand how their lead investor selected the property and the market ran the numbers to determine if it was a good deal and how they get a lender to fund the project.
And once the deal is finalized there is more work to be done, as syndications not only negotiate the deal and get financing, but also manage the property until they sell it.
That all adds up to a lot of hard work! generally speaking, syndicators are compensated in two ways: equity split and fees. As a lead investor, the syndicator also participates in the income of the real estate investment, along with everyone else that is involved in the deal.
That could include two main sources of income: rental income, and appreciation if the property is held long enough to appreciate in value.
Equity split means that the income that the property produces is split between the syndicator, who is the General Partner, and the investors, who are the Limited Partners. A common equity split is 30%-70% or 20%-80% (where the Limited Partners receive the larger equity stake).
Additionally, each syndicator has an equity split from the proceeds of the sale of the property. It can either be the same as the equity split of the property income, or higher. It’s not uncommon to see syndications with a 30%-70% equity split from the income, plus a 50% of the sale proceeds.
Another equity split format is a waterfall, where syndicators receive higher percentage of the equity if they manage to provide certain returns to investors. For example: 30% equity if the investment yields 15% IRR to investors and 40% equity if they get 16% IRR. This way, the syndicator is incentivizing to maximize the returns on the investment for passive investors.
In addition to equity split, syndicators are been compensated for their effort by charging syndication fees. In this article I will discuss only the most common ones.
Multifamily investments don’t happen overnight. in fact, syndicators often spend anywhere from 3 to 6-months (and sometimes even longer) in order to find the right deal. This is especially true in what are considered “hot” real estate markets, where buyers are willing to overpay for investments.
The syndicator’s transaction fees are usually 1% to 3% of the transaction’s value. This will compensate them for months of hard work. They also have operating costs involved in finding and acquiring the property, like travel, hotels, paying salaries to their employees,