In previous article, Benefits of Investing Alongside A Syndicator, I discussed a few of the reasons that it is beneficial to invest with a syndicator or a Lead Investor: the ability to diversify your investments, access to more attractive investment opportunities and more. Generally speaking, the main goal of a syndication is to gather a group of investors to purchase a property. Every syndication has two type of investors – Limited Partners and General Partners.
Lead Investor/Syndicator/General Partner (“GP”) – The GP is the investor that leads the transaction. The syndicator can be an individual, a small group of investors or a company. They do everything from searching for the right deal, firming relationships with brokers and apartment owners, analyzing deals, negotiating with the owner, performing due diligence, signing on the loan, renovating the property (if that is what the business plan entails) and managing the third party property management company.
Equity Partners/Limited Partners (“LP”) – The LPs are passive investors who invest their money with the Lead Investor, but normally they have no decision-making power, though some syndicators allow LPs to vote on some critical issues, such as property sale. LPs receive investment reports periodically.
The Benefits for Limited Partners
You do not do all the hard work and have minimal risk - By investing along with a Lead Investor, who takes care of all aspects of the deal from A to Z, you have the opportunity to own real estate and receive proceeds from the property without doing all of the hard work. In addition, the lead investor signs on the loan, so your risk is limited to your investment amount. This is a classic passive investment.
You can diversify – You have the ability to invest in other properties or investment vehicles such as stocks, bonds, startups, etc. Investing in a syndication is a great way to diversify your investment portfolio and spread the risk.
You do not need to be an expert in real estate – Multifamily investing is not extremely difficult, but it does require education and experience – and both can be achieved over time. However, many passive investors have satisfying high-paying jobs and some own businesses. They do not have the time to allocate to learn about real estate. By partnering with a Lead Investor, they can join a group of investors on great deals without changing their status quo.
When a property is purchased, the transaction lawyer opens an LLC that holds the property, and its members are the Limited and the General Partners. In each deal, there will be an agreed equity distribution between the GP and the LP, such as 80%-20% or 70%-30% (the lion share goes to the LP, since they usually invest most of the money in the deal).
The equity allocation works in a way that the income the property generates is distributed between the GPs and the LPs based on an agreed percentage. For example, if the property generated $1,000,000 in year 1, and the equity allocation is 20% to the GPs and 80% to the LPs, then the GPs will receive $200,000 and the LPs will receive $800,000.
The Lead Investor can charge various types of fees, but the following three are the most common types.
Transaction Fee – Compensation for all the hard work s/he performed until they find the right deal. Sometimes it takes 3 to 6 months to find the right deal, especially in hot markets. The fees are usually 1%-3% of the transaction value.