Have you ever wondered how a Real Syndication works and who are the key people responsible for handling this unique business? 

If so, then allow us to bring you into a super fun air-travel adventure! 

One of the easiest ways to understand real estate syndication is to think of it as an airplane ride. There are passengers who purchase a seat plus pilots, flight attendants, mechanics, and an entire crew, who all work together to get the plane safely to its destination.

In this analogy, the pilots are the sponsors of the syndication, and the passengers are the passive investors. They are all going to the same place, but they have very different roles in the process.

If unexpected weather patterns emerge, if an engine has mechanical issues, or if any other surprises occur, the pilots are the ones who are responsible for keeping the flight on course.

The pilots will likely update the passengers (“Just to let you know, folks, we’re experiencing some turbulence at the moment…”), but the passengers don’t have any active responsibilities in making the decisions or flying the plane.  They get to just relax and enjoy the ride.

A real estate syndication works in a similar way. The passive investors, sponsors, brokers, property managers, and more, all share a vision to invest in and improve a particular asset. However, each person’s role in the project is different.

We explain who those players are, as well as their respective roles in a given real estate syndication in our Noblivest education series.

People in a Real Estate Syndication

Here are the key roles that come together to make a real estate syndication happen:

• Real estate broker
• Lender
• General partners
• Key principals
• Passive investors
• Property manager
• Nobivest

Real Estate Broker

The real estate broker is the person or team who surfaces the property for sale, either as a listing or as an off-market opportunity (i.e., not publicly listed).

Having a strong real estate broker is crucial, as they are the main liaison between the buyer and the seller throughout the acquisition process.

Lender

The lender is the biggest money partner in a real estate syndication because they provide the loan for the property. The lender performs their own due diligence, underwriting, and separate appraisal to make sure the property is worth the value of the loan requested.

In the airplane analogy, neither the real estate broker nor the lender are aboard the plane. They have important roles in bringing the project to fruition, but they are not part of the purchasing entity, nor do they share in any of the returns.

General Partners

The general partners synchronize with the real estate broker and lender to secure the loan and acquire the property in addition to managing the asset throughout the life of the project, which is why they are often also called the lead syndicators. 

The general partnership team includes both the sponsors and the operators (sometimes these are the same people).

The sponsors are the ones signing on the dotted line for the loan and are often involved in the acquisition and underwriting processes.

The operators are generally responsible for managing the acquisition and for executing the business plan by overseeing the day-to-day operations. Operators guide the property manager and ensure that renovations are on schedule and within budget.

Key Principals

For a commercial loan, the sponsor is required to show a certain amount of personal liquidity. This reassures the lender that the sponsor can contribute additional personal capital to keep the property afloat if things were to ever go wrong.

One or more key principals may be brought into the deal to help guarantee the loan if the sponsor’s personal balance sheet is insufficient.

Passive Investors

A real estate syndication’s passive investors have no active role in the project. They simply invest their money in exchange for a share of the returns. Like the passengers on an airplane, they get to put their money in, sit back, and enjoy the ride.

What a great position!

Property Manager

Once the property has been acquired, the property manager becomes arguably the most important partner in the project because they are the “boots on the ground” who execute renovation projects according to the business plan. 

The property manager works closely with the operator (i.e. the asset manager) to ensure the business plan is being followed and that any unexpected surprises are addressed properly.

Noblivest

In a real estate syndication, Noblivest is part of the general partnership. Our main role is to lead investor relations and help raise the equity needed.

We serve as an advocate for investors by ensuring that the sponsors’ projections are conservative, deals are structured favorably toward investors, that multiple exit strategies exist, and that capital will be preserved and grow.

After the property is acquired, we act as the liaison between the sponsor/operator team and the investors by providing updates, financial reports, and other important information between parties.

Essentially, we are like the flight attendants, who prep the passengers for the journey and help ensure they are well-informed and comfortable throughout the flight.

Conclusion

A real estate syndication, by definition, is a group investment. And it’s only through pooling resources and coordinating that the syndication can be successful.

In addition to the key roles discussed here, there are inspectors, appraisers, cost segregation specialists, CPA, legal team, insurance agents, and more, who work in the background to make sure that the syndication gets off the ground. 

While all their respective roles are different, they are all needed to ensure the success of the syndication.

The Benefits of Investing in Real Estate

If you’ve ever experienced owning single-family or multifamily homes, you know that these investments require time and energy. 

Investing in residential real estate can be challenging because, typically, you as the investor wear many hats throughout the seemingly never-ending process. Responsibilities include finding the property, negotiating and funding the deal, renovating the property, interviewing tenants, and even performing maintenance.

The trouble is, it doesn’t stop there. You have to repeat most of the process over again when your tenant’s lease is up.

Why Investing in Multifamily Rentals Can Be a Lot of Work

Small multifamily rentals have some advantages over single-family homes. For example, if one tenant moves out, the tenants in the other units are still there to help cover the mortgage. Plus, it’s much easier to manage one property with multiple tenants than to manage multiple properties with one tenant each. 

But, even with a property manager on board to help with your rentals, bookkeeping, strategic decisions, and maintenance/repair costs are still your responsibility. You’re basically running a small business, which can be challenging if you’re working a full-time job.

The Case for Passive Real Estate Investments

On the flip side, there are fully passive investments in commercial real estate. These are professionally managed and operated investments so you don’t have to deal with any of the three T’s  – Tenants, Toilets, and Termites.

Once investors begin to understand passive commercial real estate investments, it’s common for them to move toward syndications. Here’s why:

1. Minimal Time Required

Have you heard the phrase “set it and forget it”? In a syndication deal, you put money in, collect cash flow during the hold period, and receive profits upon the sale of the property.

You won’t be fixing toilets, screening tenants, or handling maintenance. The sponsor team and the property management team expertly attend to those things so you can sit back, enjoy the returns, and focus on living life.

2. Opportunity for Diversification

It would be unreasonable for anyone to attempt to become an expert in every phase of the property investment process, and even more so when it comes to different markets. 

By investing with experienced deal sponsors, you can easily diversify into various markets and asset classes while resting assured that the professionals are taking care of business. This allows you to quickly and easily scale your portfolio while also mitigating risk.

3. Did You Say Tax Benefits?

Similar to personally owned rentals, you get pass-through tax benefits when investing in real estate syndications. You’ll be able to write off most of the quarterly payouts, which means you basically get tax-free passive income throughout the holding period.

You will, however, likely owe taxes on the appreciation income you earn upon the sale of the property.  Always check with your own CPA on your personal situation.

4. Limited Liability

When you invest passively through real estate syndications, your liability is limited to the amount of your investment. If you were to invest $50,000, your biggest risk would be losing that $50,000. You wouldn’t be on the hook for the entire value of the property, or the loan to buy the property, and none of your other assets would be at risk.

5. Positive Impact

With personal investments, you make a difference in two to four families’ lives. But with real estate syndications, you have the chance to change the lives of hundreds of families and whole communities with just one deal.

Each syndication creates a cleaner, safer, and nicer place for people to live and impacts the community and the environment positively. And that’s something you won’t get from stocks and mutual funds.

Conclusion

If you’re on the fence between active and passive real estate investments, the experience you gain from owning small rentals is irreplaceable. However, personally owning rental properties is not a prerequisite to commercial real estate syndications.

Either way, investing in real estate is a great way to diversify your portfolio and mitigate risk. It gives you an opportunity to have a positive impact on the families who will live in your units, as well as a positive impact on the environment and community.

The vast majority of people spend their lives working full-time jobs to earn a “steady” paycheck. Meanwhile, the wealthy have somehow unlocked the secret to working less while making their money work for them.

So what is it that the wealthy know that the rest of us don’t? 

One of the biggest secrets that the wealthy tap into is the incredible power of real estate. Real estate has the ability to generate passive income and provide a path toward building wealth. Every dollar invested in real estate works for you in these five ways:

• Cash flow
• Leverage
• Equity
• Appreciation
• Tax benefits

#1 – Cash Flow

The greatest benefit of investing in real estate is passive cash flow. When an asset is purchased and rent is collected from tenants, the remaining value after property expenses are paid is your cash flow.

If you put down $50,000 to buy a rental for $200,000, your mortgage payment would be about $1,000 per month. Now let’s say that you’re able to rent the unit out for $2,000 per month.

Upon receipt of the $2,000 rent payment each month, you pay the $1,000 mortgage, use $700 for expenses and reserves, and keep the remaining $300 as passive cash flow (i.e., money in your pocket). 

#2 – Leverage

In the example we just discussed, you hypothetically bought a $200,000 rental without paying $200,000 in cash. Instead, you put in $50,000 as a down payment, and the bank contributed the remaining $150,000.

The cash flow you earn is based on the full $200,000 asset, not the $50,000 portion. This is the magic of leverage. 

Even though the bank contributed 75% of the money, all you have to do is pay the mortgage and interest, and any excess cash flow or profit is all yours. No need to share it with the bank.

#3 – Equity

As you receive monthly rental checks and use them to pay the mortgage, your equity in the property increases. In this way, the rental property generates income to pay for itself.

Imagine buying a laptop that generated money to pay for its own wifi!

Once your rental builds significant equity, you may have the opportunity to use a home equity line of credit (HELOC), which allows you to borrow against your existing asset. HELOC funds can be invested into another asset, which allows you to make your money work even harder for you.

#4 – Appreciation

Real estate values tend to rise over time, which means your money can also work for you in the form of appreciation. 

For example, consider a property purchased for $580,000. In time, the duplex appreciates to $750,000, at which point it is sold. The profit at the sale, or $170,000, will have been generated via appreciation, plus any additional equity that you had built through paying down the mortgage.

That being said, while appreciation is nice, it’s not guaranteed, which is why you should always invest for cash flow first and foremost, with appreciation as the icing on the cake. 

#5 – Tax Benefits

When you invest in real estate, you get the benefits of depreciation and mortgage interest deductions, as well as a whole host of write-offs for a number of other related expenses. 

Investors often show losses on paper, while actually making money through cash flow. The losses play a big part in helping to offset other income, which is a major reason real estate is so lucrative.

Further, when investing in commercial real estate syndications, you have the opportunity to take advantage of cost segregation and accelerated depreciation, further increasing your tax benefits.

Advantages of Investing in Real Estate

With each dollar invested in real estate, you have the opportunity to take advantage of cash flow, leverage, equity, appreciation, and tax benefits. This is true regardless of whether you invest in single-family rentals, large syndications, or anything in between.

Did you know that you could invest in real estate without the headaches of tenants, toilets, and termites? It’s true – you can get all the benefits of investing in real estate, without any of the hassles of being a landlord.

In this article, you’ll see what passive real estate investing means and find out if you should be an active or passive investor.

What It Means To Be An Active Investor

When most people think of real estate investing, they think of rental property investing – buy a single family home, find a renter, and collect monthly rent income. Sounds easy enough, but the reality can be quite different.

Even with a professional property management team on board, you as the landlord still have an active role in the investment.

The property managers may take care of the day-to-day issues, but you will still need to be involved in strategic decisions, including whether to evict tenants who aren’t paying, filing insurance claims when unexpected surprises happen, and sometimes having to put in additional funds to cover maintenance and repair costs.

What It Means To Be A Passive Investor

On the flip side, you have passive investing, which are the “set it and forget it” type of real estate investments. You invest your money, and someone else does all the heavy lifting.

The great part about passive investing is that it’s totally passive – you don’t get any calls from the property manager, you don’t have to screen any tenants, and you don’t have to file any insurance paperwork.

However, being a passive investor also means that you relinquish some of your control in the investment and trust someone else (i.e., the sponsor team) to manage the property and execute on the business plan on your behalf.

Should You Be an Active or Passive Real Estate Investor?

Here are 10 factors to help you decide which path is right for you.

#1 – Tenants, Termites, and Toilets

If you’ve dreamt of becoming a landlord, having tenants, and making improvements, then consider an active investor role.

Otherwise, if the title to this bullet point makes you nauseous, you should go the passive route.

#2 – Time

Active real estate investments require more time, during the initial acquisition and throughout the project lifecycle, while passive investments only require your time up front, during the research phase.

#3 – Involvement

How hands-on do you want to be? Do you want to manage the property yourself, field tenant requests, and schedule maintenance and repair appointments? Or do you want to sit back while someone else does all of that? 

#4 – Profits

With active investing, you would likely be the only owner of the property, so you would get to keep any net profits. With passive investing, the profits are distributed among many investors. 

This doesn’t necessarily mean that one type of investment will net you higher returns than the other; you’ll need to compare one deal to another.

#5 – Expenses

Active real estate investors should plan to handle insurance claims, emergencies, and repairs, which may require additional money at times, whereas passive investors only make an initial capital investment.

#6 – Risk and Liability

With active investing, if things go south, you are personally held liable, which means you may lose not just the property but also your other assets. 

With passive investing, your liability is limited to the capital you invest. Typically, the asset is held in an LLC or LP. If anything goes terribly wrong, the sponsors are held liable, not the passive investors.

#7 – Paperwork

Active investments are paperwork-heavy, from the initial purchase of the property to tracking purchase and rental agreements, bookkeeping, and legal documents throughout the project.

With passive real estate investments, on the other hand, you typically sign a single PPM (private placement memorandum) to invest in the property. No need to fill out lender paperwork, file for insurance, or do any bookkeeping.

#8 – Team

As an active real estate investor, you will need to build your own team, including brokers, property managers, and contractors.

As a passive investor, you rely on the shared expertise of the existing deal sponsor team. The sponsors are experts in the market and typically already have a team set up to manage the property.

#9 – Diversification

With active investing, you yourself would need to be an expert in the market and asset class you’re investing in. If you’re investing outside your local area, you would need to research the market, find a “boots on the ground” team, and possibly visit the area.

With passive investing, it’s easy to diversify across different markets, since you don’t have to start from scratch with each market. You are investing with teams that have already taken the time to research those markets and build strong local teams.

#10 – Taxes

As an active investor, you’ll be responsible for the bookkeeping, meaning that you will need to keep track of the income and expenses. You’ll also need to work with your CPA to make sure that you are properly depreciating the value of the asset each year.

As a passive real estate investor, you don’t need to do any bookkeeping. You receive a Schedule K-1 every spring for your taxes, which shows the income and losses for that property. No need to track income and expenses throughout the year. 

Conclusion

If you’re ready to roll up your sleeves and get involved in the various aspects of being a landlord, active investing just might be the perfect adventure for you. 

However, if your time is limited but you have capital to invest, you might want to consider being a passive investor.

If you’re hoping for a middle ground option, turnkey rentals and buy-and-holds may provide some control without the huge time investment.

When determining which is the right path for you, be sure to factor in your unique situation, goals, and interests.