10 Steps to Simplifying Real Estate Syndications

Have you ever asked yourself, “Why syndications? What makes them a worthy addition to my investment portfolio?” Welcome to Syndication 101, where you’ll learn everything you’ll need about this form of real estate investing. So let’s go; class is in session! 

There are a variety of unique benefits that syndications bring to the table. The first is that you get to keep your time, meaning you’re not the landlord dealing with property management and time-consuming headaches. And beyond the upfront steps of choosing a syndication, it’s probably the closest thing to true passive income, especially when it comes to real estate. 

Syndications are easy to love because they create a nicely diversified portfolio that maximizes your earning potential while mitigating risk. They offer potentially higher returns, access to professional expertise, and, perhaps most importantly for busy physicians like us, passive income. When you educate yourself and take action, syndications can contribute to your growing wealth. 

Don’t sit on the sidelines any longer. There is an incredible opportunity to participate in larger, high-yield deals that would otherwise be out of reach. Whether you’re a seasoned investor or new to the realm of real estate, I’m here with ten steps to unlock syndications as part of your wealth-building strategy.

Step 1: Structure

At their most basic level, a syndication means investing in someone else’s deal. People pull their capital together for a professional manager—an individual or company called a sponsor, an operator, or a general partner—to go out and buy larger or more valuable properties. The sponsor is responsible for finding, acquiring, and managing the property. They are the expert making sure everybody profits from the deal. They are on top—the decision-maker. 

It is important to know your role. As a limited partner, understand what you can and cannot do, in terms of your legal rights as an investor, as well as the deal’s financial framework. Not every syndication is created equal.

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Step 2: Risks and Rewards

Recently, a doctor told me he was scared to make a mistake investing in real estate. I get it. Investment fears are real, especially for busy professionals who haven’t been formally trained in finances. Overcoming these fears involves taking the time to evaluate a deal’s risks and rewards—an essential practice that leads to better investment decisions.

Know that investing in syndications, like all investments, carries a degree of risk, including potential loss of capital. The flip side is the potential for turbocharged returns. And in my experience, risk and reward are usually paired, meaning that with greater the risk, the greater the reward. Is your risk tolerance high enough to withstand a deal’s potential losses? Align the risk-reward profile with your financial goals and risk tolerance before diving in.

Here’s something to avoid. When I first started investing, I would only look at the rewards—the gains potential. And if I was considering two different deals, I’d only compare their upside. That was a mistake. The deal with a slightly higher reward may come with significantly more risk, making it a worse deal overall. For every syndication, put the reward up against the risk and see how they compare to other deals.

Step 3: Due Diligence

For the unfamiliar, due diligence is doing the research to understand all aspects of the deal. Don’t feel like you need to be an expert on how you conduct due diligence; it can take years to perfect. I’m still learning with each deal I invest in. By continuing to engage in syndications, I make better and smarter decisions each time and regardless of market. 

For syndications, the most important piece of due diligence is looking at the sponsor. Who is leading the deal? Scrutinize the sponsor’s track record—successful previous deals are a good sign. How have they fared in bad times? The best sponsors will make an average deal better. 

You also need to analyze the property’s financials. What are the projections? What are the assumptions that allow for projected returns? What are the market conditions—is it a growing market and an area with good employment? Or is it a shrinking market with poor employment? Make sure the winds are at your back from the start. 

Due diligence can feel a bit intimidating at first, which is one of the reasons we developed Passive Real Estate Academy. There, we give you the tools to secure a smart syndication that will be right for your portfolio. You will not only grow your real estate knowledge but also your investment confidence. Join our waitlist now and receive details about upcoming courses.

Step 4: Investment Terms

Included in your due diligence is this vital step: Understand the terms of the investment. Terms can vary from syndication to syndication, but the essential elements to look for are the minimum investment amount, the expected return on investment, the duration of the investment, and the potential exit strategies. Carefully review each to help you understand if the deal meets your risk tolerance. 

Syndication investments shouldn’t be hope-and-pray situations. If you’re about to invest in something, know the deal. If somebody were to ask for details, you should be able to quickly rattle off its terms. It’s your money, and you need to know where it’s going and why things will work out well.

Step 5: Tax Implications

One of the most powerful things about real estate investment is taking advantage of the many tax incentives. For example, syndications generate passive income, but they can also generate paper losses for you through something called depreciation. Using this strategy, your syndication investment money could offset some of your other investment gains. 

Keep in mind that all earnings from syndications are subject to tax. And the sale of the property could attract capital gains tax. For these and other tax implications, it’s absolutely necessary to consult a tax professional to plan accordingly.

Step 6: Sponsor Communication

There’s nothing worse than making an investment and being left alone in the dark for months. A transparent and open line of communication builds trust and fosters a healthy investor-sponsor relationship. Ensure that the sponsor has a clear communication plan in place, including regular updates on the property and investment performance. Most syndications provide inventors with quarterly updates, good or bad. It’s worth your time to read over them. 

For my investments, I like to have a direct line of communication with somebody at the sponsor company when I have questions. And like with any relationship, there will be miscommunications. But how do you resolve those? The best syndications allow smooth and efficient communication if you have questions or concerns.

Step 7: The Exit Strategy

Exit strategies determine how and when you might get your initial investment back plus any profits. Common strategies include selling the property or refinancing. But you need to know the details. Are they going to sell the property in three years? Five? Ten? Will there be refinancing to distribute profits along the way? These are the details to look for and align with your financial goals. 

Then ask the sponsor about backup plans in lieu of the market not cooperating with the intended business plan. Understand how these backup strategies affect your return on investment. With that information, ask yourself if they align with your goals and your timeline. 

Step 8: Legal Documents

Legal documents—such as the operating agreement, the contract, or subscription agreement, depending on the situation—set the terms of the syndication. They outline your rights, the deal’s duration, and other important due diligence factors. 

Don’t gloss over them. Understand them fully before making an investment, and when in doubt, consult a legal professional—they know what to look for. Make sure there are no discrepancies between the terms presented in the legal documents and what you were informally promised.

Step 9: Investment Goals

The world of investing creates a lot of FOMO. If everybody is putting their chips into a certain investment, it’s tough not to follow the crowd. But it’s at that exact moment that you need to step back and make sure you look at the bigger picture of your investment goals. 

Understand how investing in a given syndication fits into your overall investment strategy and long-term financial plans. Are you looking for cash flow? A fix-and-flip syndication can fit that need. Are you looking to stash cash for five or ten years? Look for syndications with long-term business plans. 

Here’s a strategy: start by letting go of a few deals. There will be more down the road, and letting some go generates your early, hands-on education. But don’t let that build up into an analysis paralysis that prevents you from taking action. The more deals you invest in, the more you’ll develop quick and strong investment decisions.

Step 10: Fees

Understand all of the different fees that are involved with syndications. That’s right, fees. When we get hit with bank or phone fees that we weren’t expecting, it can be frustrating. Syndication fees are not different. Prevent that frustration by choosing a sponsor who transparently communicates about fees.  

Common fees you’ll incur are exit fees and sponsor fees, both of which eat into your return. Keep in mind that sponsors need to get paid—that’s their incentive for finding good deals for investors. As Charlie Munger, Vice Chairman of Warren Buffet’s Berkshire Hathaway, famously said, “show me the incentive, and I’ll show you the outcome.” Without incentive, you can't expect the sponsor to do a good job.

In Conclusion: Class Dismissed, For Now 

And there you have it: a beginner’s guide to real estate syndications. If you approach your next investment with these ten steps in mind, you’ll be ahead of the curve compared to most investors. 

Syndications are more than an investment opportunity; they’re a tool to amplify the potency of collective investment. Opening doors to larger, lucrative deals, they can be a powerful tool for building wealth if used wisely. Leverage the sponsor’s professional expertise to generate passive income. 

Class is dismissed, for now, and it’s time for you to take action toward a future of enduring wealth. 

Continue your education by joining our community at Passive Income Doc Facebook Group. And let us know in the comments below which steps you’ve taken when choosing a syndication investment.