As an investor in real estate, your goal is to work smarter this year, not harder. So, what’s one of the smartest things you can do to strengthen your bottom line? Stop trying to make it all on your own.
In other words, find your first syndication deal and start tapping into the benefits.
Syndication in the real estate industry involves pooling funds from several investors and then channeling these funds into projects. The syndicator, also known as the sponsor, can use the funds to acquire properties in their entirety. Alternatively, the sponsor can use them as equity contributions to projects along with commercial mortgages, which would be used to fund most project costs.
If you’re a real estate investor, you should always be searching for syndication opportunities, as they offer a quick way of acquiring properties and generating profits. However, there are some expenses you should be aware of.
Here’s a rundown on overlooked syndication expenses you should know about before investing in apartments.
How Syndication Works
Before we delve into the often-overlooked costs of syndications, let’s take a look at how the syndication process works.
First, the syndicator establishes the structure of the investment and brings the investor pool together. Then, he or she will oversee and manage this investment. Ultimately, through his or her efforts, the syndicator should generate a profit for all investors.
The syndicator basically serves as the investors’ fiduciary, which means he or she may assume a lot of risk when developing the syndication. As a result, the investors should be prepared to pay various real estate investment expenses to compensate the syndicator accordingly.
Syndication Expenses Include Acquisition Fees
Syndicators receive acquisition fees during their offerings’ formation stages. These fees compensate the syndicators for their expertise, time, and effort in securing the investment opportunities. After all, securing the opportunity involves several steps, including finding and vetting the deal, obtaining financing, and finally structuring the syndication.
Of course, if a syndicator makes these types of syndication expenses too high, investors, understandably, may not be keen in on working with him or her.
The Amounts of these Real Estate Investment Expenses, and Other Considerations
Acquisition fees are usually percentages of the amounts invested in individual offerings. These percentages are typically between 5% and 10%. However, in some cases, they can be between 2% and 5% of the acquired properties’ prices. Meanwhile, in other cases, the acquisition fee real estate might be flat (for example, $20,000). A syndicator can usually negotiate the fee with his or her other investors.
Note that other names for acquisition fees include due diligence fees, upfront fees, and sponsor fees. Also, note that these types of real estate investment expenses are not the same as the fees associated with third parties, such as inspectors, title companies, attorneys, and lenders.
Syndication Expenses Include Fees for Asset Management
While the syndicator is holding an apartment property, investors will have to compensate him or her for the costs and time required to make sure that the property runs successfully. And that’s where an asset management fee comes in.
This type of fee is usually a percentage of the rent collected or the net flow of cash received by the syndication. Specifically, it’s typically between 1% and 2%, and it can be paid monthly, quarterly, or annually. However, in many cases, syndicators make the amounts of these real estate investment expenses fixed.
What You’re Paying for with These Syndication Expenses
Remember that the syndicator is responsible for managing both the apartment property and the syndication partnership, which is why this fee structure is not unreasonable.
When it comes to the property itself, the syndicator must constantly ensure the proper management and efficient operation of the property by staying in communication with the property’s manager. In addition, he or she must make sure that any necessary renovations are done under budget and on time.
When it comes to the syndicate, your syndicator will need to communicate with you and the other investors regularly regarding your apartment investment. The syndicator is also responsible for making sure that you receive your compensation within the agreed-upon time frames—for example, quarterly or monthly.
Syndication Expenses Include Profit Splits
Your apartment property’s value is usually derived when it is purchased. Therefore, a savvy syndicator who aims to maximize profits will view the potential net profit percentage as an incentive when closing deals out.
The net profit percentage will, of course, vary based on the deal. However, it should always be relatively high to motivate the syndicator to put in the necessary effort and time during the hold period so as to maximize the returns.
A More Detailed Look at These Syndication Expenses
An investor’s equity stake in a project may range from 5% to 50% based on the deal’s details and his or her experience. However, as an investor, you’ll normally get a preferred return rate that ranges from 8% to 12%, if not more, on your invested capital at the outset. Then, the cash flow or equity that remains will be divided between the syndicator and the investors at the percentage you have all agreed upon.
Start Generating Income through the Power Syndication!
If you are excited to buttress your bottom line this year in real estate, apartment syndication couldn’t be a smarter way to do it.
It’s paramount that you can readily access available capital so that you can capitalize on a wide range of buying opportunities present in the current real estate market. Then, you can hold your apartment properties long term and watch them appreciate. Down the road, you can sell them for a profit, and you can generate cash flow from them in the meantime.
Part of the syndication process is understanding the syndication expenses associated with it and planning accordingly. But there’s so much more to syndication that you don’t want to overlook. Get in touch with me, Joe Fairless, to find out more about how you can fully capitalize on syndication opportunities this year and in the years to come
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.