February 13, 2023

Role of syndication in commercial real estate

Syndication in commercial real estate is the model of pooling in resources of multiple real estate investors to build or purchase a new property, which none in the group could have managed individually. It gives you the bandwidth to close more deals dipping into a shared and larger resource pool. Some even treat this mode of investment as retirement planning.

Of course, like any other investment option, real estate syndication too comes with its share of risks and rewards.

What are the positives of syndication?

# Potential of high returns: When your investment works out well, there is a serious amount of money to be made in the syndication business. Studies have shown that syndicate investors have on an average enjoyed returns of nearly 18%, which is extremely rewarding when pitted against many other investment avenues.

# Opens up a whole new world: You can make things happen as a collective that you can’t do alone. That’s the power and thrill of real estate syndication. For instance, as a consortium, you can aim for a large hospitality or retail project or a cutting-edge commercial property, which you could never conceive doing all by yourself.

# Room to expand: By creating a cohort of investors, one can think of broadening the basket of offering by venturing into different domains. That helps you hedge your bets and gives you much greater leverage in the markets as you get to diversify your portfolio.

What are the possible downsides?

# Lack of liquidity: Unlike shares in a real estate investment trust (REIT) or a property you have invested in alone, you can’t just monetize a syndicated property whenever you want to. You are stuck with it for the entire holding period. So it’s not a short-term liquid bet, rather an extended waiting game.

# All eggs in single basket: Since your syndicate’s collective investment pool is typically locked into one single project, your fortunes largely hinge on the performance of that one property. In case it underperforms, the syndicate’s resource pool could become a dud investment. That’s a risk this route carries.

# Investment might bomb: While the returns are usually lucrative and the investment load is shared across the group, there’s always a possibility that one particular syndicate project doesn’t take off. That risk-reward scenario must always be kept in mind.

# No guaranteed passive income: Not all projects will yield immediate passive income, some might not cough up anything at all. Elsewhere the income can fluctuate year-on-year. In any event, brace up for income inconsistencies if you opt for the syndicate investment route.

What is the usual structure of a real estate syndicate?

There are primarily two components of such an investment syndicate. One is the real estate syndicator/s and the others are passive investors.

The syndicators are the ones who structure and run the syndicate by underwriting the deal, doing the necessary due diligence, organizing the investors, making the business plan, etc.

The passive investors, by dint of part-investing in the property, are entitled to periodic passive income from the asset as well as returns on their investment once the property is sold. They also enjoy tax benefits.

So it’s quite clear that real estate syndication presents a great opportunity for generating passive income if you choose your fellow investors well and carry out proper due diligence of the property which you couldn’t have acquired all by yourself. Over a longer period, this route is always likely to yield handsome returns.

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Role of syndication in commercial real estate