What are the Different Phases of Real Estate Syndication?
Real estate investors who are looking for a way to generate truly passive income are often drawn to the world of real estate syndication. Under the syndication model, a proven real estate investor serves as the syndicator (or sponsor) while investors who entrust the syndicator with their money simply sit back and collect the positive returns generated by their investment.
If you’re interested in the world of real estate syndication, whether as a sponsor or an investor, it’s important that you understand the different phases associated with each transaction. It’s not as simple as simply selecting a property and purchasing it. There is a lot of work that goes in before, during, and after the purchase. Fully understanding how the process works can put you in a better position to enjoy success in the world of real estate syndication.
Phase 1: Organization
As is the case with any type of real estate investment, doing due diligence is crucial. For syndicators, the process of finding a potential property and then doing their due diligence on it is the backbone of their business. The most important tool that syndicators have is their reputation. When a real estate syndicator establishes himself or herself as a reputable source of income for investors, more investors will obviously want to work with them.
Long before a property is purchased and offered through syndication, the syndicator is responsible for gathering as much information as possible about the property. For instance, if they plan on offering a shopping mall for syndication-based investment, they need to review the overall financial viability of the mall, the leases of every store found inside, and their individual financial reports.
Once the financial prospects of potential investment have been thoroughly investigated, the syndicator is also responsible for checking on the physical condition of the property itself. Remember, everything about the property that investors are putting their money toward falls in the lap of the syndicator. He or she must do everything possible to ensure that investors receive a positive return on their investments.
Phase 2: Operation
The syndicator must present a business plan to his or her investors before asking for their money. After all, without a plan in place, investors are not going to be willing to give their money to someone so they can just spend it as they see fit. These business plans should include everything from marketing the property to maintaining it.
The operation of the building is perhaps the most important part of the entire process. This is especially true if the property being offered for syndication is being held as a long-term investment property. The earliest steps of the operation phase include taking care of any deferred maintenance on the property, creating and executing a renovation plan, and putting financial programs in place that will benefit the syndication.
Once the property has been improved and policies and procedures have been put in place, the operation doesn’t stop. The syndicator is responsible for negotiating contracts, collecting rents, and more. Additionally, syndicators are solely responsible for the tax returns for the asset, ensuring that everything is being done legally.
Phase 3: Liquidation
In many syndications, the ultimate goal presented in the business plan is the liquidation of the property. While investors may receive regular dividends based on the long-term rental value of a property, they generally invest in syndications based on the premise that the property will be sold, and they will receive a share of the profits. The marketing and eventual sale of the syndicated property is once again the responsibility of the syndicator, making this the final phase of syndication.
It’s important to note that a sale isn’t the only form of liquidation, though. If refinancing becomes a viable option for profit generation, the syndicator must shop lenders, apply for refinancing, handle the appraisal process, and eventually close the new loan.
A real estate syndication is a popular option for investors, primarily because it has been proven as an effective method of generating passive income. However, it’s important that potential investors understand how thorough the process of investing in syndication truly is.