An Investor’s Guide to Commercial Real Estate Syndication
The most important things you need to know about this popular method of real estate investing.
When you’re first exploring any new investment opportunity, it can be difficult to know where to start.
Maybe you’ve heard stories of real estate syndications generating steady passive income for your friends or coworkers. Or maybe you’re interested in investing with Excelsior but want to understand more about how syndication works, and how it can benefit you.
This guide will cover some of the most frequently asked questions for people who are new to the real estate syndication space: “What is it?” “Why should I invest?” and, “How do I find the right deals to invest in?”
What is Real Estate Syndication?
A real estate syndication is when a group of investors pool their funds to purchase equity in a property, with the help of a sponsor like Excelsior.
The sponsor does all the work of sourcing the deal and then provides prospective investors with details, including the location of the property, information about the market environment, all financials, and an overview of each tenant. The individual can then choose how much they want to invest.
From there, the sponsor handles all back-end operations, including property management and quarterly reports, and the investor can simply sit back while their investment generates passive cash flow.
Investors are often drawn to real estate syndications because they allow them to own a share of an asset they may not have been able to purchase on their own, such as a multifamily project or a large commercial property. Other investors appreciate syndications because they’re a completely passive investment, and because working with an experienced sponsor can grant them access to off-market deals they wouldn’t know about otherwise.
Real Estate Syndication vs. Other Investment Types
To better understand the benefits of investing in a real estate syndication, it’s often helpful to compare syndications to other common investment types — namely, funds and real estate investment trusts.
Funds, REITs, and syndications all involve a sponsor or fund manager who pools the capital of multiple investors, but the exact mechanism is very different.
When you invest in an REIT, you’re purchasing a share of the company that owns the properties. You don’t gain equity in the properties themselves, and you don’t get to choose which deals the company invests your money into.
When you invest in a fund, the fund manager chooses which deal or deals they want to invest your capital into.
Of these three investment types, a real estate syndication is the only option that allows you to choose the specific asset you want to invest in. And because real estate syndications are a direct investment — which REITs and funds are not — they’re subject to unique tax benefits, as well.
Tax Benefits of Real Estate Syndication
Because real estate syndications involve investing directly into a property, participants are eligible for certain tax deductions, including depreciation. This deduction allows you to write off the value of your investment over time.
A REIT investment, on the other hand, is treated as ordinary dividend income. This means that you pay higher taxes on that income and you are not eligible for depreciation and the other deductions associated with real estate investing.
If structured properly, you can also use investments in a real estate syndication to take advantage of strategies like 1031 exchanges, which you can use to reduce or defer your taxes.
Where to Find Commercial Real Estate Syndications
Before you start searching for specific investment opportunities, it’s usually helpful to know what you’re looking for. Questions to ask yourself include:
- What are my ideal investment criteria?
- What type of deal do I want to invest in?
- Who do I know that can help me?
- Which investments make sense for our current market conditions?
From there, focus on building your brokerage network. If you’re just starting out, you can begin by researching teams that invest in the markets and product types you’re interested in. Then take the time to call, email, or connect with those people on LinkedIn and start building a relationship.
When people in your network know what you’re looking for, they’re much more likely to reach out to you with specific opportunities that you might not be able to learn about on your own — including off market deals.
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