Understanding Real Estate Syndications: A Passive Investment Option

Dear valued existing investors and future investors,

Welcome to this week’s CPI Capital’s news briefing. Our regular, weekly newsletter contains a mixture of updates, commentary and informative related articles about the lucrative world of passive real estate investment.

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For anyone looking to invest in real estate, there are a variety of options, from directly owning the asset to indirectly owning it through shares in a property fund or REIT or via a crowdfunded property. Over recent years, many investors have chosen to participate in multifamily and/or BTR-SFR real estate syndications.

What are real estate syndications?

Real estate syndications are investment opportunities where a group of investors pool their money together to purchase and manage a real estate project. Typically, a syndicator or sponsor will identify an investment opportunity, raise capital from investors, and manage the project on behalf of the group. Investors may be passive or active participants in the project and can benefit from potential returns such as rental income, appreciation or profits from the sale of the property. Syndications can range in size and complexity and can be structured in various ways such as limited partnerships, LLCs, or REITs.

Such syndications are typically managed by a sponsor, who is responsible for identifying the investment opportunity, managing the project, and distributing profits to the investors. They
have become an increasingly popular investment option for individuals looking to diversify their portfolio or generate passive income streams.

What are some of the key characteristics of real estate syndications?

For investors who are interested in real estate but don’t have the time or expertise to manage their own properties, syndications can be an attractive option. Accordingly, here are some key things to understand about real estate syndications:

Syndications are a passive form of real estate investing

One of the main advantages of real estate syndications is that they are a passive investment option. Investors provide capital to the syndicate and the sponsor manages the day-to-day operations of the project. This means that investors do not need to have any real estate experience or knowledge to participate in a syndication. They simply need to have the capital to invest and trust the sponsor to manage the project effectively.

Syndications offer potential for high returns

Real estate syndications can offer investors the potential for high returns. The sponsor will typically identify an investment opportunity that has the potential to generate significant profits, and will then structure the syndication in a way that allows investors to participate in those profits. Depending on the structure of the syndication and the success of the project, investors can potentially earn returns that are much higher than what they could earn from other types of passive investments.

Syndications can be structured in different ways

There are a variety of ways that real estate syndications can be structured and it’s important for investors to understand the differences between them. Some syndications are structured as limited partnerships, where the investors are limited partners and the sponsor is the general partner. In this structure, the general partner is responsible for managing the project and making all investment decisions, whilst the limited partners are passive investors who do not have any decision-making authority.

Alternatively, a syndication can be formed as an LLC, with the sponsor as the manager and the limited partners as members. The sponsor is responsible for managing the property, whilst the limited partners provide the equity investment. The LLC can be structured with different classes of membership interests (e.g. Class A and Class B), with different rights and priorities in terms of distributions, voting rights and control. The sponsor may receive a promote or carried interest in the profits above a preferred return and also receives a management fee for their services. The limited partners typically receive a preferred return on their investment before the sponsor receives their promote.

Investing in real estate syndications does carry some risks

As with any investment, real estate syndications carry risks. The success of the project depends on a variety of factors, including the type and class of property, performance of the real estate market, the skill of the sponsor in managing the project and the ability of the sponsor to secure financing for the project. Investors should carefully consider the risks before investing in a syndication to determine whether a syndication is an appropriate investment option for their specific financial goals and risk tolerance.

Syndications have minimum investment requirements

Real estate syndications typically have minimum investment requirements, which can range from upwards of around US$ 25,000 to hundreds of thousands of dollars or more. This means that they may not be accessible to all investors, and investors should carefully consider whether they have the financial resources to invest in a syndication before committing their capital.

Real estate syndications can offer tax benefits

Real estate syndications can offer tax benefits to investors. Depending on the structure of the syndication, investors may be able to take advantage of depreciation deductions, which can help offset their taxable income. In addition, investors may be able to defer taxes on any gains from the investment by using a so-called 1031 exchange to reinvest their profits into another real estate investment.

Investing in real estate syndications require due diligence

Investors should conduct thorough due diligence before investing in a real estate syndication. This includes researching the sponsor’s track record, understanding the terms of the syndication agreement, and reviewing the financial projections for the project. Investors should also carefully review the legal documents for the syndication and consult with a financial advisor or attorney to ensure

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CPI Capital has considerable experience with and knowledge about real estate syndications and passive investments. When investors are considering investing in such syndication, it is important to evaluate the general partner (GP) responsible for managing the investment, with some of the key factors to examine being:

Experience: look for a GP with a strong track record of successful real estate investments;

Investment strategy: review the GP’s investment strategy and determine if it aligns with your investment goals and risk tolerance
Communication: the GP should have open and transparent communication with their investors;

Alignment of interest: the GP should have a significant financial stake in the project and is invested alongside the limited partners;
Management team: strength of the GP’s management team

CPI Capital has already proven that it has the foregoing characteristics. It also believes that investing in a real estate syndication is a partnership, and it is important to select a GP who you trust, and whose values align with your own!

Yours sincerely,
August Biniaz
CIO, Co-Founder CPI Capital