In order to get to the why of syndication, first we must start with what is syndication. A syndication is when a group of investors pool together money in order to buy a larger property. This can be done with any kind of real estate, whether it's offices, retail, or apartment buildings.
A syndication is made up of two roles, the syndicator, and the passive investor. Syndicators have a very important role in a syndication, they have the responsibility of laying out the risks and returns for the investors, and protecting the investment. They oversee the management of the property, handle disbursements to the investors, and deal with the financing, and then selling of the property.
The passive investors, they have the most important role in a syndication. They provide the initial funds for the down-payment of the property, repair funds, and an operational expense reserve for any possible surprises that can appear.
There are a few pros and cons to a syndication that I will list out below.
Pros:
Faster to acquire large properties like apartment buildings.
Easier to continue to scale up
Less risky investment for passive investors than stock market
Cons:
Upfront costs for the syndicator. Often having to put up legal fees for attorneys and documentation, earnest money deposits when a deal is put under contract, due diligence fees for inspectors, and loan processing fees.
Requires working with a large group of people.
Many moving parts to make a deal successful.
So to summarize the pros, syndications make it easier for groups of people to purchase larger properties like apartment buildings. The syndicator manages the asset to get the targeted returns, and investors provide the initial capital (money) for the down payment and rehab/repairs. Because their are more investors involved, they can acquire large properties faster and easier than a single person. Making it easier to acquire even more properties. It is a less risky investment than the stock market because there is more control in the syndicators hands. They can improve the property, forcing the value to increase. They can hire a good property manager that will ensure vacancy and expenses are kept to a minimum.
For the cons, there are a few ways to mitigate those. For the upfront costs, the syndicator would be reimbursed for those after the money from the investors was raised. Working with a large group of people and personalities is always a challenge. This is where good project management and people skills will be essential for success. With the many moving parts involved, education is key and and having processes in place to make sure each item will is accounted for and won't get lost in the shuffle.
Thank you for reading. Stay tuned for the next topic!
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