Real Estate Investment Options (Part 3 of 3): Co-Investing (AKA Syndication)

​In earlier posts we discussed direct ownership of real estate and private lending investment options. In the third and final installment of our series, we’ll be explaining a real estate investment option known as co-investing or syndication. 

​In a co-investment, a group of investors pool together money and resources to do a deal together. The person or entity who finds the deal, raises the capital, and implements the business plan is known as the sponsor or promoter. The sponsor controls the deal and typically invests alongside the investors, which shows investors the sponsor is confident enough in the project to put his own money on the line. Syndications are usually structured as a limited liability company (LLC) with the sponsor as the managing member (the member who actively controls the LLC, and hence the investment project) and the individual investors as non-managing (passive) members. We are simplifying for illustrative purposes, as there are an almost unlimited variety of ways to structure syndications, much too complex a topic for this blog post.

Advantages of Co-Investing

• Direct Ownership. Co-investing offers many of the same advantages of direct real estate ownership: attractive yields, cash flow, tax shelter, hedge against inflation, and ability to drive value through improved operations.

 

• Upside. Investors have the opportunity to share in the profits of any “upside” of the investment but remain almost entirely passive.

 

• Larger Projects. With multiple participants and more funding, investors have the opportunity to invest in much larger projects than they could undertake alone.

 

• Passive. Co-investing is a great option for passive investors who want to invest in real estate but have insufficient knowledge and time.

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• Diversification. Experienced real estate investors benefit from being able to participate in projects outside their usual investment niche (e.g. a multi-family investor who wants to participate in a retail development project). Anyone participating in group investments has the opportunity to diversify across multiple real estate markets and with multiple operators/promoters, therefore decreasing risk. This is much harder to do through direct ownership.

"Anyone participating in group investments has the opportunity to diversify across multiple real estate markets and with multiple operators/promoters, therefore decreasing risk. This is much harder to do through direct ownership."

• Options. Different syndications are structured differently, giving investors options. Some syndications are set up for development deals. There may be no cash flow up front, but the investors see a large return upon project completion. In a multi-family syndication, investors receive cash flow from rent payments and get their investment back when the property is sold or refinanced.  

 

• Leverage Sponsor Experience and Team. Participants benefit from the experience of the sponsor, and the team he or she has assembled. Successful real estate operators spend years and frequently large amounts of their own capital to build a successful track record and team. By investing passively with a proven sponsor, you can save time, aggravation, and costly mistakes, and learn a lot along the way too.

​We discussed the importance of due diligence in our post on private lending. The same holds true for co-investment opportunities. As the success of the project depends on the experience of the sponsor, you should be certain the sponsor has a good track record.
 
Disadvantages of Co-Investing

• Highly Illiquid. Investors in a co-investment forego access to their money until the project is fully executed, sold, or refinanced. In an extreme situation, one investor could buy out another investor, but the investor who sells his position will almost certainly take a hit. Additionally, there is no guarantee that another investor will agree to a buy-out. If you plan to invest in a syndication, be prepared to tie up your capital for the duration of the project (typically 3-7 years, sometimes more).  

 

• Limited Control. The sponsor retains the vast majority of control in a syndication. As a passive investor you want this, as the sponsor is the one with the knowledge and experience, and should be in the best position to make business decisions on behalf of the investment group. Investors typically have voting rights when it comes to the sale or refinance of the property, but the sponsor controls the day-to-day operations of the project.

 
Ultimately, everyone’s investment preferences are different, and only you know what types of risk and how much risk you’re willing to tolerate. However, we believe real estate investing – if done diligently – offers something for everyone. If you’ve got any questions about any of the real estate investment options we discussed in this series, or if you’d just like to talk about real estate investing in general, please do not hesitate to contact us at any time. And if we’re not already connected, remember to find us on LinkedIn and Facebook!