When you first start getting into the commercial real estate game, investing in a property can seem discouraging once you start getting a glance at the price tags of what’s on the market. Intuitively, newer investors see those large numbers and immediately start thinking about their personal out of pocket. And though solo investing does happen, and there are larger out of pocket costs that come with investing alone, syndication serves as a great way to make these deals happen.
Essentially, to syndicate an asset is to pool multiple investors’ capital together to purchase it. This is very prevalent in the commercial real estate realm but also happens with most other investments.
Investing in a commercial real estate property entails many costs. Pursuit costs, down-payment, closing costs, etc. are all costs that are incurred when going after a deal. Like previously mentioned, all of these costs can add up to be quite a bit of money. And though, technically, the investor is responsible for covering these costs, when syndicating a deal, the investors will bring in the majority of the capital required to make the deal happen. So overall, as the syndication’s sponsor, your personal out-of-pocket costs are minimal to none.
This is probably the most valuable benefit of syndication. Since there are more investors involved, your buying power significantly increases. The reason for this is very simple. More investors equals more down payment money, which opens your options to deals with many more doors. This also means that you have much better leverage overall since the majority of the capital put into the deal is not yours. Further, you then have more opportunities when it comes time to follow through with your exit strategy. If you plan on refinancing, you likely will have more equity than you would have if you did not syndicate the deal, so you’ll have more down payment capital for your next deal.
Overall, when you syndicate a large deal, your risk is much more spread out, and the management process is much more hands off. If you own, say, three single family homes, you have to be much more on top of operations. The reason for this is because if one of your tenants moves out, there goes a third of all of your rental income. On top of this, you are the one who has to clean the unit, fix anything that is broken, and re-rent it out. However, on a larger deal like a 20 unit apartment building, for example, these problems are diminished substantially. If you have a tenant move out from there, you’re still getting 95% of your rental income. Further, since it is a larger property, you likely have a management company that oversees the operation. In that case, you don’t have to do any of the work except making sure your property managers follow through with cleaning the unit and renting it out. All in all, owning a larger property that you’ve syndicated allows for a more “passive” investment.