Looking for a viable way to build wealth through real estate? If so, a syndication may be the right path for you! These partnerships allow multiple investors to pool their resources into a single investment, and they’ve evolved a lot in recent years.
How Syndications Have Evolved
Once, syndicates were forced to raise money either through private solicitations or by registering the offering with the SEC if the sponsor(s) wanted to raise funds from the public, which meant jumping through a lot of hoops.
That changed with the JOBS Act of 2012, and now you can market your offering to any accredited investor. Yes, it’s a smaller pool of potential investors than the general market, but it’s a highly targeted demographic made up of people with A) the financial wherewithal to take part in your deal and B) a decent understanding of the rules and risks involved.
Individual accredited investors typically have an income of over $200,000 per year, while couples have over $300,000. Both have a net worth excluding $1 million, not counting their primary residence.
Trends in Real Estate Syndication
Like the rules governing them, the types of syndications popular with sponsors and investors have also evolved. Once, apartment buildings were the primary option, but today, things have changed. The COVID-19 pandemic had a lot to do with that, but there are also other underlying factors, like investor preference.
Multi-family properties, like apartment buildings, condos, and the like, remain very popular today. They’re proven income generators and with today’s rents, they’re very attractive to investors who want to maximize their income. They’re also located throughout the country, providing sponsors with options in every state.
If you feel like self-storage locations are cropping up everywhere, you’re not far from the truth. They have been incredibly popular and for good reason. Americans are dealing with more clutter than ever before, but many people can’t bring themselves to toss those treasures. Instead, they store them somewhere away from their homes.
It’s not just people who can’t part with their long-term possessions, though. Self-storage is a vital consideration for many others, including:
- Those inheriting items who have no place to store them
- Those moving into smaller homes
- Those relocating for short-term work needs
Self-storage businesses are affordable to start, have instant appeal in the community, and are proven profit generators. Those qualities make them very popular with investors.
Mobile, Tiny Home, and RV Parks
Mobile home parks have grown up. While you’ll still find the occasional run-down park, you’ll find more high-end, even upscale options. They’re particularly popular in states like Florida and Arizona, where retirees seek downsized homes within communities of like-minded individuals, with plenty of activities.
It’s safe to say that today’s mobile home parks bear little resemblance to those of yesteryear. And there’s a sub-trend here involving tiny homes. More and more tiny home communities are appearing that blur the lines between traditional mobile and site-built homes. They’re small, energy-efficient, and can be anything from rustic to glamorous. They also have a much wider appeal that goes beyond retirees.
RV parks are like mobile home and tiny home parks, with a few differences. These parks offer a combination of mobile and long-term residences. Some residents come and go, while others might set up their RV and remain in the park for years at a time.
Traditionally, single-family homes weren’t within the scope of real estate syndications. That’s changed today. You’ll find builders whose entire business is based on building rental homes and selling them off. The trend is shifting, too. While some builders still do single homes, many are now focusing on developing entire neighborhoods designed as rentals, rather than doing homes one at a time. This allows sponsors and investors to invest in an entire street of homes in one location, which makes property management much more efficient.
The Syndication Process
During the syndication process, timing is incredibly important. Things change, often very quickly, it can change from your LOI to the purchase agreement during your due diligence. With the PPM, you must time everything correctly with the release. Your pitch deck, marketing materials, legal documents, and PPM must match the transaction’s description. Your attorney will need an executive summary or pitch deck to pull important information to structure the deal, too.
Partnership Elections and REITs within Syndicates
Partnerships and REITs offer different benefits within a syndicate. With Reg D opportunities, most opt for REITs, because they’re designed for larger funds with potentially thousands of investors. They offer a 20% tax deduction, which is important with that type of cash flow.
For smaller deals, a corporation or crowdfunding company is usually better. These startups don’t expect there to be distributions and you want to avoid dealing with K1 taxes regularly.
Syndications offer sponsors and investors more options than would otherwise be available. However, they must be structured correctly to avoid potential infractions with the SEC. If you’re considering forming a syndicate, get in touch with Crowdfunding Lawyers to schedule a consultation and learn how we can help you grow.