Investing in Real Estate Syndications as a Limited Partner

There are many ways to be a real estate investor.  Most popular is to flip houses, own rental properties or even do some wholesaling.  Those aren’t the only options though, and I’d like to talk about one that may seem less common to the mainstream.

Investing in Real Estate Syndication Deals

A real estate syndication deal is basically crowd sourcing the financial and intellectual resources of a group of people.  This allows the group to do a much bigger real estate deal than if they were to go it alone.

All the players in a syndication

There are several different “roles” in a real estate syndication from sponsor and general partner to property management and limited partners.

This post will focus on investing in a syndication as a limited partner.  This is a passive investment within a syndication deal as you don’t have involvement in the day to day activity.  It is more a pure investment play.

Limited Partner

A syndication is usually structured through a Limited Liability Corp. (LLC) or a Limited Partnership (LP).  The limited partners invest money for a specific preferred return and a percentage of profits.

When looking into investing as a limited partner you will see a few different terms thrown around to discuss the targeted return on investment.

Key terms

Preferred Return: This is the first thing to be paid out.  Before sponsors can get their share of the profits for work as manager and promoter, all investors receive their preferred return.  The preferred return percentage is set before investment begins and can be find in a syndication’s pitch deck or marketing material.  A range of 5-10% annually of is the going market rate.

The preferred return is also paid out before investors receive their portion of cash flow/profits.

Internal Rate of Return (IRR):  This is the one that confuses people so here is a layman’s explanation: IRR tells you the expected annual rate of return for an investment.

It’s based on some complicated math using the discounted rate and net present value of money. That is where it begins to get confusing so let’s just stick with the following: the average annual return over the lifetime of an investment.  They key thing to keep in mind is this is an expectation, because, at least in my opinion, you cannot guarantee the exact amount and timeline that cash flow will be distributed.

IRR’s of 12-18% are considered value add opportunities, above that is more opportunistic but can be had when property is purchased at a big enough discount.

Cash on Cash Return:  The most common and straight forward of the group, the cash on cash return is simply the amount of cash your investment will generate from the investment made, listed as a percentage.

GP & LP Split:  This is the ratio of which profits will be distributed.  For example: a 30/70 split means 30% of profits are distributed to the general partners and 70% to the limited partners.  Again, this is after the preferred return has been paid out to investors.

Conclusion

The above is entry level knowledge for investing as a limited partner.  The topic runs deeper, but you should at least know these basics to get by and evaluate a potential investment.  The experience of the sponsor and general partners should be taken into consideration just as much as the financials.

In the end, if the principal operators cannot execute on the plan, then the financial returns will be for naught.

Always be analyzing deals, whether flips, rentals or syndication opportunities.

 

 

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