How Syndication Investing Works

Apr 26

Let’s start with the risks

You lose all your money invested
They ask you to put more money in the project
You lose that money too

Now how do you avoid those risks?

The Deal. Learn to read return projects and operating details and always ask for the business plan and comps.
The Operator. Track records matter. Check for referrals or work with someone you trust.
The Market. Learn to analyze neighborhoods and cities.

How do I get paid?

Let’s say you’ve found a GP (General Partner/Sponsor/Operator) that you want to partner with on a syndication. Let’s start from the top down with a typical real estate deal where we put a down payment and borrow the rest.

Now let’s say there are only 5 LP (Limited Partner/Capital Partner) investor spots available for a total of 500k as the down payment for the project.

For this example deal structure: 8% preferred return and 30 GP/70 LP equity split deal.

*Fig 2. You decide that we’re the right syndicators to work with*

Preferred Return

Each year, you will get the first right to the cashflow in the form of a preferred return. This is similar to a simple interest loan, the main difference being that you don’t need to be paid every month like a lender. This could lead to a return structure like that in new development construction, where the preferred return is accrued until sale because there is no cashflow until the project is constructed.

Ex. say you invest in a project with 8% preferred return with a 100k investment, you would be owed 8k every year until you got your original capital back.

Equity Splits

Your equity share is determined by the percentage you invest of the total project.

Ex. The total amount of money needed for the project is $500k. Your 100k investment means you own 1/5 of the 70% equity for capital partners, which means you would own 14% of the property and return for tax purposes.

However, that doesn't mean the General Partners takes 30% of your investment immediately, as the profit is split after preferred return and the return of the equity you invested.

Investor Portion of Returns

Ex. Say we earned 10k in cashflow for the year based on your cut of the investment and want to pay it out. The extra 2k above your 8k in preferred return is split based on the 30/70 equity split.

The same principle applies at the sale - after your original 100k is returned and all debts, expenses, and preferred returns are paid, we split the profit based on equity.

Fun Fact: You can BRRRR in a Syndication

You can get your money back even sooner, while still maintaining cashflow in a project. If you’re looking to stack equity and cashflow, this is a strategy to cycle through your capital faster