Investing in real estate can be lucrative, which explains why so many people are eager to find an investment opportunity. There are a number of ways that you can invest in real estate, one of which is known as a real estate syndicate. Before getting involved in this type of investment, it’s important that you understand the basics of syndicate law.
What is a Real Estate Syndicate?
A real estate syndication establishes, sells, buys, and operates real estate investments. In it's simplest form, a real estate syndicate involves gathering money from a number of different people who are contributing to the real estate investment, by pooling the money and organizing these funds as a whole into real estate projects. The monies contributed can be used as an equity investment to a real estate project in addition to a commercial loan secured by a mortgage or trust deed to fund the bulk of the cost and development of the project.
Investing in a real estate syndicate is essentially investing in a commercial real estate venture. Real estate syndicates often take the form of limited liability companies, corporations, or partnerships. Common examples would be the purchase of land to develop a residential apartment complex or an industrial park for small scale manufacturing of items.
Investing in a real estate syndicate requires due diligence in looking into the pros and cons of the potential investment. As such, it is highly recommended that individuals considering investing in a real estate syndication do a thorough background search of the individuals involved in getting the project off the ground, and consult with their attorney as to the merits of the investment and inherent risks.
Profiting From a Real Estate Syndicate
Sponsoring a real estate syndication also requires due diligence of the potential investment. There are rules imposed by both Federal and State regulators that list in great detail the information sponsors must provide to potential investors in the form of a Prospectus or Private Placement Memorandum. As such, it is highly recommended that individuals or companies considering sponsoring a real estate syndication consult with a syndication attorney to develop the required documents and report to the federal and state agencies as required by law.
The syndicator of such a venture usually receives compensation for locating the property to be purchased, doing the due diligence for its acquisition and intended development, and getting the purchase to close.
Of course, syndicators are not the only ones who stand to profit from a real estate syndicate. Investors in the transaction typically pay the syndicator’s fee based upon a percentage of the costs of the transaction when the targeted property is acquired. The syndicator also receives a management fee, typically based upon a percentage of gross revenue on a yearly basis. The investor typically receives a high rate of interest paid quarterly on his investment (7% to 9% per annum), besides maintaining an ownership interest in the syndicated project. Many investors also have the opportunity to sell their interest in any real estate syndication to a willing buyer or even to the syndicator.
There’s no way to guarantee that you will profit off of a real estate syndicate. But, if you do your research to identify good investment opportunities, and use qualified legal professionals to help you along the way, there is a lot of potential to profit off from engaging in real estate syndication.
Legal Issues Related to Real Estate Syndication
Another reason why it’s important to do your due diligence is to identify fraudulent syndication projects. There have been cases of fraudulent syndication projects in the past where investors contributed money to a real estate project that did not exist. You can easily avoid falling for this type of scheme by conducting research on the investment group and the syndicator prior to doing business together.
Legal Representation for Real Estate Syndications
Syndicate law can be complex, especially if you are a fairly new real estate investor. If you have questions related to real estate syndicates, get in touch with our team of attorneys today. Call DLG Law Group at 303-758-5100 or contact us by filling out our online form.