It’s frustrating when you find the perfect real estate investment but aren’t able to secure the necessary financing. Real estate can move quickly in today’s market, and there’s no time to waste waiting until you have the required capital.
Table of Contents - Finance Corner: Real Estate Syndication
Fortunately, there’s a solution: real estate syndication. With real estate syndication, you can seize an investment opportunity with the help of other investors. Real estate syndication pools the funds from multiple investors to put towards real estate projects. Syndicate members join so that they can invest in properties they may not have been able to afford or that they would prefer not to manage on their own. These funds are then used to purchase a property outright or to use as an equity contribution towards the project in addition to the mortgage.
Real estate syndicates are structured business entities, not groups of friends crowdsourcing an investment. There are two types of syndicate members: the money partners and the general partner. There can be hundreds of money partners, or limited partners, who invest anywhere from a few thousand to tens of thousands of dollars. The general partner serves as the syndicate’s manager and has the real estate expertise to organize the deals and make decisions. The general partner advises on which property to purchase, how to manage the investment and when to sell.
Choosing a syndicate
As with any investment, it’s important to research real estate syndicates to find the right fit for your interests and investment goals. You can start your research online, but your best bet is to talk to other investors and seek their advice. Local networking groups are a great way to find syndicates within your community. Many real estate syndicates are actively seeking members and will place ads in online and print real estate publications. If you join an established real estate syndicate, much of the legwork is already done for you. All you need to do is contribute.
Finding the right general partner for a syndicate requires thorough vetting. It’s easy to assemble the money partners; many people are eager to invest in real estate but lack the capital to get started on their own. It’s much harder to find the right expert to serve as a general partner. You’ll want to find a general partner who has an established reputation in real estate and can direct you to satisfied clients.
In addition to expertise, the general partner also contributes funds. The general partner should expect to contribute 5 to 10 percent to the deal. This keeps the general partner honest in making a good deal and lets them reap the benefits of their hard work. A good fee structure is a 70-30 split between the money partners and the general partner.
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How real estate syndicates are structured
Contracts are a crucial component of maintaining order among all parties involved in a real estate syndicate. Each investor has their interests and priorities. Rules about decision-making, contributions and exit strategies need to be clear.
Money partners are not managing the property, so they need regular financial reporting to keep them informed of the status of their investment. The money partners may wish to retain the right to use an auditor when necessary.
When it comes time to sell a property, the general partner makes the decision, but the money partners have the right to agree on an exit strategy. They might decide to sell once the property reaches a 30 percent increase in market value, or after a certain amount of time. The contact may also detail how an individual can leave the syndicate when desired, and how the buyout from the other partners would work.
Money partners have a direct ownership interest in the purchased property. This gives them a proportional share of income, capital gains, depreciation and losses. Money partners are only responsible up to the amount of their capital contribution, so long as they do not take part in managing the property.
Return on investment varies depending on the syndicate type. Income-generating properties are less risky, so the return is secure but relatively smaller. An apartment building in an urban area might see 6 to 18 percent returns. If the syndicate is investing inland, there is a greater risk, but also the potential for greater returns.
Regulations on real estate syndicates
Each province has its own rules regarding real estate syndication. There are currently no federal laws governing real estate syndicates. Each province has eligibility requirements for syndicate investors, so you’ll want to check that you qualify before getting started. Typically, the requirements are centred around ensuring that the general partner is a legitimate third party.
In Ontario and British Columbia, money partners might need an exemption such as an accredited investor clause. This requires investors to have a salary of at least $200,000 and a net worth of at least $1 million. Alberta investors are exempt if they have a net worth of at least $400,000, including their primary home, or an annual income of at least $75,000 before taxes. The goal is to ensure these investors have enough resources to weather a big loss.
Because you’ll be profiting from the syndication, you’ll have to pay taxes on your income. Income and net taxable gains are allocated proportionally the same to the money partners as the general partner.
Distributions can come in any of the following forms of income:
- Distributions representing part of the capital gains allocated to investors as a result of a gain on property sale
- Distributions considered a dividend from a Canadian or U.S. subsidiary corporation
- Distributions that are defined as taxable under current law
- Distributions that are not currently taxable and will be treated as a capital returns on the tax return
Real estate syndications are a way to pool both capital and knowledge to create a winning situation for investors. They can be complex legal entities, so it’s important to read the fine print and trust your colleagues – especially the general partner – when deciding which syndication to join.
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