Real Estate Syndication FAQ: 20 Questions Answered

The short answer: a real estate syndication is a partnership where several investors pool money to buy a property that would be too large to buy alone. A sponsor runs the deal and the investors stay passive. Below are the 20 questions we hear most, answered plainly by ZB3 Real Estate, a Colorado multifamily operator.

Syndication basics

1. What is real estate syndication?

Real estate syndication is a partnership between investors who pool their capital to buy and run a larger property than they could individually. Passive investors contribute funds as partners in the ownership entity and share in the property's profits under the operating agreement.

2. How does syndication work?

A sponsor, also called the general partner (GP), finds the property, arranges the financing and executes the business plan. Limited partners (LPs) contribute capital but aren't involved in day-to-day management. Profits are shared according to the structure in the deal's documents.

3. What are the potential benefits of investing in a syndication?

Investors often look at syndications for access to larger properties, passive ownership, diversification, professional management and tax treatment such as depreciation. Each of these comes with tradeoffs, covered below.

Investment structure

4. How long is my money typically tied up?

Hold periods commonly run 2 to 7 years, depending on the business plan and market conditions. During that time your capital is illiquid, meaning it generally can't be withdrawn early.

5. Where do returns come from?

Returns, when there are any, usually come from two places: cash flow while the property is held, and proceeds from a refinance or sale. Sponsors often show projections as an IRR, but projections are estimates, not promises, and actual results can be lower or negative. Our post on 19 key terms for evaluating multifamily deals defines IRR and related terms.

6. What are the risks?

Like any investment, syndications carry real risks: market downturns, slower leasing, renovation overruns, interest rate and refinance risk, and the sponsor's own execution. Conservative underwriting and reserves help, but they don't remove risk.

7. How much do I need to invest?

Minimums are set deal by deal and are stated in each offering's documents.

Distributions and fees

8. How are profits distributed?

When a property produces distributable cash flow, many syndications distribute it quarterly. A significant portion of any return is often realized at a refinance or sale.

9. What is a preferred return?

A preferred return is a set rate of return that LPs receive before profits are split with the sponsor. For example, with a 5% preferred return, LPs receive the first 5% of distributable profits before the GP shares in them. A preferred return is a priority, not a guarantee.

10. Do I need to be an accredited investor?

It depends on the offering. Accredited investors meet income or net worth thresholds set by the SEC. Under SEC rules, a Rule 506(c) offering may only sell to accredited investors, while a Rule 506(b) offering may also include up to 35 sophisticated non-accredited investors and can't be publicly advertised.

11. How do I get paid?

Distributions are usually paid by direct deposit, and many sponsors use an investor portal for statements and tax documents.

12. Can I invest using retirement funds?

Often yes, through a self-directed IRA or Solo 401(k). Talk with your custodian and financial advisor about how to structure it.

Performance and exits

13. What happens if the property doesn't perform as expected?

Distributions can be reduced or paused, returns can come in below projections, and in serious cases investor capital can be lost. Reserves and conservative debt are how sponsors try to give a property room to recover.

14. How do I evaluate a syndication deal?

Look at the sponsor's track record through good and bad periods, the market, the debt, the deal structure and the assumptions behind the projections. Read the offering documents with your own advisor.

15. What happens at the end of the syndication?

The property is usually sold or refinanced, and the proceeds are distributed to investors according to the operating agreement.

GP compensation

16. How do general partners get paid?

GPs are typically paid through some combination of fees, such as acquisition and asset management fees, and a share of the profits, often called the promote or carried interest. The exact terms are in each deal's documents.

17. What are acquisition fees?

An acquisition fee is a one-time fee paid to the GP when the property is purchased, for sourcing the deal, negotiating the purchase and securing financing. Industry norms are often in the range of 1 to 3% of the purchase price.

18. What is a promote, split or carried interest?

The promote is the GP's share of the profits after LPs receive any preferred return. For example, in a 70/30 split, LPs receive 70% of the remaining profits and the GP receives 30%. It ties the GP's pay to the property's results.

19. What are asset management fees?

Asset management fees are recurring fees the GP collects for overseeing operations and executing the business plan. They are commonly set as a percentage of the property's income or value and paid from operations.

20. Are there other fees?

Some deals include a disposition fee when the property is sold or a refinance fee when it's refinanced. All fees should be spelled out in the offering documents.

The bottom line

A syndication can be a way to own part of a larger property without running it yourself, but it is illiquid, it carries real risk, and it depends heavily on the sponsor. For more, read our plain-English guide to apartment syndication and our Colorado multifamily market updates.

This article is general education. It is not an offer to sell or a solicitation of an offer to buy any security, and it is not legal, tax or investment advice.

About the author: Zach Bagby is the founder of ZB3 Real Estate. Zach has invested in Colorado apartments since 2018, starting with a Denver 4-plex Zach lived in and growing to a 77-unit community in Colorado Springs. Zach leads deal sourcing, underwriting and capital raising, and lives in Castle Rock.