Creating passive income through real estate has become more common and accessible over the years, creating new financial investment “products”. One of the most popular “products” are investments in real estate syndications. The increased interest in these products can bring uncertainty and unfamiliarity.
Let’s try to clear things up.
Most passive real estate investments, such as crowdfunded investments, real estate funds, and syndicated investments require investors to pool funds for investments in multi-million dollar property projects. Through passive real estate investment vehicles, individuals invest in high-end institutional, residential, and commercial properties, that they wouldn’t otherwise have access to due to the cost-prohibitive price hurdles.
The passive investors in these products are considered Limited Partners (LPs), while the person or company calling the shots is the General Partner (GP). The GP is the one that sources the deal, negotiates both the purchase and debt terms, and closes on the property. Financing the deal usually comes from lenders (e.g. banks) and/or private investors (LPs). During the process, the GP is actively managing the deal, signing the documents, and taking on the liabilities, while the LPs have minimal risk exposure, other than the potential to lose the funds they invested.
Once you begin to dive down the real estate syndication rabbit hole, an entire terminology mess unfolds. In most cases, the GP is the actual operator (the one we mentioned earlier who’s in charge of the deal) but sometimes there are multiple GPs - This includes the actual operator, along with others that act as the syndicator/sponsor (the individuals or companies that raise the funds from LPs).
Here are some clarifications:
As mentioned above, the operator is the person or company in charge of finding, closing and operating deals, which includes hiring and overseeing the property management firm and most importantly, executing the business plan. Often, the expertise of the operator is what directly affects the probability of a deal being successful or not.
This is who brings the deal together from the private financing side. A person or company with investor relationships, who has experience structuring a deal and raising funds for it.
Sometimes, the operator and syndicator are one and the same. However, when the need for capital goes beyond what the operator can raise on their own, they’ll often find other individuals/companies (these are the Syndicators/Sponsors) that can assist them in raising the necessary funds for the deal from LPs. Keep in mind that the Syndicators/Sponsor are acting as marketers for the deal, who will help raise the financing but have no part in the execution and management of the business plan once the acquisition is complete.
As compensation for raising their share of the capital, the syndicator/sponsor may be considered a Co-GP (more equity in the deal), receive a finder's fee/commission, or work out other creative ways to incentivize them to raise funds for the operator.
Many times, top-performing operators require large capital commitments, which limits the access for smaller investors. (A good sponsor will sometimes be able to get you more beneficial terms as an LP or make you aware of a deal you otherwise wouldn’t have known about). In these situations, it can be highly beneficial to invest through syndicators/sponsors, who not only provide access to deals but also serve as a funnel for filtering out good deal flow.
It's important to remember that these syndicators/sponsors come at a cost, and although this is not a direct cost to the LP from the get-go, they will get paid from either the operator or from receiving a chunk of equity in the deal.
Regardless, if you choose to invest directly with an operator or through a syndicator/sponsor, monitoring these LP investments can be challenging using spreadsheets. You need a centralized and error-free platform that helps you record, view, and store real-time information on all your real estate syndication and fund investments.
Vyzer allows you to manage your real estate investments, monitor performance, and keep track of your shares in real estate funds and syndications. With Vyzer, you can track your investments across various asset classes and investment vehicles in one place.