Real estate syndication is among the lucrative businesses in the modern era. The introduction of the JOBS Act in 2012 has opened the doors of this business to inexperienced, non-accredited investors. However, it is crucial to understand the structure and investor earning distribution in real estate syndication.
For instance, investors pool their investment along with a syndicator to acquire a 50-unit apartment building in a prime location. The syndicator promises investors certain returns on a long-term basis. Where does this money come from?
In this article, let's figure out the investment distribution in real estate syndication.
The Structure of Real Estate Syndication
Real estate syndication comprises two significant stakeholders
- Sponsor or syndicator acting as General Partner and
- Passive Investors, who are Limited Partners.
The sponsor's capital share may vary from 5% to 20%. To raise the remaining capital, passive investors pool their financial resources under the leadership of the syndicator. They own the property collectively.
Usually, passive investors get 70% of the profit. In comparison, the syndicator gets 30%, along with sponsor fees. The syndicator is responsible for finances, decisions for investment management, and routine administration.
Standard Real Estate Investment Distribution
Now, usually, the cycle for distribution is predefined in the agreement. Meanwhile, investors receive regular communication from the syndicators regarding the upgrade and repairs of the property and the periodic financial statements.
The distribution may be carried out usually quarterly or, in some cases, monthly. The syndicators calculate the profit and divide it for every investor. The investors' profit shares depend upon their agreed-upon percentage and the contribution in the capital investment.
Calculating the Returns for Investors
Calculation of the investor earning distribution is a crucial part of the financial accounting of any real estate syndication. Let's analyze the process in a simplified manner:
- Gross Rental Income
Let's continue with the previous example- The 50-unit apartment building.
Considering the rental rate of $500 per month, and considering that all units are filled,
Gross Rental Income Per Month will be 50 Units * $500, totaling $25000.
So, the Annual Gross Rental Income will be $300,000.
Here, we haven't considered the vacant units and the expenses. So, naturally, any investor will not receive the total sum of gross rental income as the real estate investment distribution.
Expenses: The Other Side of the Coin
While acquiring the property, syndicators usually get a mortgage. Repayment of the mortgage is their liability. The installments are paid from the rental income the syndication makes.Usually, syndicators close a deal when they have sufficient funds to make the down payment for the mortgage and pay the processing charges. Later, they raise funds by convincing more potential investors.
Renovation and Maintenance
Property with better amenities attracts more high-paying tenants. The syndicators may renovate the parking lot, the gardens and plantations, and other social amenities within the apartment building to attract the tenants. The cost for upgrades is an essential aspect of expenses.
Any real estate syndication needs to comply with the norms of the SEC and the regional authorities. Some taxes are applicable, like property tax, which will be paid out of the rental income.
Net Rental Income
The net rental income of the real estate syndication is the difference between the gross rental income and the total expenses.
The real estate investment distribution is usually lucrative if the syndicators strike a proper balance.
- The capital investment to acquire the property and
- The rental income or cash flow it generates, in the long run
Investor Earning Distribution
Now, let's turn to the eternal question- What will an investor get as a return on investment?
Syndicators calculate the net rental income and distribute the predefined share to the investor community.
Here, investor earning distributions depend upon the initial capital investment of every investor. So, the investment distribution will be directly proportionate to the initial funds deposited by every investor.
Investors' Share During Exit
It is important to note that the recurring rental profit share is a part of the ROI every investor receives. The crucial game is to work with experienced syndicators. Choose syndicators who know real estate investment management and possess a successful track record.
Usually, the holding period of a multifamily apartment will be 5 to 10 years. Investors can discuss this with the syndicators initially or during any stage. The recurring quarterly passive income will keep flowing to the investors up to this period.
What happens next?
Syndicators discuss their exit strategy and alternate plans initially. After a considerable holding period, syndicators start looking for a buyer for the property. If they find a profitable deal, they will sell the property at a better price.
At this stage, the investors will get their initial capital back. Is that all they receive? Wait! The good news is here- Investors also receive a profit share in the appreciation.
Importantly, all this chaos can be managed efficiently by adopting the best real estate syndication software. The tool for syndicators and investors helps you accelerate the business. It keeps various operations on the auto-pilot mode so that real estate syndicators can spend more time closing more deals!
To help you understand the concept of real estate investment distribution better, we have created an infographic. The infographic covers various aspects discussed in the article briefly. We hope that the infographic will help you remember the process quickly. Here is the infographic:
The Final Thoughts
This article explains the process of real estate investor earning distribution from a real estate syndication's perspective. We are sure that the various aspects of calculating the profits and sharing it among investors will be helpful.
Never rely on conventional methods for real estate investment distribution. Switch to the most appreciated real estate syndication software to attain more transparency, better efficiency and to enjoy its time-saving features. Take your growth in real estate syndication to the next level by adopting the best investor management portal today!