Everything You Need to Know About Real Estate Syndications: 20 FAQs Answered

Thinking about investing in real estate syndications but still have questions? We’ve got you covered. Below are the top 20 FAQs to help you understand syndications, how they work, and whether they’re the right investment for you.

Syndication Basics

1. What is real estate syndication?

Real estate syndication is a partnership between investors who pool their capital to acquire and manage larger properties than they could individually. As a passive investor, you contribute funds to the project as an official partner and receive a share of the returns.

2. How does syndication work?

Syndications typically have a sponsor or general partner (GP) who finds, manages, and executes the business plan for the property. Limited partners (LPs) contribute capital but are not involved in day-to-day management. Profits are shared according to an agreed structure.

3. What are the benefits of investing in syndications?

Benefits include access to larger deals, passive income, diversification of your investment portfolio, professional management, and tax advantages such as depreciation.

Investment Structure and Returns

4. How long is my money typically tied up in a syndication?

The typical hold period for a syndication is between 2 to 7 years, depending on the business plan and market conditions. During this time, your capital is illiquid, meaning it cannot be easily withdrawn. At ZB3, we aim to turn properties in the lower range of this timeframe.

5. What kind of returns can I expect?

Returns vary depending on the deal and market conditions but typically include cash flow from rental income and a lump sum when the property is sold. These returns are often projected as annualized returns or IRR (Internal Rate of Return), with the potential to see 20%+ returns in some cases. ZB3 typically sources deals with an estimated IRR of 15%, with some upside. You can check out a deeper definition of IRR and other key terms on our blog post What are 19 Key Terms for evaluating multifamily real estate deals?

6. What are the risks associated with syndications?

Like any investment, real estate syndications carry risks. These include market downturns, unexpected expenses, and property management challenges. However, risk is mitigated by the sponsor’s expertise, conservative underwriting, and diversified properties.

7. How much do I need to invest?

Minimum investments in ZB3 syndications usually start at $25,000, depending on the deal, but there may be exceptions for first-time investors. We will outline the specifics for each opportunity.

Profit Distribution and Fees

8. How are profits distributed?

Profits are typically distributed quarterly, depending on the deal's cash flow. Some syndications have a preferred return structure, meaning LPs receive a specific percentage return before the GP receives their share of profits. A significant portion of the return is often realized when there is a sale or refinance.

9. What is a preferred return?

A preferred return is a set percentage of return on your investment that you receive before any profit splits are made with the sponsor. For example, if a deal has a 5% preferred return, LPs receive the first 5% of profits before the GP receives any portion.

10. Do I need to be an accredited investor?

Many syndications require investors to be accredited, meaning they must meet specific income or net worth thresholds defined by the SEC. Some syndications, however, are available to non-accredited investors through exemptions like Regulation 506(b), A+, or Regulation CF. At ZB3, we only do 506(b) offerings, allowing up to 35 non-accredited investors.

11. How do I get paid?

As an investor, you’ll receive distributions via direct deposit. All payments are handled through our secure investor portal.

12. Can I invest using retirement funds?

Yes, you can invest in syndications using self-directed IRAs or Solo 401(k)s. Consult your financial advisor or custodian for details on how to structure this investment. If needed, we can refer you to a custodian experienced in these types of investments.

Dealing with Performance and Exit Strategies

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

If the property underperforms, returns could be lower than projected, or there may be delays in distributions. In extreme cases, capital could be at risk, but we typically have contingency plans and reserves in place to mitigate these risks.

14. How do I evaluate a syndication deal?

Look at the sponsor's track record, market conditions, deal structure, and financial projections. Review key metrics like cash-on-cash return, IRR, equity multiple, and the business plan to see if they align with your investment goals.

15. What happens at the end of the syndication?

At the end of the syndication, the property is usually sold, and the proceeds are distributed to investors according to the agreed-upon structure. This is where a large portion of your return is realized, alongside any cash flow you received during the hold period.

GP Compensation and Additional Fees

16. How do General Partners (GPs) get paid?

GPs typically get paid through a combination of acquisition fees, asset management fees, and a share of the profits (also known as the "promote" or "carried interest"). They may also receive a portion of the equity in the deal. The acquisition fee is typically 1-3% of the property purchase price, and asset management fees are often 1-2% of the gross revenue or total assets under management.

17. What are acquisition fees?

Acquisition fees are a one-time fee paid to the GP upon the purchase of the property. It compensates the GP for their time and effort in sourcing the deal, negotiating the purchase, and securing financing. This fee usually ranges from 1-3% of the total property cost.

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

The promote is the GP's share of the profits after the LPs have received their preferred return. For example, if the profit split is 70/30, the LPs would receive 70% of the profits, and the GP would receive 30%. The promote incentivizes the GP to maximize the returns of the deal since their compensation is tied to the performance of the investment.

19. What are asset management fees?

Asset management fees are recurring fees that the GP collects for overseeing the day-to-day operations of the property and ensuring the business plan is executed effectively. These fees typically range from 1-3% of the property’s income or total value and are paid out of the property’s operating income.

20. Are there any other fees that GPs charge?

Other fees may include disposition fees (paid when the property is sold, typically 1-3% of the sale price) and refinance fees (paid when the property is refinanced, often around 1% of the new loan amount). These fees compensate the GP for the additional work involved in selling or refinancing the property. All fees should be outlined clearly in the syndication’s offering documents.

Ready to Get Started?

Real estate syndications offer a unique opportunity to invest in large, income-generating properties while letting experienced professionals handle the heavy lifting. Whether you’re looking for passive income, portfolio diversification, or the potential for high returns, syndications might be the perfect fit. At ZB3, we’re here to guide you through the process and help you achieve your investment goals.

Interested in learning more? 

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