Real Estate Syndication 101: What to Know Before You Invest

NerdWallet's Smart Money Podcast

The episode explores the mechanics and risks of real estate syndication as a method for diversifying investment portfolios. Hosts Sean Pyles

Key takeaways

• Real estate syndication is a group investment model used to purchase large-scale assets like apartment complexes or shopping centers.
• Accredited investor status typically requires a net worth of at least $1 million (excluding primary residence) or an annual income of $200,000 for individuals.
• Online platforms like Fundrise and Equity Multiple offer lower entry points, though specific deals may still require thousands of dollars.
• Private syndication deals often involve much higher capital requirements, ranging from $25,000 to over $100,000.
• REITs provide a more liquid alternative to private syndications and can be traded easily within standard brokerage accounts.

Main topics

• Real Estate Syndication
• Crowdfunding Platforms
• REITs vs. Private Deals

Notable quotes

Real estate syndication is a group investment where a bunch of investors pool their money together to buy or build something.

Conclusion

The episode serves as an educational primer on complex real estate veh

Transcript preview

Speaker 3 (0:00) Today's episode is brought to you by Vinted. Sean, Speaker 1 (0:02) do you have clothes in your trunk that you've worn but have no idea what to do with? Speaker 3 (0:07) You know what? I do not because my car is super clean right now. But I'm betting that you do, Elizabeth. I Speaker 1 (0:13) sure do, Sean, unfortunately. And I've been wondering what to do with these clothes. And then I found out about Vinted. So they're like this secondhand marketplace app. And their mission is to make secondhand your first choice. Speaker 3 (0:26) Yeah, Vinted helps their members find great deals and easily sell the clothes they no longer wear. And that helps give quality items a second life again and again. Speaker 1 (0:35) And it helps the planet too. And we care about the planet, don't we, Sean? We Speaker 3 (0:38) do. Well, Elizabeth, whether you're clearing out a bag of clothes in your trunk that's been sitting there for months and months, or you just have pieces in your closet you don't want anymore, Vinted makes it super simple to refresh your wardrobe, earn extra cash, and give your clothes a second life. Plus, there are no seller fees, so you keep what you earn from every sale. And Speaker 1 (0:56) also, the app is free to download. I think that's a great perk. Speaker 3 (1:00) Vinted makes listing items quick and simple. And once an item sells, Vinted creates a prepaid shipping label for you, which takes out a lot of the burden of sending your items. See Speaker 1 (1:08) what's hiding in your closet or like me, your trunk. And you might be surprised how much you can earn with Vinted. Download the Vinted app for free to start listing with absolutely no seller fees. Speaker 3 (1:19) Hey, smart money listener, you could win a $250 Amazon gift card and help improve our show. Speaker 1 (1:24) We're inviting you to take our annual listener survey. It's shorter than last year's and could bag you a sweet grand prize. We're giving away not one, but two $250 Amazon gift cards. To Speaker 3 (1:35) participate, just visit nerdwallet.com slash pod survey or check out the link in the show notes and submit the form by September 30th for a chance to win. Official rules are at nerdwallet.com slash pod survey. Good luck. Speaker 1 (1:46) Katie wants to diversify into real estate. and is considering real estate syndication. Today, we break down what it is, what it costs, and also what's at stake. Speaker 3 (1:59) Welcome to NerdWallet's Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Piles. I Speaker 1 (2:06) was going to serenade myself, but I won't. And I'm Elizabeth Ayola. This episode, we're talking about something that we have not touched on in some time, and that is real estate investing. Thanks to you, Katie. Hopefully you're listening and watching. They want us to weigh in on the pros and cons. So here is their question. I hear I should think about diversifying my investments into real estate. I don't need to learn another profession, so I don't want to manage rental houses or STR, short-term rental. Can you tell me about getting into real estate syndication? Pros and cons. Minimum investment for most places. Questions I should ask as I talk to its sponsor. How long will the capital be tied up? As well as everything I don't know. Thanks, Katie. Speaker 3 (2:48) Well, Katie, we can't teach you everything that you don't know because that is a long list that extends well beyond real estate investing. But we'll give you some tips today. And we're joined by NerdWallet investing writer Sam Taub to help out. Sam, welcome back to Smart Money. Long time no see. Sam, let's start by outlining what real estate syndication is. Speaker 2 (3:05) So real estate syndication is a group investment where a bunch of investors pool their money together to buy or build something, typically something big like an apartment complex or a shopping center. Big expensive things that you need a lot of money for. Speaker 3 (3:19) Well, Speaker 1 (3:19) you can get involved with real estate syndication in different ways, Sam. I know because I was researching the topic. And one is by joining a real estate crowdfunding platform. Can you explain to me how this works? Speaker 2 (3:31) Real estate crowdfunding platforms organize these kinds of syndications online, which gives investors some of the ease of use of like an online brokerage account. Although you can't necessarily buy and sell whenever you like as if you're trading stocks online, but it does kind of give you some of that easy. user experience. NerdWallet has a roundup actually of online real estate crowdfunding platforms that we can put in the show notes of this episode. Speaker 3 (3:55) Okay. That sounds like it's almost somewhere between a Kickstarter account and like a Fidelity or another kind of taxable brokerage account. Is that about right? Yes, definitely. Speaker 2 (4:05) Yeah. Those are other types of crowdfunding accounts, your Kickstarter and your Indiegogo and whatnot. But there are other points of entry into syndicate investing. Can you Speaker 3 (4:14) talk Speaker 2 (4:15) about those too? Old school real estate syndication is generally just about knowing a guy. It's about networking. But nowadays, there are also online networks you can join. Angel Investors Network and Grid Investor Network are two of the bigger ones that can facilitate access to private deals, not on these platforms. On the other end of things, one investment vehicle that's open to pretty much everyone is real estate investment trusts. These are publicly traded funds. They're kind of like exchange traded funds, but they're structured a little differently. But basically, they invest in real estate on behalf of shareholders, and they're available in pretty much all brokerage accounts. Granted, these aren't quite the same thing as real estate syndication deals, but they're another kind of pooled investment in real estate. And for that matter, they're actually significantly easier to buy and sell than an investment in a private syndication deal. Speaker 1 (5:11) Yeah, someone who was lazy with her money, as soon as I heard about REITs, I was like, yes, please, that's for me. Okay, so for the people out there who are maybe like, hey, I don't want to go the crowdfunding platform way, and also I don't want to go the REIT way. Sam, they could also start their own syndication, right? For the ambitious folks? Speaker 2 (5:30) For the ambitious folks, sure. You'd probably need to be a real estate lawyer or have the money to hire a bunch of real estate lawyers, but you could theoretically do it on your own. Starting up your own syndication would mean incorporating a company. and then drafting a bunch of complex legal documents like a private placement memorandum, which is basically an investment prospectus for your partners that outlines objectives, risks, and so on. So it also means, you know, potentially exposing yourself to a lot of legal risks. If you don't want to deal with all that lawyering, you're probably better off just joining someone else's syndication. Sounds like Speaker 3 (6:06) our listener Katie will be more Speaker 2 (6:07) in that latter camp because they don't want to take Speaker 3 (6:09) up Speaker 2 (6:10) a whole new profession or go to school or anything. They just want to invest in real estate, and this is one way they're considering doing that. There are different members Speaker 3 (6:16) of a Speaker 2 (6:17) syndication, but two key ones are the Speaker 3 (6:20) syndicator or sponsor who leads strategy and financing initiatives and the passive investor, which it seems like Katie would hope to be. What are some questions that Katie or anyone else in this situation should be asking to ensure they're choosing the right real estate syndication or sponsor, as Katie mentioned? I'm thinking here about, you know, communication agreements, profit sharing, Speaker 2 (6:40) voting. Those are good things to ask about. And then I think another thing I'd add is track record. Has the person ever completed a deal? Did it make money or did it lose money? Do they have people who come back and invest with them again after previous deals? This is probably something to ask them and see what information they give you. And for these sorts of deals, sponsors are typically required to file forms with the Securities and Exchange Commission. And so you could use the SEC Edgar database to kind of verify what they tell you by looking for their name. I Speaker 3 (7:10) think you'd really want to do your due diligence and make sure they have done all those filings before you give anyone any money so that you don't end up giving it to some sort of scammer who's promising a bunch of returns on some kind of real estate project. For Speaker 2 (7:22) sure. Speaker 1 (7:22)