Becoming a real estate syndicator can open up numerous avenues for generating remuneration as you coordinate group investments to acquire, manage, and eventually sell properties. However, it requires strategic thinking and a keen understanding of the various income streams available in this field to open them up.

Whether just starting or looking to enhance your skills, it’s imperative to learn the ways to maximize your earnings. Below are several that are not only lucrative but also legal.

Real Estate Syndication Distribution of Profits

Profit distribution in a real estate syndication is a key income source for real estate syndicators. After covering expenses and loan payments and setting aside reserves, any remaining cash is considered “distributable cash.” You can earn 20% to 50% of this from three sources:

  1. Regular earnings from surplus rental income: This can provide consistent returns not only for your investors but also for you
  2. Any surplus cash received if your syndication refinances a property
  3. The equity realized from a property sale, which could be a substantial payout

Your earnings may be paid as a direct split between you and the members (e.g., 70/30) or as a preferred return to the investor class, followed by a split. Typically, rental income profits are shared quarterly or annually, depending on the agreement terms.

If the property is refinanced, any surplus cash from the new loan is distributed among investors. Meanwhile, proceeds from a property sale result in larger, one-time payouts. The agreement establishes guidelines about payout schedules and amounts in this scenario.

Proceeds from the refinancing or sale of the property may first be used to return all or part of the investors’ cash investment, i.e.capital contributions. Any remaining distributable cash will be allocated to the company members and the syndicator according to a “waterfall” described in the company’s operating agreement or limited partnership agreement.

It is the syndicator’s responsibility to distribute this cash to investors on a pro-rated basis as per their respective percentage interests in the company or in other forms as prescribed in the waterfall. An investor’s percentage interest is usually calculated by dividing the amount of an individual investor’s capital contributions by the total capital contributions of all the investors.

Various Manager and Sponsor Fees Due to Syndicators

As a real estate syndicator, your expertise and efforts are compensated in different ways — collectively referred to as syndication management fees. These are considered as an expense of the syndicate before determining distributable cash, which you may collect on a monthly, quarterly, or annual basis.

  • Acquisition Fee. Typically 1% to 3% of the purchase price, this is your reward for identifying and securing the property.
  • Asset Management Fee. Usually 1% to 2% of the gross collected revenue, which covers ongoing property management.
  • Refinance Fee. You earn 1% to 2% of the refinance loan amount for arranging refinancing deals.
  • Disposition Fee. During the property’s sale, paying the syndicator 1% to 3% of the sale price is standard.
  • Guarantor Fee. If you provide experience and financial net worth to help the syndicate qualify for loans on specific properties, you can charge 1% to 2% of the loan amount or a flat fee.
  • Should you lend money to cover capital shortfalls or unexpected expenses, you may charge interest ranging from 8% to 12% on these loans.

These fees are crucial for rewarding your skills and maintaining the syndicate’s financial health. Beware of any syndicate structure that doesn’t allow the syndicator to earn fees or a share of profits until the property is sold, as this doesn’t align with your interests or those of the investors.

Real Estate Brokerage Fees in Syndications

These fees can come from earning commissions on property purchases and resales, which can be particularly lucrative in larger transactions. Keep in mind, though, that you must be a licensed real estate broker or agent in the state where the property is located.

Additionally, managing the property allows you to collect property management fees for your hands-on involvement and expertise. This involves overseeing day-to-day operations, maintenance, and tenant relations that ensure the property remains a profitable investment.

Recovery of Pre-Closing Costs

Before the finalization of a property deal, the syndicator fronts the numerous expenses incurred, including:

  • Property deposit
  • Inspections
  • Lenders, private equity partners, and due diligence consultants fees
  • Appraisals
  • Legal expenses and real estate attorney fees
  • Travel expenses

These expenses are incurred during the organization of the company, creating the offering, drafting a purchase agreement, negotiating with the seller, and visiting the property for various purposes.

As a real estate syndicator, it’s vital for you to track and recover these pre-closing costs accurately and efficiently, as transparency fosters trust. You can reimburse them from the capital raised from investors or incorporate them into the overall financial planning of the project.

The Risks of Real Estate Syndicators

While there are numerous opportunities for income, real estate syndication is not without the probability of losses and uncertainty.

Be prepared for a waiting period before the property generates distributable cash. It might take three years or more for commercial development projects and 1-2 years for value-add syndications that enhance existing properties. Where investors are offered a preferred return, it could take even longer.

Remember that you cannot use investor funds until closing on a property. If the deal doesn’t close, you must promptly refund them without any deductions. And depending on the property’s purchase price, you may incur anywhere from $50,000 to several hundred thousand dollars in pre-closing expenses. This is your personal investment and risk to bear.

Syndicators often hold 5% to 30% of a property’s shares, but these ownership stakes can vary significantly. Market fluctuations, unexpected property expenses, and financing challenges can impact profitability.

Moving Forward with a More Profitable Real Estate Syndicator Career

Understanding and leveraging the various income streams offered by a real estate syndication is essential for maximizing one’s income as a syndicator. Each one can contribute significantly to one’s overall financial strategy.

Profit distributions provide consistent returns, syndicator fees reward your expertise and management efforts, and brokerage fees add another layer of income through commissions. These payments recognize the critical role you play in overseeing transactions and maintaining profitable properties.

Recognizing the risks involved in real estate syndication and having strategies to manage them is also key to your success. Effective due diligence, sound financial planning, and ongoing property management are necessary to adapt to market fluctuations and unexpected expenses.

By understanding and leveraging these income streams and managing risks, you can enhance your potential for success as a real estate syndicator. However,  approaching each aspect with insights from experts will help you build a rewarding and sustainable career. Make sure you consult accountants for your financials and attorneys specializing in real estate syndication for legal counsel.

Earn the highest income possible in your real estate syndicator career without breaking laws and regulations with the best legal advice! Shams Merchant is one of the leading real estate private equity and syndication attorneys, representing clients in real estate projects across the nation. Specializing in real estate syndications, fund formations, securities law, and private placements for commercial property investments and development, Shams has been featured in publications like Law360, the The Business Journal, BisNow, and The Real Deal.