How Does A Syndication Deal Work?
First off, there are two main groups of people who come together to form a real estate syndication: the general partners and the limited partner passive investors.
The general partners (GPs) form a team that takes care of all day-to-day management (so you don’t have to!) in exchange for a small share of the profits. They do all the legwork of finding and vetting the property and creating the business plan. Essentially, they do the work that you would be doing as the owner and landlord of a rental property, just on a massive scale.
The limited partners (LPs) are the passive investors (others like you), who invest their money into the deal. The limited partners have no active responsibilities in managing the asset, and they have no personal liability beyond their investment.
A real estate syndication can only work when general partners and limited partners come together. The general partners find a great deal and put together an efficient team to execute the intended business plan. The limited partners invest their personal capital into the deal, which makes it possible to acquire the property and fund the renovations.
Together, the general partners and limited partners join an entity (usually an LLC), and that entity holds the underlying asset. Because the LLC is a pass-through entity, you get the tax benefits of direct ownership.
Once the deal closes, the general partners work closely with the property management team to improve the property according to the business plan. During this time, the limited partner investors receive regular and ongoing cash flow distribution checks (usually on a quarterly basis).
Once all the planned renovations are complete, the general partners sell or refinance the property, return all or a portion of the limited partners’ capital, and split the profits. If the property is refinanced, the asset is held and continues to put off cash flow that is distributed to the LPs, which provides an even higher return percentage on the still-outstanding investment dollars.