The Lazy Investor’s Guide to Real Estate Syndications (Passive Income)

0:00If you've been around real estate investing for more than five minutes, you've probably heard the word syndication thrown around. And if you're a rookie, you're probably thinking, what is that? And should I even be paying attention to it? Yeah, it's one of those terms that gets tossed around like everyone's just supposed to understand it, but no one explains it in plain English. What it actually is, how it works, whether it even makes sense for where you're at right now. So today, we're breaking it all down. What a syndication actually is, how people make money with them, what risks are there, and then how it compares to owning rentals yourself.

0:33And we're also going to talk about the other side of it. what it really takes to run a syndication because that part gets glamorized a lot and the reality is very different than what you see on social media.

0:48This is the Real Estate Rookie Podcast. I'm Ashley Kerr. And I'm Tony J. Robinson. With that, let's talk about what a syndication is, like in plain English. So a syndication, without any of the crazy jargon, is basically a group of people pooling their money together to buy something together. You can technically syndicate anything. You could syndicate a racehorse. Our friend Mauricio Raul talks about syndicating racehorses. You can syndicate a restaurant. You can syndicate buying a business. That's what private equity is. It's basically a big syndication of people pooling money to go buy businesses.

1:25But obviously, this is the Real Estate Rookie Podcast. When we talk about syndications in our industry, it's a real estate syndication. So generally speaking, you have two groups of people inside of a syndication where we talk about who's involved. The first group of people are your general partners, and the second group of people are your limited partners. Your general partners are the folks doing all of the work associated with the deal, and your limited partners are the people bringing the capital to the deal. So generals are the ones doing all the work. Limited are the ones bringing the capital.

2:00Those two groups work together to buy whatever asset it is being purchased through that syndication. So the next thing is a syndication, just a fancy word for using someone else's money. If you're pooling money, can you just say, hey, everybody, give me your money and I'm going to go and buy something. But really, there is a lot more to that. There is the general partners and there are the limited partners. And depending what side you're on, this could be a passive investment versus more active. When we think of your normal day real estate investing, you're going out and buying. It is more active.

2:38When you are investing in a syndication, you are passive. You have no control. You may have some like voting rights, right? Tony compared based on different things in a syndication, depending how it's structured. But other than that, you are not operating the deal. You are not finding the deal. And you really don't get a say in much at all. Also, there's a difference in kind of control versus convenience. If you're just buying a property yourself or maybe you're in a small partnership with a syndication, you have no control, but it's also convenient. You just give your money and you let them do all the work.

3:20And hopefully you're getting some dividends, you're getting a return, or you're getting a big cash out when they sell the property in the end. So there are differences as far as that as to investing. So when you think of a syndication, really think about, first of all, what side of the syndication you would rather be on. And we're going to break into that more as to what each side looks like. But first, we're going to talk more about the passive side when you are invested as a limited partner and you're just giving money to be in the deal. So this is a question that's probably popping into your head.

3:58Do I need to be rich to invest in a syndication? We often see, you know, if somebody posts about a deal that's saying it's a$50 ,000 minimum,$100 ,000 minimum to invest. And there's two different, actually, there's probably more that I don't even know about, but there's usually two SEC regulations. regulations. Okay. So that's another thing we haven't talked about is that syndications are regulated by the SEC, where if Tony and I just went and partnered on a deal, we are not, you know, obligated to follow the SEC regulations. So when you pool a large group of people's money, and there are people that are not active.

4:43So even if it is a couple of people, if they're not active in the property. Like Tony and I, if we invest in a deal, we both need to actually materially participate. Even if that's just Tony reconciling the bank account every month and me doing the rest, they have to have active and material participation in the deal to not be under the SEC rules and regulations. Tony, do you want to break down the two kind of what is 50 yeah yeah i'll break down the differences between the types of syndications that are most commonly used so again ash and i are not uh you know securities attorneys so go talk to someone who's qualified we're just giving you some general education here but there is a 506b and a 506c a 506b 506c i like to think of the i'd like to think of the 506b as the 506 buddy and the 506c is like the 506 commercial okay so on the 506b as ashley said you can raise money from people that you are already buddies with your friends your family people who you have pre-existing relationships with where if someone from the sec came and said well hey tony ashley gave you you know a million dollars for your deal i can point to you know 700 plus episodes we've recorded together all of these text messages and emails all the meetings we've been together the vacations we've gone together like i have a pre-existing relationship with ashley so it's okay for me to raise money from her under this 506b now if i just met someone today you know and then they gave me a million dollars well it's a little bit harder to establish that pre-existing relationship so 506b is for people that you already know these are like warm contacts these are friends family people to have a relationship with under a 506b you can't go and advertise on social media or any platform.

6:37There's no general solicitation is what it's called. So I can't go send out a mass email to 80 ,000 people. I can send one email to one person, but if I send it to a big list, that's soliciting. If I post on my social media, that's soliciting. If I buy a billboard, that's soliciting. Any type of general marketing activities that's one to many is considered soliciting. So that's not approved through a 506B. A 506C allows for general solicitation. So I can go and get on a podcast. I can get on YouTube, short form. I could put it in a magazine ad if I wanted. I can do whatever I want. But there are limitations around who can invest in a 506C.

7:15And you have to do what's called an accredited investor, which takes me to my next point, that you have to be what's called an accredited investor to invest in a 506C. And that's basically kind of like a fancy way of saying you have to have some level of income or net worth to be able to prove to the SEC that you're what they call like a seasoned investor, right? So the requirements for being an accredited investor are either$200 ,000 if you're an individual of annual income over the last, I think it's like two or three years, with reason to believe that that will persist going into next year, or if you're a married couple, it's$300 ,000 or a net worth of at least$1 million, not including your primary residence.

7:57Okay. So it can either be based on income or based on net worth. I've heard rumblings of them changing those figures because it's been the same for a while now, but I believe as of today, that's still what it is, but that's the, that's the trade-off, right? 506C, I can go in mass market. So if I've got a big brand or a lot of folks, I can go market it, but I can't get the kind of everyday investors. 506B, I can't market it, but I have a, maybe a wider kind of demographic of folks that I can then go market it to. So then the next question is, what do you actually own in a syndication and you're actually owning a percentage of the property or properties that are in the syndication deal.

8:36You'll notice that your name isn't specifically in the deed because there will be some kind of company set up that you will be a limited partner in. You are going to most likely put your money into the syndication. So give your money and then they are going to go and buy the property. So you'll mostly commit to the purchase of the property before they actually own it. Then you'll buy the property. And then when they go and refinance or sell the property, that is oftentimes when you're going to be repaid or even bought out of the property. So it will really depend on the term you sign on for when you're doing the syndication.

9:23Oftentimes you'll see it's a three-year commitment where they're going to hold on to the property or they're not going to refinance for three years and they're going to stabilize the property. Tony, how do you have your hotel set up? Do you have a certain timeframe as to when investors will be paid back where you're going to refinance or sell the property? Not explicitly stated. Our note is a 10-year note. So that's kind of the timeframe that we're up against more than anything is just making sure that we either refinance or exit within the first 10 years of owning it. So we've got some flexibility there.

10:00But just going back to your point earlier, Ash, on like the structure piece, just like as an example, let's say that I'm the general partner and I need to raise, you know, just for like basic numbers, let's say I need to raise$10, right? And of that$10, all of that's coming from my limited partners. If I buy, you know, say Ashley is a passive investor and Ashley buys two shares. So she spends$2. That means she owns 20 % of that limited partner pie, right? But remember, the limited partner pie is not the entire pie because me as a general partner, I own, call it maybe 30 percent so ashley with her two dollar investment owns 20 of the 70 okay 20 of the 70 so on a property this may be worth again for just like round numbers sake let's say the property is worth 100 70 of 100 is 70 20 of 70 is 7 times 0.2 which is 1.4 right so ashley owns 14 out of that$100 pie based on her 20 % ownership, right?

11:13So I know the math gets a little tricky, but just trying to break it down for you as best as we can, that when you invest in a syndication, your ownership is based on the amount of money that you put into the deal for your investment. So unless you put up 100%, you're typically not going to own 100 % of that deal at some smaller percentage. And you have to look for what percentage is available to the limited partners. Like in your example, you would use 70%. So there is no way that you would be able to own 100 % of the property because it is two separate pools there. Okay. So now that you've invested your money into the syndication, I put my$2 into Tony's syndication.

11:51How do you actually make money in a syndication and when? So now, Tony, this is on the passive investor side, and we'll go and we'll talk about the general partner side later and how they make their money. But what is your first opportunity when you put money into a syndication to actually see some money back to you? Yeah, well, first I'll say that most syndications, at least in the real estate space, probably aren't returning anything for the first couple of years, right? There's been the first couple of years to really stabilize that property and stabilize that asset. improve income, decrease expenses to be able to eke out profit and improve that profit as time goes on.

12:33So 2025 was our first operating year, like our first full year operating the hotel. And we didn't do any distributions, right? Like all of the cash stayed within that business. But we did a really, really good job, especially in the back half of 2025, of starting to reduce our labor expenses and increase our income. Like we're recording this right now in February of 2025. January and February are the slowest months of the year for a hotel, like incredibly, incredibly slow. But we doubled our January revenue year over year, but we also cut our labor expenses in half for January of 2025, right? So those are the things that we're really working on in this syndication is trying to improve operational efficiency, increase revenue, and all those things.

13:15So first, it takes some time to really get to that point. But usually the first opportunity you have to realize any sort of return from a syndication is through distribution. So it means that there's cash flow being produced by the property. That pile of cash flow gets to a point that's big enough to say, hey, we've got enough in this pile here to start sending money back to all of our limited partners. And it's usually a very small percentage as you start. And again, that number starts to ramp up as that deal matures and progresses. So cash flow would be the first. The second, and this is where a lot of kind of those bigger chunks of cash start to come back, is if there's a refinance.

13:57So let's say that someone buys a deal initially, maybe on some sort of bridge debt or basically like hard money, and then they refinance at year two or year three. And during that refinance, because they've, again, increased the income, decreased the expenses, increased the profit that's being produced, a bank looks at that and says, hey, you bought this for$2 million, but now I think it's worth$4 million. So I'll give you a loan for$3 million. So now there's a million dollars that they just made that they can go send back to a lot of their folks who have invested into that deal. So that's one way.

14:26And then the biggest thing that we typically see is that the biggest payday comes when that property sells. So they buy it for two, maybe 10 years later, five years later, it's worth 10. Now they've just made 8 million bucks and that's when those private money investors get a really good check at the end. We're going to take a quick break, but when we come back, we're going to cover what it's like to be a GP, a general partner of a syndication and running the deal. We'll be right back. Do you ever notice how every passive investment somehow turns into a very active lifestyle? Active spreadsheets, active phone calls, active stress.

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17:24Basically everything. They're the ones that are sourcing the market, deciding on the market. They're the ones that within that market, they're the ones that are sourcing the deal. Once the deal is found, they're doing the underwriting. Once the underwriting is confirmed and they're negotiating on the contract, once the contract is signed, they're doing all of the due diligence. Once the due diligence is done, they're the ones that are going through the managing the rehab, repositioning the property, whatever it may be, and then managing the property long-term oftentimes comes down to either the GP or they're maybe managing a property manager as well.

17:56So every single part of the transaction falls under the responsibility of the general partner. Again, the limited partners are really there just to bring the capital. The GPs do literally everything else. And when we say the sponsor, that's not necessarily one person. That's a group of people. Tony, how many people are actually in your general partnership? So for us, we actually set ours up slightly differently because there's only four of us involved on that deal. We didn't actually syndicate this deal. We did this as a as a joint venture. Now, I didn't know that. Oh, then we can cut this part out.

18:35So because there's only four of us, we actually didn't run this as a syndication. We did it as a small joint venture. Now, the difference here is that, one, all of our partners have voting rights. So like I'm the manager of our NC and I'm also the property manager, but I can be voted out at any time by my other three partners because they have the voting rights to say, Tony, you're actually doing a really poor job managing this. We want to hire someone else. So I can be voted out at any time. So we meet quarterly to discuss performance and do all those things. So there's a certain level of involvement that all of our partners have.

19:08I'm still responsible for the majority of the day to day, but all of the major decision making, like I can't sell it on my own. I can't refinance it on my own. I can't even hire, I can't even replace myself on my own, right? I have to get buy-in from all of our other partners. So we structured ours as a joint venture, making sure that they were voting rights, making sure that everyone had an actual say on the different actions that go into it, and then keeping each other in the loop and kind of leveraging each other's expertise to make those decisions around what we do at scale for the property.

19:35Yeah, I honestly had no idea this whole time. I thought you did a syndication, but like, honestly, a joint venture, I would way rather do that than do a syndication deal all day long. Let me just do that because we had attempted two syndications prior to that. And neither one of those were able to raise enough money to actually close in those deals. First deal, I think we raised like 4 million out of 6 million that we needed. The second deal, we got like halfway on a$3 million raise. And I think clarify that when you mean raised. It's not like you had people give you money and then you sat with it in your bank account.

20:10That's exactly what happened. That's exactly how it happened. So we raised everyone's money, right? So we had all these different webinars. Oh, okay. I thought you would have just got commitment, but you actually got to the point of taking your money. Wow. We had money wired in the bank. We had 4 million bucks sitting in the bank account for this deal. And then as the funds kind of dried up, we had to go back and wire all those funds back and have a couple of people to say, hey, we didn't get to the raise. So it was a very, I think, a lot of learning, right? Obviously very frustrating. But we learned a lot through both of those processes, which is why for the third go around, we're like, hey, let's just go a little bit smaller.

20:47Let's try and simplify this process. And that was one that we were finally successful with. But that's how we set up the hotel to make it easier on ourselves. I was going to do a syndication too. I think probably it was around the time maybe when you were going to do the West Virginia one. Was that the one of them? Okay, yeah. And mine was a campground and we got the campground under contract. I put a hundred thousand dollar earnest money deposit down, but gave myself like 60 days due diligence period or something like that. But, you know, I met with attorneys, everything like, OK, what do I need to do for a syndication?

21:18And then, you know, during my due diligence period, I just found so many more issues than I expected with this campground. And we ended up getting out of the deal, getting our earnest money deposit back. And I am so thankful because I don't think that I understood the responsibility of being a GP and like how much you are, you know, responsible to other people. And I just don't think that I have the, first of all, I don't like to take a phone call. So having to, first of all, pitch to investors, following up with them, what's going on with the property. And I know there's all systems and processes to set up like that.

21:59But I really like the fact that if I make a mistake or I decide against something or I don't take action on something, and if I lose money because of it, it's me losing money. and I'm not losing it for anybody else. Like if I decide to go hang out with my kids for one day and it's going to lose me$100 because I'm not doing something one day sooner, like that's okay. It hurts me. Like I'm taking the laws because I want to do that. But I learned a bunch of things about the syndication process, but not to the full extent that you definitely have going through the deals. Yeah. So it's, I do think that for a rookie doing a syndication on the GP side as your first deal would probably be a bigger undertaking because there's a lot that goes into it.

22:48So if you are interested in syndication as a GP, as a general partner, the person putting the deal together, my strong recommendation would be to find someone who's already done a few successful syndications and see what value you can bring to them. So if someone came to me with a hotel and said, hey, Tony, I've got a great hotel that's under contract. I just need your help with everything else. I need your help raising the capital. I I need your help managing the rehab. I need your help managing it once we get it. I need your help with all these different pieces. I would love to give someone a piece of the pie because they brought together the deal that maybe they couldn't execute on themselves, right?

23:21So if you are a rookie that's listening, one, send me a DM on Instagram at Tony J. Robinson if you find something. But second, partner with someone who I think can fill those gaps for you to make it a little bit easier to get that first move done. Yeah, it's definitely a lot of things to figure out and a lot of legal implications. and also a big thing is having someone sign for the debt. Like if you're doing a huge deal, they're going to want, what's the word for it? The person that's going to sign on the debt that has the high net worth. A KP, a key principal. A KP. Yeah, and what they're looking for is someone who's like, hey, if we're going to write you a loan for millions of dollars, we need someone on your team who has the net worth to kind of cover this debt that we're giving it to you.

24:05Because even if you find a great deal, even if the numbers look fantastic on paper, who knows what could happen in the future. So the banks want to make sure that they have some form of guarantee to say, hey, someone's got it. The buck has to stop somewhere. Like we got, you know, we got to get paid. Right. So the buck's got to stop somewhere. But what I will say also is that depending on what size of property you go after, like our buy box specifically asked for our hotel was we wanted seller financing. And while that limited us on some options, it also gave us incredible flexibility in that initial acquisition because we were able to negotiate terms that really played.

24:47Really, it was a win-win, right? It worked out really great for the sellers, but also worked out really well for us. And when you have to jump through the hoops that a traditional bank might have made us jump through. So there are other levers there, I think, that might work as you're looking to put the deal together also. Okay, then kind of another topic, if you are thinking about being, you know, a sponsor of a deal is do you need your own money in the deal? And technically, no, you could raise all the money. But I would say like probably anybody that's teaching or talking about investing in a syndication, when they talk about how to vet the sponsor, how to vet the deal is one, I would say this probably in the top five of the first questions you should ask is are they putting capital into the deal themselves?

25:33So are they putting, you know, having some skin in the game? And I think that just shows like, you know, they believe in this deal too. They're committed to this deal that they're investing their own capital. So I would say, yes, like you're going to have an easier time finding people to invest in the deal. If you're showing that you're committing your own money and putting it into the deal too. I will say, even, even if you are able to find a deal raise all the capital without putting any money into the actual deal yourself there's still other costs that that you as the the general partner are responsible for there's i mean just putting together all of the paperwork for a syndication is tens of thousands of dollars like it's not a small expense to put together uh this this paperwork for the deal i think on our last indication we spent like 30 30 or 40 000 on paperwork like just on the on the paperwork that people are going to sign was$30 ,000 or$40 ,000.

26:29And just think that's not even like it wasn't guaranteed either. You know, like you ended up sending money back and it didn't happen. Yeah. Like that's a college tuition, you know, that we just spent on paper. Sorry, Sean, you're not going to college. Here's some documents though we blew up. Here's a TPM that you can do through. So there's that, right? There's the legal cost. There's the due diligence, Just getting out to the property, paying for inspections, even just like an appraisal on a commercial property is significantly more expensive than an appraisal on a single family home. An inspection on a commercial property is significantly more expensive than a single family home.