How Real Estate Syndications Benefit Self-Directed IRA Investors

Published on June 17, 2021

Although real estate syndications are not new, they are becoming a popular way for individuals to invest in real estate, including those with self-directed IRAs.

Real estate syndication—also called property syndication—is essentially a partnership between people who operate in two roles: the syndicator (or sponsor) and the investor(s). By partnering up, investors combine their resources, capital, and skills to purchase and manage a property or multiple properties that would not have been feasible to purchase on their own.

In short, the syndicate pools funds for greater buying power, enabling all parties, as a group, to access deal flow. You may hear syndication referred to as real estate crowdfunding because it is a way of making investments more accessible to a wider pool of interested parties. Syndicates may invest in office buildings, multifamily properties, warehouses, or a property fund.

Sponsors and investors

The sponsor is the individual responsible for finding, acquiring, and managing the real estate. Ideally, this person has experience in this area and can underwrite and conduct necessary due diligence on the property. He or she may choose not to put up any cash, and may also earn an acquisition fee or a property management fee if a third party is not contracted to handle that. Everyone else—including self-directed IRAs that participate—are the investors, who own a percentage of the real estate. It is passive ownership for them, providing all the benefits of owning real estate in their portfolios without having to do all the work.

Syndicate structures, syndicate profits

Syndicates are usually limited partnerships or limited liability companies; in these cases, the sponsor is the managing member or general partner. These are special purpose entities through which investors purchase the real estate. All members of the syndicate, including the sponsor, earn periodic returns on the initial investments.

A syndicate agreement is drawn up between the parties, with all arrangements agreed upon in advance (such as acquisition fees, returns on net income, ownership percentages, voting rights, the exit strategy, and how to divide profits after the property is sold). When it is sold, the syndicate is complete.

Using a self-directed IRA in real estate syndication

Rather than go all in on your own, you can have your self-directed IRA partner up with a syndicate. This lowers overall investments costs compared to buying real estate directly, since expenses are spread out over multiple investors. Plus, if your IRA is short on the necessary funds to directly invest in commercial property, participating in a syndicate is a great way to include this asset in your self-directed retirement portfolio.

As with all self-directed investments, you, as the investor, are expected to do your full due diligence—in this case, about the syndicate and the property or properties it plans to include in its portfolio. And, like any other asset, all income and expenses related to this investment flow through the self-directed retirement plan, which will earn returns on the investment until the syndicate is complete. Note that when using your self-directed IRA to invest in a syndication, you may NOT also act as a general partner; investments should be limited partnership only.

If you have questions about using syndications to include real estate investments in your retirement plan, or want to better understand how self-direction as a retirement strategy works, you may schedule a complimentary education session with Next Generation. You’ll gain insights into how these and other assets can be included to create a more diverse portfolio. Alternatively, you may contact the Next Generation team directly via phone at 888.857.8058 or via email at NewAccounts@NextGenerationTrust.com.