Syndicated Property Investment – What Is It And What Are The Risks? (Ep155)
What is syndicated property investment and is it a good investment strategy or a risky way to invest in property?
A syndicated property investment is a property investment where multiple buyers pool their money together to buy a property they probably couldn’t afford on their own.
Multiple structures are used in property investment syndicates and they include but are not limited to:
- A unit trust
- A property fund for small property syndicates
- A participating property syndicate or
- A joint venture
Now if I just totally confused you here is an awesome article I found on DIY Syndicates that you can read.
Depending on the circumstances, you may need to hold an Australian financial services license (also known as an AFS license) if you want to set up one of these syndicates yourself. These licenses are issued by the Australian Securities and Investments Commission (or ASIC) and they’re actually really difficult to obtain. So if you want to set up your own large property syndicate, you’re probably going to need one of these licenses.
With the smaller property syndicates, you can actually get around needing this license but that would be something you would need to do more research into and something that I would suggest speaking to a professional about as this article is intended for educational purposes only and is not financial advice.
So now I want to talk about the benefits and risks of the syndicated property investment. First, the 7 benefits.
The Benefits Of Syndicated Property Investment
1. Get Into The Market Quicker
The benefit of a property market syndicate is the pooling together of multiple people’s cash and multiple people’s money in order to purchase an investment property that they probably couldn’t buy themselves. In some cases this may be residential property (which doesn’t require as much capital) or larger investments like commercial real estate or developments.
So being able to get into the market quicker can have huge advantages if your investment goes well because you’re getting growth much earlier on than if you had to wait another two or more years before you had your full deposit saved.
2. Build Your Portfolio Faster
Because you can get in earlier and get access to that growth and invest in different property syndicates or different investments with less cash than you would be able to by yourself, it means that you may be able to build your property portfolio quicker.
3. It Can Help You Save Money
We’re really good at spending money, but we’re not really good at saving money in most cases. By spending money on property syndicates and on these investments that potentially generate you income, you could actually be saving by purchasing more syndicates rather than trying to save for a big deposit and then not experiencing any growth.
4. You Can Save Your Time
Because you’re not going through all of the effort of purchasing the property, doing all of the research, and managing the property, a syndicate can save you a great deal of time.
5. Diversify Your Risk
You can actually diversify your risk if you don’t put all of your eggs in one basket and spread money between multiple syndicates. Obviously though there is the risk that if you buy all those different properties through one company that something can go really bad.
Well in that case you’re not really diversified are you? So it’s definitely something to be aware of.
6. Access To Different Investment Options
For yourself, maybe you can only afford to purchase an investment property around $200,000. With a syndicate, however, you can actually purchase properties upwards of a million dollars and maybe even enter into commercial or development that you wouldn’t have had access to if you were trying to do it by yourself.
The benefit of that is that sometimes these investments have better potential upside than what you could do by yourself.
In order to go from one property to two properties, you either need to grow the equity of your first property or you need to save a whole other deposit again which is a big chunk of money that takes time to save.
By investing in syndicates you can invest smaller amounts of money more constantly and therefore it’s less cash intensive to grow and you can do it more slowly over time.
The Risks With Syndicated Property Investments
Alright, now it’s time to bring in the risks and warn you about the potential risks of property syndicates. Property syndicates were extremely popular in the 80’s and 90’s. They have kind of fallen out of fashion especially with the global financial crisis with companies like Centro and Octavia (which got into massive financial strife).
They have kind of fallen out of favor, so let’s have a look at the 5 risks and why you may not want to invest in a syndicate
Again, this isn’t financial advice and is intended for educational purposes only.
1. Less Control Over Your Investment
One of the things that I love about investment property is that you have almost full control over your investment. You choose who the tenants are, who the rental manager is, what improvements you make, etc. . .
However, with the property syndicate you are one small part of a larger pool which means you have a lot less control over the investment and how the portfolio matures and changes over time.
2. The Company Running The Syndicate Can Suffer Severe Financial Problems
These situations did happen in the past, as I mentioned earlier, with companies like Centro and Octavia where they suffered severe financial problems so that’s something that you need to be aware of and do your research into the company that you are doing your syndicate with.
3. It May Not Serve Your Interests First
Because you have a lot of people in the pool to buy the property, the goal of the syndicate would be to serve as many people as well as they can but obviously your financial goals might be different to someone else who is in the syndicate. And because someone else is probably managing it, they might make a decision that’s good for them or good for the group but isn’t necessarily the best decision for you.
4. Potential Sales Commissions
Potential sales commissions could be heaved on top of the purchase price of properties. This is especially going to be the case in terms of new built properties or developments where there may be kickbacks to whoever is running the syndicate for the sale of that property through the syndicate buying it.
It’s a little bit complicated and I don’t know if it actually happens. That’s just something that I am suspicious of but it’s a possibility that you should be aware of and speak to your syndicate partner about.
5. Potentially Less Transparency
If you’re investing in your own investment property you’ll know if the rents come in or not, what the rates are, everything that needs to be paid, and how everything’s progressing. You can also get your property valued whenever you want.
With the syndicate it’s probably going to work a bit different because, again, you’ve given away some of that control by going in with a group of people. That can mean less transparency on how the property is really performing.
I hope that helps cover exactly what a syndicated property investment is and what some of the benefits and risks are associated with it. I don’t have any partnerships and I haven’t spoken to anyone who has been in the syndicate or who runs a syndicate so I can’t say with certainty whether they’re good or bad.
I suggest doing a Google search if you are interested in having a look at the companies that do offer them or if you want to run it yourself. Definitely get professional financial advice and legal counsel as well just to make sure that you’re doing everything by the book and don’t do anything that may be illegal.
If you think syndicates aren’t for you and you’d rather find your own investment properties, then I’ve got tools and lessons to show you how to find, calculate, and invest in positive cash flow properties. I also go out and find properties to list them in my members’ areas as well. This program is called On Property Plus and if you want to learn more about it head watch this video.