Promoters and property managers have enjoyed a surge in fees from organising property syndications over the last few years.
What exactly is a property syndication? Property syndications pool the funds from a group of investors (anyone with money) so the investors can share in ownership of a single managed property. Usually property syndications are done for commercial properties which are valued at higher than $20 million, and the minimum investment you have to make is $100,000.
The Property syndication process is similar to an IPO. You have a promoter who gets a commission based on how much money is raised. The promoter sets up a roadshow or investor briefing and sells you the reasons why you should invest. Usually the investment is claimed to have high returns. You have the property manager (“management”) who manages the building and gets paid a management fee (much like the board of directors get paid a directors fee). However, unlike IPO, your “share” in the property syndication vehicle is generally illiquid. If you want to exit and cash out, you have to find someone to buy your share.
While the returns from property syndications can be attractive, many financial advisers have reservations about potential conflict of interest when syndications are marketed by real estate agents who may also be involved on behalf of the vendor of the property. Legal, marketing, accounting and valuation fees also adds costs to investors.
Our opinion is that property syndications should be only for sophisticated investors. Those wanting to get a higher return thank investing in a term deposit, should be reminded that the rise in property syndications promising high returns just rings a similar bell to the financial companies promising a lucrative return.
Where to put your money when interest rates are sinking and property is increasingly out of reach? A better way is to use your the equity on your parents house or to partner up with your siblings to buy a property. That way you have more control over your investment and the return will depend more on the property’s location and how much you pay for it rather than how well a property manager performs.