Summary: Real estate syndications are a popular investment option for those looking to diversify into real estate. But before you make your next investment, you should know just how much the general partners or the person sponsoring the deal stands to make. It’s your hard-earned money and you should know how much it’s costing you!
[Disclaimer: We are not accountants, lawyers, or financial advisors, so please consult your own team of professionals about the topics covered in this article.]
Real estate syndications are a popular investment option for those looking to dip their toes into real estate and diversify beyond the stock market. [If you don’t know much about syndications, you can read an article about them HERE.]
But before you invest in one, you might be curious to know, just how much do the general partners, also known as deal sponsors, make?
If you’re a real estate investor and interested in leading a syndication, you might be wondering just how lucrative is it to lead one of those syndications?
We’ll not only answer these questions, but we’ll also provide a hypothetical example so you can see just how much money GPs make!
How GPs Make Money
There are two main ways GPs make money: fees and profit split.
Fees are earned by the GP regardless of performance. These are typically tied to certain milestones. Such as completing the acquisition of the real estate asset or completing a refinance after the property appreciates in value. There are also fees tied to managing the day-to-day operations of the property. This fee is on top of the fee they pay a property manager. These fees are explained in more detail below.
Profit split is a predefined split of both the cashflow and capital gain. The passive investor typically gets a larger share of this split but the split can be tilted towards the general partner if there’s more work and/or risk involved. This split is explained in more detail below.
What Are the Typical Fees Charged by GPs?
Acquisition fee: This is one of the most common fees charged by GPs. This is the fee they earn for completing the acquisition of the property. The amount varies between 1-5% of the purchase price. With 2 to 3% being very common. In the case example below, we’re going to use 2%.
Asset management fee: This is another common fee. This is the fee for managing the day-to-day operations of the property, communicating with the passive investors, and handling any legal issues and tax reporting requirements. If the GP hires a property manager, this fee is on top of whatever the property manager is paid. This fee also ranges between 1-3% of the total annual revenue that the property generates. With 2% being very common. In the case example below, we’re going to use 2%.
Loan guaranty fee: Banks often require guarantors on their loans. The guarantor can be the GP themselves. Or more commonly, it’s a high net worth individual who is pulled into the deal for this specific reason. This fee varies significantly based on the level of risk involved. We will not be including this fee in the example below.
Refinance fee: This is a fee that is charged to investors for the time/effort involved in refinancing a property. This can range from 1-2%. We will not be including this fee in the example below.
Disposition fee: This is a fee that GP’s charge for the time/effort involved in selling the property. We will not be including this fee in the example below.
What is a Typical Profit Split?
The profit split is a predefined percentage of cashflow and capital gains between the GP and passive investor. The passive investor typically gets the larger share because general partners often do not put any money into the deal (more on this later).
The split can vary from 90/10 to 50/50 with 70/30 being very common.
For example, let’s assume the profit split is 70/30. This means that the passive investor gets 70% of the annual cashflow and the GP gets 30%. At the time of sale, the passive investor gets their money back plus 70% of the capital gain. The GP on the other hand gets 30% of the capital gain.
I mentioned above that the GP typically does not put money into the deal. They may put some money into the deal but it’s usually not any more than the acquisition fee. So in effect, they aren’t pulling money out of their pocket to put into the deal. Also, anything the GP puts in is in addition to the fees and profit split.
In the example below, to keep things simple, we’re going to assume the GP didn’t put any of their acquisition fee into the deal.
Keep in mind that many of the top syndicators don’t put any money into their deals AND they take the highest percentage of fees and profit split. So it’s not uncommon to see acquisition and asset management fees north of 2% and a profit split of 60/40 or even 50/50. The reason is, they’re able to raise money because of their popularity and still charge these high fees.
How Much Do Syndicators Actually Make?
Let’s look at how much GPs make using a hypothetical example.
In this example, we’re going to assume the GP is acquiring a $20 million property. The property is fully occupied and performing well. The property generates $2 million in total revenue and $500,000 in cashflow each year. After 5 years, the property is sold for $30 million. To keep things simple, we’re going to assume $10 million in capital gains.
Starting with the fees, we assumed the GP is going to charge a 2% acquisition fee and a 2% asset management fee.
So in terms of the acquisition fee, the GP will make 2% of $20 million or $400,000.
In terms of the asset management fee, the GP will make 2% of $500,000 in cashflow, or $40,000 per year. So assuming a 5 year hold time, the GP will make $200,000 over that time period.
Now let’s look at the profit split. We assumed a 70/30 profit split. Each year, the GP makes 30% of the cashflow or $150,000 per year. Over 5 years, this totals $750,000. In terms of capital gains, the GP makes 30% of the $10 million in capital gains or $3 million.
What Does a General Partner Actually Make?
Let’s total this up:
Acquisition fee: $400,000
Asset management fee: $200,000
Cashflow profit split: $750,000
Capital gains profit split: $3 million
In total, the GP stands to make $4.35 million on this one deal. No wonder they say you can retire after one or two of these deals!
Now keep in mind that these deals are often split among several GPs. Many of the larger deals involve at least two, if not three or four GPs.
Also, note that this is over a 5-year time period. With most of the money coming in at year 5. This also assumes the deal goes well. Not all deals go this well. Therefore, sometimes GPs will not receive the big payout at the end. However, they do receive the fees, regardless of how the deal performs. Something to keep in mind if you are a passive investor!
Also, don’t forget to download our FREE Cash on cash calculator to help you analyze how much profit potential properties can make you.
Key Takeaways
Whether you are a passive or active investor, it’s important to understand how fees work. It is also important to understand just how much general partners stand to make when they lead a syndication.
For passive investors, it’s important to understand the incentive GPs have for raising money and acquiring larger and larger deals. The fees alone can be in the millions. As mentioned above, GPs receive these fees regardless of the performance of the investment.
Investing as a General Partner vs. Active Investor
For active investors or those thinking about investing in real estate, this article really isn’t about how much money you can make as a GP. Rather it’s about how much you can make as an active investor. If you think about syndications, it’s no different than going out and buying a rental property using a loan. The lenders in the case of syndications are the passive investors. The money you make as a GP is the same as the money you make with a rental property. As a GP you make whatever is left over after paying the passive investors. As a rental property owner, you make whatever is left over after paying back the loan. We like to think about syndications as a tool in our toolbelt. It’s one way to buy a property, especially larger properties. But it’s far from the only way to buy properties!
Want to learn how to build a significant source of income from investing in real estate while reducing your taxes? Join us in one of our courses, Zero to Freedom, or Accelerating Wealth.
