If you are interested in the potential high returns that come from investing in hotel real estate but don’t have the time, expertise, or inclination to do due diligence, structure the deal, and manage the property—you don’t have to forego these lucrative investment opportunities.
By investing through hotel real estate syndication, you can have all of the benefits of owning a commercial real estate investment without the hassle. Here’s what you need to know.
In its simplest definition, real estate syndication is a group of individuals pooling capital together for the common purpose of purchasing and managing a property with multiple owners.
There are typically two parties involved in real estate syndication—the sponsor and the investor. The sponsor (also sometimes called the syndicator, asset manager, general partner, GP, or operator) is the individual or company in charge of finding, acquiring, and managing the property. They also underwrite and complete the due diligence of the asset.
Meanwhile, the investors (often called the limited partners or LPs) provide funding and own a percentage of the real estate being acquired. They enjoy the benefits of property ownership without getting involved in the actual process of acquiring the property, such as arranging financing and being responsible for the day-to-day asset management.
Sometimes, a joint venture (JV) or equity partner may be involved. These groups typically have access to many investors and can serve as a conduit between the sponsor and the investors. Besides potentially facilitating financing, they may also assist the sponsor with investor reporting and communication as well as tax documentation.
Hotel real estate syndication allows investors to broaden their access to deals with the potential for high returns without spending the time to research hundreds of properties. As limited partners, they can take advantage of the passive nature of the investment without the hassle of managing the properties.
When you work with sponsors who have a track record of success, you can rely on them to manage the property’s day-to-day operation and ensure the highest ROI. They’ll also give you monthly or quarterly updates on your investment to keep you informed.
Investing in syndicated hotel real estate allows you to diversify your portfolio into an asset class that’s not directly tied to the public markets. This can help protect your investments during a financial crisis or recession. Hotel syndications also have the benefit of being able to improve overall yields through tools such as dynamic room pricing, monetization of meeting/conference rooms, food and beverage services, etc.
Lastly, a large commercial property offers investors economies of scale in their contracts for property management, renovation expenses, cleaning services, etc.—which can improve the profitability and return on investment compared to smaller, non-syndicated investments.
When you partner with a real estate syndication sponsor, they are responsible for doing the due diligence and underwriting the investment. Making and confirming accurate underwriting assumptions is one of the best ways to ensure that a deal is successful and profitable.
Typically, the sponsor will provide you with financial projections of the investment and can often outline some of the main assumptions included in the underwriting. It is beneficial to understand how changing some of these assumptions can impact the returns of the investment. Here are some an experienced hotel syndication investor considers when reviewing a deal:
A sponsor will also evaluate the location, the number of rooms, acquisition assumptions (e.g., capitalization rate and sales comps), financing assumptions (e.g., loan-to-value ratio, loan interest rate, amortization period), exit assumptions, and historical cash flow. (for a definition of common financial terms, please click here)
To ensure success in hotel real estate syndication deals, the interests of the sponsor and the investors must align. This can be accomplished in several ways:
Working with the right sponsor is the key to hotel real estate investment success. Here are some criteria you can use to evaluate your potential partner:
Partnering with a reputable and experienced hotel real estate syndication sponsor can maximize your investment while eliminating the hassle. Lifeafar’s leadership and expertise has made us one of the most successful hotel real estate syndication sponsors in Colombia and Puerto Rico. If you are interested in learning more about the lucrative financial returns that can come from investing in hotel real estate, with returns often ranging from 12-26%, please visit our website to see our current hotel real estate investment opportunities.