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How to Earn Money from A Real Estate Syndicate

Nov 25, 2007
The real estate syndicate is a pooling of resources of many investors to buy a building or long-term leaseholds.

If you contemplate investing in such a syndicate you will receive a brochure which will have a statement about the anticipated yearly distribution. Note the words anticipated, and distribution. The syndicate has evaluated the property, but does not know and cannot always know whether throughout the years - or even next year - it will show a sufficient return to make the payments which are hoped for.

So he usually tells you that he does not guarantee the return, that the return of 10, 11 or 12 percent is "anticipated". The word distribution is really the key word. Why do they use that instead of profit or income? Because the money which you receive every month is not just profit, but in the legal sense is partly return of capital.

Assume that you have $10,000 to invest and that you are examining the brochures of two syndicate offerings which seem substantially of equal merit. Both state that your anticipated distribution will be 10 percent. One brochure states that during the first five years, none of the distributions will be reportable for federal income tax purposes. The other brochure states that during the first five years, 50 percent of the distribution will be reportable for federal income tax purposes.

This means that in the first case you keep the whole $1,000 every year during the first five years and need pay no federal income taxes on that $5,000. In the second case, you have to pay income taxes on $500.00 of your income every year. If you are in the 30 percent bracket, you pay $150 per year on the $500. Therefore you are keeping only $850 out of the $1,000 distribution.

If you are in the 40 percent bracket, you pay $200 per year on the $500 which is taxable and you keep $800 out of the $1,000 distribution. Ten percent distribution may mean in one case 10 percent take home pay. In another, it may mean 82 percent, 8 percent or even less, depending on your tax bracket. If you want to know your net income after taxes, be sure to check what portion of the anticipated distribution is reportable for federal income tax purposes.

Depreciation Applied To Real Estate

The traveling salesman uses the car in his business. The manufacturer uses machines. In a syndicate - your equipment - your means of making money is the building which is owned by the syndicate. The building, like any other piece of equipment, is subject to wear and tear and to obsolescence. The tenants, users, and the elements all cause the wear and tear. But do not underestimate obsolescence.

The useful life of a building and the deduction permitted for depreciation depends on the type, age and the condition of the structure. But a part of the distribution of the syndicate will represent depreciation reserve, or funds which the syndicate may set aside for depreciation and you will not have to pay income taxes on that part. Be sure to check the brochure to find out what portion of the distribution is subject to income tax and what portion exempt.

New York State law requires that your brochure state how much of the contemplated distributions are income and how much return of capital. Many other states have similar legislation or are in the process of enacting similar laws.

At some time in the future the depreciation allowance will come to an end. All distributions which you receive thereafter are fully subject to income taxes. The reasons are simple. If the syndicate bought a building for $500,000 and over the years it received $500,000 for depreciation, there is no need to worry anymore about wear and tear and obsolescence. The syndicate got its money back.

Make sure you understand what you are likely make if you invest in a particular syndicate.
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