Many real estate investors want to combine their resources and partner with a more experienced partner or developer to manage each project.
Forming a small syndication is often preferable to creating an actual real estate investment fund. A “club deal” typically involves a handful of investors who take a more active role in the decision-making process of the investment. In a club deal, participants will contribute capital and invest as a group. This structure has many benefits: it allows the group to make larger investments than any one individual could; it can distribute risk more evenly among investors; and it can increase the group’s access to better financing.
This also is helpful for the sponsor, who is usually an individual with more experience than the other investors in a specific area, such as real estate, or construction.
Restricting the number of participants in the group can mean that the group is more agile. The ability to act quickly is often the most important reason entrepreneurs or real estate investors who want to raise capital turn to these small syndications, and why small syndications may need a fair amount of liquidity. Small syndications also may not require many of the cumbersome accounting, regulatory, and reporting infrastructures necessary that are requirements of an investment fund.
Despite their size, club deals must also be structured properly and all members need to fully appreciate the inherent risks of any investment.