Are Real Estate Syndications Right For You?
Many realize that they should be figuring out how to add some real estate investments to their portfolio. They like the sound of adding additional cash flow by way of rental income but have limiting beliefs on the barriers to entry. And while owning a bunch of single-family homes sounds lucrative, you may prefer the sound of passive investments. The mutual fund you may have invested in feels passive, but the returns just aren't cutting it, let alone the tax advantages. You've discovered the power of passively investing in real estate syndications. While you feel pretty confident it ranks well amongst investment opportunities, you may not be convinced it is the right investment strategy for you.
After all, your own financial advisor doesn't know much about them, and much to his dismay, he will not find his name in the private placement memorandum. When you have your advisor place your money into the stock market, they are making their fee, so don't necessarily look to them to help you figure out whether it is a good investment vehicle.
The ability to make passive income by investing in large commercial properties with a group of investors, all while making higher returns and enjoying tremendous tax benefits, seems like a no-brainer. And though it may be a single property, it is an investment property with many doors giving it a diversification of risk and economies of scale that is hard to match. Need I mention that you won't have to be taking any late-night calls on backed-up toilets or noisy neighbors, and while some cannot handle the lack of control, for many to free of those headaches is what makes this so beautiful.
Yet, no matter how enticing they may sound, real estate syndications aren't for everyone. Real estate investors are not all created equal - each has a different level of risk tolerance and maintains other goals.
Before adding real estate syndications to your investment portfolio, see if you fall into the following categories.
#1 If $50K is the minimum investment amount, this should equate to at least 10% of your net worth.
While some real estate investment platforms will accept smaller investment amounts, most private real estate syndications begin at a minimum investment amount of $50,000.
It would be beyond painful to lose $50,000. Even the wealthy would feel nauseous at the very least. You want to ask yourself, If I lost this $50k, would I be okay? Would I still be able to pay for my mortgage, my kid's necessities, vacations, and possess an ample emergency fund? If this is your only $50k, or even $200k, you should continue to save and keep up with the real estate education. In another year, two or three, you may be in a much better financial position to invest.
Obviously, suppose you are an accredited investor, then by all means. In that case, you should be investing with your favorite real estate syndicator, but remember, you do not have to be accredited to be in real estate syndication deals. You do have to be "sophisticated," meaning you have the knowledge, and you do have to have the financial wherewithal - as I spoke to above - to become an equity partner.
#2 You're Okay Having Someone Else Have The Control
If you are a busy professional or parent, and having the capital to invest is not a problem, then you've found a more than suitable investment.
Passively investing into a commercial real estate syndication is much less hands-on than your typical residential real estate rental property. In fact, you'll probably never see the property in person and won't be involved in any day-to-day decisions, much less the business plan. Yes, once you get beyond your own due diligence, the only job you will have is monitoring your bank deposits and reading the monthly or quarterly reports.
You don't have to contact the broker, monitor the property management, or oversee renovations. You are not the captain of this ship, and to many, that is music to their ears as long this is a highly qualified crew (they have a good track record. I also realize this initial investment may be difficult to part with as some cannot tolerate the loss of control, and I get that. This is your very own money we are talking about here. Can you get to a place where you feel comfortable having someone else be the steward of it? If they double it for you in five years, then the answer might be heck yes.
#3 You Are at Peace With Long-Term Investments
If you are trying to place a bet on cryptocurrency or some Meme stock, chances are you are not crazy about seeing your principal go away for a while. Unlike stocks or something you can flip in the two-year range, real estate syndications typically have a hold period for five or more years.
If you're more of a set it and forget it type investor and can plan for your investment capital to be unavailable for long periods, passively investing in real estate syndications may be your new obsession. Remember, you will also get those regular cash flow distributions into your bank account during the hold.
#4 Sharing Returns In Exchange for Less Work is Attractive to You
Fix-and-flips and standard rental property approaches to investing allow 100% of the profits in your pocket. Mainly because they are smaller deals, require plenty of sweat-equity, and often have only one party (you) financing and managing the deal.
Multifamily real estate syndications are entirely different as there could be hundreds of individuals involved, thus some profit sharing. Usually, the passive investors get the more significant portion of a 70/30 or 80/20 split, with the general partners getting the smaller percentage.
Group investments like this take a "team" or collaboration mentality versus a competitive mindset. The general partners actively manage the property, make decisions toward renovations, and handle marketing and financial reporting. So, it only makes sense that they
are rewarded for their efforts. If profit sharing and the concept of "a rising tide lifts all boats" works for you, then this could make a lot of sense for you.
#5 You Won't Be Needing That Large Chunk of Money You just Invested for a While
Are you in that phase of life where your kids' college decisions are either several years in front of or behind you? Are you in a home that doesn't need a massive kitchen renovation? Is your daughter not about to get married?
If this is the case, you will be okay having your money "locked up" for a bit. You've worked hard to save, budget, and build a little nest egg, and you're just looking for somewhere to park it for a few years with the possibility of earning some interest.
Investing rather than spending your savings is a fantastic feeling. If this describes you well, investing passively in a real estate syndication might pique your interest even more after realizing how well-positioned you are for this type of investment opportunity.
You'll love being able to invest your money in real estate without the hassles of being a landlord, all while having the chance to invest with different sponsors in different markets and different asset classes. Plus, the tax benefits (and sometimes even the returns) from passive investing can surpass those from personal rental properties.
But, being a passive investor isn't for everyone.
Have more than $50k of "play" money
Are you okay NOT having an active role
Are you looking for a longer-term investment
Find collaboration and sharing returns attractive
Want to park your cash for 5+ years
The beauty of real estate investing is that it's so incredibly diverse. Perhaps some of the above doesn't' describe you, and you want to roll up your sleeves and do the work yourself first to learn the ropes. Or perhaps you're looking for a more liquid or a shorter-term investment. If you are okay with all of these, then investing passively in real estate syndications might be the best fit for you. That's okay.
There are so many opportunities out there to invest in and impact local communities while doing so. Commercial real estate syndications are just one avenue, but if you meet a few of the criteria above, you might have found your match.