The Beauty of Investing Passively in Real Estate Syndications.
I remember my last single-family rental well. I received an email from my property manager.
"We did our quarterly inspection today, and things have deteriorated. Take a look at the attached photos. All those black specs you see? Those are roaches." It is sometimes shocking to see how some people choose to live. We are talking an infestation that you wouldn't believe existed. It was gross. They ruined the place.
I had planned to buy and hold this thing for many years, but the cost to turn around the small rental was going to put me in the hole several grand. I didn't want to crawl my way out of this one, as it was a good cash-flow market, but market appreciation was just ok. Luckily, I “bought right” (bought at a discount) so if I sold, I would at least net positive. I don’t want to digress too much, but this is why I never recommend turn-key properties. With a turnkey you don’t buy at a discount - the turnkey operator does. Thus, you pay retail, so if you had a situation as I did, and you didn’t have any equity going in, you be way in the hole and would sell at a sizeable loss. Enough digressing.
When I look back on my investing career, including stocks, mutual funds, and real estate. Real estate has provided my largest chunk of wealth, and it isn’t close. Having said this, the active investments have, at times, been a major pain in the asphalt. I have shared some of my tales in the past. In addition to the cockroach story, there was the goth-fire party of 200 people thrown at a rental. The professional tenant in Seattle, who didn’t pay rent for six months. The tenant in Palm Desert who threaten to kill my partner, if we evicted him. Then there are the more standard problems you deal with on a constant basis. I’ve had several broken sewer mains – that will kill your cashflow quick. Countless appliances that stopped functioning, or literally left the building somehow. A contractor who charged me for appliances, and then never delivered them – ever.
Sadly, I could not continue the fun. I got married, my family grew, and time became massively compressed. Could I hold down a 9 to 5 (or more like 7:30), raise two rambunctious boys, and travel around to manage these properties in other states? Even after I hired property management, the work never stopped. It was a dilemma. On the one hand, I needed to grow my family's nest egg, but on the other, I no longer had the time to do it. The stock market wasn’t cutting it for me. Every once in awhile I hit on black, but after taxes, volatility, and a few bad bets, that stock account wasn’t going to take us to where we needed. What was the answer?
Because priorities shifted, so too did the investing strategy. Whereas before, our focus was primarily on investing in small multifamily rentals that we could fix up and rent out ourselves, the focus now becomes partnering with others who can take the reins. We’re moving from the world of active investing into the world of passive investing.
There are a number of ways to invest passively in real estate. My favorite? Investing in real estate syndications.
What is a real estate syndication?
In the simplest sense, syndication is a group investment. A group of investors pools their money to invest in something together. In the case of a real estate syndication, investors come together to invest in commercial real estate assets, like apartment complexes, self-storage buildings, and mobile home parks.
The beauty of a real estate syndication is that you can leverage other people’s time, energy, and expertise.
As a busy dad, I can use all the leverage I can get.
In syndication, the sponsors are the active investors, the ones who know the ins and outs of that particular market, who spend time getting to know the real estate brokers, who visit the properties and walk the units, who pore over the due diligence documents, who work with the property managers day-to-day.
As a passive investor in a real estate syndication, I get to partner with a stellar team with a strong track record, invest my money in a great piece of real estate, and get great returns, all while doing next to no work.
Let me say that again because I think it bears repeating. I get to invest in real estate without having to do any work. No more backed up toilets, tenant feuds, calls from neighbors, cockroach infestations, squatters, and goth fire parties. Not my problem anymore.
The sponsor (also called operators) takes care of all of that, and I get a neat little monthly report on the progress and updates. As a passive investor, I can spend more time with my family and less time dealing with the headaches of being a landlord.
What’s the catch?
Okay, you’re thinking, this all sounds pretty good. But what’s the catch? To be honest, there really isn’t a catch.
Think of a real estate syndication like a cruise ship. The sponsors are the captain and crew. They navigate the ship. If there is a storm, they will steer the ship to safe waters.
For their work, the sponsors get a cut of the deal, just as the captain and crew get paid for running the ship. The lion’s share of the returns, though, goes to investors. The people on the deck, sipping their Mai Tai’s.
For their work, the sponsors get a cut of the deal, just as the captain and crew get paid for running the ship. The lion’s share of the returns, though, go to investors. The people on the deck, sipping their Mai Tai’s.
No more backed up toilets, tenant feuds, calls from neighbors, cockroach infestations, squatters, and goth fire parties. Not my problem anymore.
In syndications, just as with the cruise ship, everyone is in this together and are going to the same place.
Interests are aligned, and everyone wins.
What do returns look like?
Just like when you invest in a rental home, the returns in a real estate syndication can vary, based on the asset, market, and business plan.
What I can tell you though, is that, on average, the deals that I invest in (which are the same deals that we offer to our investors) have a cash-on-cash return of 8 to 10 percent per year and are held for a projected 5 years.
When factoring in the profits from the sale of the asset at the end of the 5 years, the average returns are around 18 - 20 percent per year. Not too shabby.
In syndication, just as with the cruise ship, everyone is in this together and are going to the same place.
How to Invest in a Real Estate Syndication
The process to invest in real estate syndications is a bit different than buying a rental property. For one, you can’t just go up to a broker and ask about syndications. It doesn’t quite work that way.
Rather, to find real estate syndication opportunities, you need to find sponsors who have deals currently under contract. Often, because of SEC regulations, sponsors cannot publicly advertise their deals, so they can be hard to find unless you know someone who knows someone.
Luckily, now you know someone who knows someone - me
At Fortress Federation Investments, we specialize in connecting passive investors to experienced sponsors in growing markets. We leverage our knowledge of the business and do the heavy lifting of finding and vetting sponsors and deals.
We’re investors first and foremost. So we’re always looking for deals that we want to invest in ourselves. When a deal meets our strict criteria, we invest our own money into the deal, and we open up the investment opportunity to our investors as well.
What does Fortress Federation get out of it?
We get to share in the deal’s returns, just as everyone else, and also get the gratification of helping communities, and making investors happy.
As for how we keep our lights on, that part comes from our partnerships with the sponsors. We work hard to find great sponsors and great deals. When we find them, we partner up with the sponsors and join the general partnership.
As such, we get a cut of the sponsors’ fees and equity in the deal. That means that, as an investor, you invest your money directly into the deal; you don’t pay us any extra fees. The investors are the limited partnership. Our share comes out of the general partnership – the sponsors. This video breaks it down nicely.
Ready to learn more?
The best way for you to learn more about real estate syndications, as well as our current, previous, and upcoming deals, is to join the Fortress Federation Investor Club.
Through the Fortress Federation Investor Club, you’ll get first looks at all the deals we offer. We’ll work with you to figure out your goals for investing, and help you find the best deals to meet those goals. We’ll then walk with you every step of the way as you invest in those deals.
So if you’re ready to be done with the headaches of being a landlord, or are done with the volatility of the stock market, sign up for the Fortress Federation Investor Club below, and get started on your path toward becoming a passive real estate investor.