Co-founder and Managing Partner of Disrupt Equity. Learn more about our multi-family investment opportunities by visiting our website.
getty
If you are interested in supplementing your primary income, investing in real estate could be the way to go. Unlike most other income streams, real estate investments offer flexibility when it comes to your involvement. You can either be an active investor managing a property or you can approach it from a minimal effort standpoint. If you’re looking for the latter, property syndication is an investment opportunity to consider. But first you need to understand how they work, including their benefits and potential risks, before making a decision.
Contents
A real estate syndication occurs when investors collectively pool their resources, capital, and competencies to purchase a property such as apartments, self-storage facilities, mobile home parks, hotels, and more. Income payments from these investments typically come in monthly or quarterly installments, with a return on investment coming from the eventual sale of the property.
In a syndication, there are managing partners and limited partners. General partners make the deal possible. They find the building and the investors, and once the property is closed, they work with the necessary property management companies and contractors to ensure the investment is successful. The investors, also known as limited partners, provide the bulk of the capital. As the name implies, their responsibility (and liability) is limited. However, limited partners pay a range of fees, such as acquisition and management fees, which can affect their potential returns compared to general investors.
If you’re interested in real estate syndication, the most important step you can take is to get an education. After all, one of the biggest risks is who you work with. So do plenty of research into your syndication options to join. For example, check public records to see if they’re investing in the kind of real estate you’re interested in, check with your network to see who has first-hand experience with any syndications, and make sure none of the partners have been involved in a financial scandal. After finding some options that might work, meet each team. Ask about their industry background, past investment returns, and their structure for paying returns. Then ask them for references and actually get in touch. Once you’ve done your due diligence, you’ll be better equipped to find a real estate syndication that best fits your needs.
Syndications vs. Other real estate investment options
If you’ve ever looked into passive real estate investing before, you’ve probably looked into buying rental properties or joining real estate investment trusts (REITs).
Renting out a property allows you to pay your mortgage and, in most cases, collect cash flow each month. This type of investment benefits from the long-term appreciation of real estate. REITs typically own income-producing real estate across a variety of properties and industries. They are publicly traded just like stocks, making them incredibly liquid and a passive investment vehicle for investors.
Both investment vehicles have strong advantages, but it is important to examine the disadvantages to understand the right investment vehicle for you. For example, buying a rental property is not entirely passive and dealing with tenants, maintenance and management can be an annoying, stressful process. In addition, rental properties have the problem of depending on a single tenant, or a select few, to pay the mortgage. If you buy a property and can’t find a tenant or break down with a bad tenant, the investment could go south. REITs, meanwhile, are 100% passive, but investors can’t get many of the real estate tax benefits, such as depreciation-related tax breaks. Instead, REIT investments are taxed same as holding any other equity.
When comparing real estate syndications to REITs and rental properties, syndications are an opportunity to combine the best of both worlds. They enable you to invest in real estate in a completely passive way – thus reaping the cash flow, valuation and tax benefits. Syndications also have multiple tenants, reducing the risk of a single vacancy or an unexpected maintenance issue. Still, no investment method, including syndication, is without risk. Real estate is a volatile market, real estate can underperform and the terms you set now for the sale of your interest may not be ideal in the future.
Many real estate syndications earn in two ways. First, investors can receive rental income while owning the property. When the property is subsequently sold, investors can get back their original investment, along with any appreciation the property may have gained.
Although it varies by company, syndications typically last at least three years and earn anywhere from 7% to 10% per year in rental income from real estate. This is called your cash-on-cash return and is paid out to passive investors as monthly or annual distributions. When it comes time to sell the building, the market price for a large commercial real estate company is proportional to how much it makes in rental income. When a property is purchased and renovated to increase revenue, the building can value and sell for its original purchase price.
Are you interested in real estate syndications as your next investment opportunity? Here are five key indicators you should try.
• You are more interested in investing passively than being actively involved in the day-to-day management of your investment.
• You are looking for monthly, quarterly or annual passive income from your real estate investments.
• You are financially able to meet the typical investment minimum of $25,000 to $75 for real estate syndications.
• You are a sophisticated or recognized investor.
• You do not need to have direct access to your investment funds.
As with all forms of investing, involvement in a real estate syndication involves risk. As someone looking for passive investment opportunities, it is important to conduct due diligence and carefully weigh the pros and cons before making a commitment.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.
businesskinda.com Business Council is the leading growth and networking organization for entrepreneurs and leaders. Am I eligible?
Janice has been with businesskinda for 5 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider businesskinda team, Janice seeks to understand an audience before creating memorable, persuasive copy.