Is Real Estate Syndication The Right Investment Strategy For You?
If you're interested in supplementing your primary income, investing in real estate can be the right avenue. Unlike most other income streams, real estate investments offer flexibility when it comes to your involvement. You can either be an active investor who manages a property, or you can approach it from a minimal-effort standpoint. If you're looking to do the latter, then an investment opportunity to consider is real estate syndication. But first, you need to understand how they work, including their benefits and potential risks, before you make a decision.
What Are Real Estate Syndications?
A real estate syndication takes place when investors collectively group their resources, capital and competencies to buy a property, such as apartments, self-storage facilities, mobile home parks, hotels and more. Income distributions from these investments typically come in monthly or quarterly installments, with a return on investment coming from the property's eventual sale.
In a syndication, there are general partners and limited partners. General partners make the deal happen. 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, known as limited partners, provide the bulk of the capital. As the name implies, their responsibility (and liability) is limited. However, limited partners pay an assortment of fees—such as acquisition and management fees—which can impact their potential returns compared to the general investors.
If you're interested in real estate syndication, the most important step you can take is getting educated. After all, one of the biggest risks is who you partner with. So, do plenty of research on your options for syndications to join. For example, review public records to see if they invest in the kind of properties that interest you, reach out to your network to see who has firsthand experience with any syndications and make sure none of the partners have been involved in a financial scandal. After you've found some options that could work, meet each team. Ask about their industry background, previous investment returns and their structure for paying out returns. Then, ask them for references—and actually reach out. Once you've done your due diligence, you will 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 passively investing in real estate before, you've probably looked into buying rental properties or joining real estate investment trusts (REITs).
By renting out a property, you can pay your mortgage and, in most cases, collect cash flow each month. This type of investment benefits from the long-term real estate appreciation. REITs typically own income-producing real estate properties across various properties and sectors. They're publicly traded, like stocks, which makes them incredibly liquid and a passive investment vehicle for investors.
Both of these investment vehicles have strong advantages, but it's important to examine the cons to understand what the right investment vehicle is for you. Buying a rental property, for example, is not completely passive, and dealing with tenants, maintenance and management can be a tedious, stressful process. Additionally, rental properties have the problem of relying on a single tenant, or a few select, to pay the mortgage. If you buy a property and can't find a tenant or get unlucky with a bad tenant, the investment can go south. REITs, meanwhile, are 100% passive, but investors cannot obtain many of the tax benefits of real estates, such as depreciation-related reductions in taxes. Instead, REIT investments are taxed the same as holding any other equity.
When comparing real estate syndications to REITs and rental properties, syndications are an opportunity to blend the best of both worlds. They allow you to invest in real estate—thus gaining the cash flow, appreciation and tax advantages—in a completely passive way. Syndications also hold multiple tenants, reducing the risk of one vacancy or an unexpected maintenance issue. Still, no method of investment, including syndication, is without risk. Real estate is a volatile market, properties can underperform and the terms you set now for selling your interest might not be ideal in the future.
What Returns Can Real Estate Syndications Earn?
Many real estate syndications earn in two ways. First, investors can collect rental income while they hold the property. Then, when the property sells, investors can receive their original investment back along with any appreciation the property has incurred.
Though it varies depending on the company, syndications typically last at least three years and earn anywhere between 7% to 10% per year in property rental income. This is referred to as your cash-on-cash return and is distributed to passive investors as monthly or annual distributions. When the time comes to sell the building, the market price for a large commercial real estate venture is proportional to how much it earns in rental income. When a property is purchased and renovated to increase revenue, the building can appreciate and sell over the original purchase price.
How To Determine If Real Estate Syndication Is Right For You
Are you interested in real estate syndications as your next investment opportunity? Here are five key indicators that you should give it a try.
• You're interested in passive investing rather than being actively involved in the day-to-day management of your investment.
• You're looking for monthly, quarterly or annual passive income from your real estate investments.
• You're financially able to meet the typical $25k to $75 investment minimum of real estate syndications.
• You're a sophisticated or accredited investor.
• You don't need immediate access to your investment funds.
Like all forms of investing, getting involved with a real estate syndication has its risks. As someone looking for passive investment opportunities, it's important to engage in due diligence and carefully weigh the pros and cons before you commit.