3 Options for Funding Your Investment in a Real Estate Syndication

by | Aug 4, 2021 | Investing Process, Passive Investing | 0 comments

As you learn about real estate syndications and decide to invest, one main
question that comes to mind is how and where to get the money to fund the investment.
Passive income sounds great, but you’ve got to be strategic in setting up your personal finances so the distributions benefit you the way you intend. While it can vary from deal to deal, the typical minimum investment in a real estate syndication is $50,000. Depending on your situation, that might require a little planning and strategy.

You might be surprised to learn that there are at least three options for funding your investment in a real estate syndication. The option you choose will depend on your family situation, your investing goals, what you plan on doing with the distributions, and more. There’s no such thing as a one-size-fits-all answer, and you’ll want to sort through the details here and discuss them with your CPA or tax advisor so you can take the right steps before our next deal opens up.

So, which of the three ways is “right” to fund your real estate syndication investment? 

Let’s take a look!

The Brave Individual Investor    

The quickest and easiest way to invest is a solo cash investment. This means entering the deal as an individual (i.e., no partner) with capital from your savings or other liquid assets. As the sole signee, you’re entirely in control of selecting the deal, signing and completing the documents on time, and wiring the money into the deal. 

As an individual, you’ll receive distributions from the syndication deal deposited directly into your personal account and reap the tax benefits of owning real estate. There’s no need for bookkeeping either, because you’ll receive a K-1 tax form each Spring with all the information you need for your taxes – including that amazing depreciation that can lower them. When you invest personal money, all the benefits, tax breaks, distributions, and other joys of being a real estate syndication investor belong directly to you!

Some things you want to think about as an individual investor are alternative
forms of asset protection, like insurance or a trust. For example, you should
ensure there’s a will or living trust in place with one or more designated beneficiaries. The
General Partner team doesn’t collect beneficiary information,
so if something unexpected occurs, you’ll want to have that clearly stated in your own legal documents. 

The Power Team

Suppose you wanted to invest jointly with your spouse or life partner. Yes, the two of you can combine your resources to amass the $50,000 (or whatever the amount is) and invest in a real estate syndication deal together. It happens all the time!

Many people live in community property states, which ensure that all marital assets are jointly owned. So if you’re married, you may not have a choice – you may have to invest, reap the distributions, and enjoy the tax benefits jointly.

This gets slightly more complicated since two signees are required instead of one, and both of you have to agree to make the investment together; however, it’s still a pretty straight-forward process. Keep in mind though, both partners should consider asset protection strategies and put legal beneficiary designations in place. Whether these designations are determined by state law or can be chosen and designated in a trust or will, it should be set up by the spouses or partners ahead of time, just in case.

Investing Through an Entity      

The third way you might choose to invest is through an entity. You can invest through a retirement account like a self-directed IRA or Solo 401k, a trust, or a corporation or LLC. Depending on your state’s rules and the advice of your CPA, any one of these could be an option to invest in a real estate syndication, whether with retirement funds or as a way to harness the protection of a business you intentionally set up for investing. 

Investing through an entity typically requires one signee, so it may be simple. But it may also require some extra paperwork, which could make it slightly more complicated, particularly if investing through a self-directed retirement account with a third party trustee. You always want to check with a tax professional familiar with your financial situation and the applicable tax laws to see which choice might be most beneficial to you. 

Distributions and other financial benefits from the investment go to the entity, meaning the deposits will go back into your retirement or business accounts. If you invest this way, it’s important to keep the funds separate – you don’t want unexpected taxes or fees from the accidental withdrawal or use of retirement or business funds.

When investing through an entity, your level of asset protection and heirship is based on the Operating Agreement of the LLC, trust, or IRA you’re using. Check with your retirement account provider (if investing that way) about any rules or fees about real estate investments and understand the benefits of depreciation or loss applicable to the account. There is a chance that if you’re investing in real estate syndications through a self-directed IRA, for example, that you could become liable for unrelated business income taxes (UBIT). 

Also, check how your choice will affect how you file your tax returns. Some entities may require you to file a separate tax return for them, while others may be “disregarded entities” that are reported on your personal tax return.

So…Which Option Should You Choose?     

 

Ultimately, the question of which option is best for you depends on when you’ll need the cash flow, how you’d like the tax benefits to be applied, and what level of asset protection you’re seeking. 

If you’re interested in the distributions and tax benefits being applied to you personally and 

want cash flow to boost your lifestyle now, then an individual or joint investment may be the best.

Are you planning on the investment distributions replacing some income or funding your child’s education? Funding your investment from your personal assets, either jointly or individually, may be best. 

If you’re more interested in building long-term growth and having the distributions bulk up your retirement account, then you may want to explore a self-directed IRA, Solo 401k, or even an LLC. 

Are you intent on tripling your retirement assets within the next 15 years so you can live out your dream lifestyle during your older years or retire earlier? Then one of these entity-type options might serve you best.

Many factors might affect your choice, like if you’re married with kids, how old your kids are, which state you live in, if you have any large expenses or purchases on the horizon, when you’re hoping to retire, what you plan to do with the distributions, and what heirship designations you require. 

How to Find and Fund Your Next (or First?) Syndication Deal       

To invest in a real estate syndication, you may have to be an accredited investor. However, the syndication deals we’ve offered up to this point have been structured so they can be made available to non-accredited sophisticated investors also. 

Related article: Accredited vs. Sophisticated Investors…What Does it Mean?

In other words, you don’t have to be a mogul to get into this stuff! All you have to do is join the BluSky Investor Club and have a little chat with us about your investing goals, what you’re looking for, and how you see real estate syndications moving you toward the lifestyle you’ve been dreaming of. Then, and only then, can we share our upcoming deals with you…we can’t share them without that chat!

Whether you’re a sophisticated or an accredited investor, our deals can fill up fast, so take some time to think – and talk with your CPA – about whether, when you
do invest, you’ll invest individually, jointly, or through an entity. Once that
legwork is done, and you have your capital ready to go, we can help you find a
real estate syndication deal projected to best move you toward your financial and lifestyle goals.  

Further reading: STOP!! Know Your Goals Before Investing in a Real Estate Syndication