Once you’re aware of the power of real estate syndications and you’re thinking about the possibility of investing passively in them, it’s natural to have questions…lots of questions.
Investing in real estate is a big deal, and you should get answers to all the questions you have. Furthermore, real estate syndications aren’t widely known about, so not only will your friends probably not have any answers to your questions, but they will likely not have any idea what you’re even talking about.
For this exact reason, it’s important you find a trusted, knowledgeable resource to get your questions answered, along with doing plenty of your own research. In an attempt to make this easier on you, we’ve addressed 4 big questions today:
- What types of properties can I invest in using syndications?
- What are the risks to investing in syndications?
- Where can I find real estate syndication deals?
- How do syndications compare to crowdfunding sites?
The answers to these four simple questions are really going to help clarify things for you. Ready to dive in? Let’s go!
What are the different types of real estate syndications?
A syndication is simply a group purchase, so many types of real estate can be syndicated. Real estate syndication deals are commonly available to invest in multifamily properties (apartments), self-storage, manufactured home parks,
land development, hotels, student housing, warehouses, and more. Some real estate syndications are for ground-up construction and others are for buy-and-hold
(i.e., buy an asset that’s already stabilized, and the group will hold it for a number
of years).
A great example of a value-add multifamily deal is an apartment community whose units haven’t been updated in ten years. The kitchens are all dated, the carpets are worn, and the landscaping needs some work.
By making those improvements, we can increase the rents, which increases the income of the property, and thus the overall value.
What are the risks of investing in real estate syndications?
You’re no dummy…you already know any type of investment has risk. Syndications aren’t immune to risk either.
One of the biggest risks lies in executing the business plan. Before the deal, you’re wooed with glossy marketing packages and the sponsors will answer your questions with lofty ideals.
However, when the rubber meets the road, the sponsor team needs to be able to execute the business plan in the face of unforeseen circumstances. Investing with sponsors who have a proven track record and who prioritize capital preservation helps ensure they will protect your investments and do what they say they’re going to do.
Changing market and economic conditions are always a risk. No one can predict what market conditions will be like at the end of a project’s hold time.
This means, if the projected hold time is 5 years, check to make sure that the loan term is for at least that long, and ideally longer than 5 years, so there’s a buffer in case the sponsors need to hold the property longer than intended.
At the end of the day, as a limited partner and passive investor, you’re concerned with your personal liability. The good news is your liability in real estate syndication is limited. At worst, you could lose your original investment capital. But your other personal and business assets are not at stake (e.g., you can’t lose your house).
Related article: Real Estate Syndications—Are They Too Good to be True?
Where can I find real estate syndication opportunities?
The only publicly advertised real estate syndication deals are for accredited investors only. So, how does a “regular person” find real estate syndication deals to invest in?
You can do a Google search, but how do you know that the opportunities that pop up are legitimate ones, put together by experienced teams with strong track records, who will safeguard your money over a period of
several years?
You don’t!
The best way to find real estate syndication opportunities is to get out there and talk to people in the real estate syndication space. This community is quite small, and once you get connected, you’ll easily be able to find sponsors and real estate syndication opportunities that fit with your investing goals.
Related article: Accredited vs. Sophisticated Investors…What Does It Mean?
How do private real estate syndications compare to real estate crowdfunding sites?
Maybe one of your friends claims they invested in a syndication deal for just a few thousand bucks. This is because recently, real estate crowdfunding sites like RealtyMogul, RealtyShares, and Fundrise have helped make it possible for millions of people to invest passively in real estate.
Real estate crowdfunding sites can be a good place to find real estate syndication offerings. However, there are a few things you should keep in mind.
First, most of these platforms require that you be an accredited investor in order to invest in their real estate syndication offerings.
Some of these platforms do offer REITs (real estate investment trusts) or other funds as an alternative for non-accredited investors. Typically, you can invest in these REITs or funds with a low minimum investment (you can invest in Fundrise’s eREIT for just $500).
When you invest in a REIT or fund, you’re investing in a company that buys real estate; you don’t have direct ownership of the underlying asset yourself. You might still get good returns (depending on the structure), but you’d be investing in a bunch of assets rather than a single one, and you wouldn’t get the same tax benefits as with a real estate syndication.
Personally, I still have some money in a REIT my investment advisor convinced me to invest in back in 2013. He said they’d have a liquidity event where I could cash out in 2 to 3 years. That was 8 years ago….the only options I’ve had to cash out were other companies offering to buy my shares for 60 cents on the dollar. When it does sell, I won’t get a huge share of equity growth like I do investing in a syndication. And…my REIT distribution check I get each month is about $35. (Yippety doo dah.)
Personally, I’ve never seen a REIT that was anywhere near as lucrative as a syndication…but maybe that’s just me. If you don’t have the capital to invest in a real estate syndication deal (the minimum is typically around $50,000), however, then a crowdfunding site may be a good option to start smaller and build up.
Regardless, if you’re just starting out, you should definitely check out some real estate crowdfunding sites to see what they’re about.
In Conclusion
In summary, it’s important to understand the risks, the terminology, the options available to you, and how to find a deal that best fits your goals and investing style. Real estate syndications aren’t for everyone, but they can be a fabulous addition to anyone’s portfolio. Now that you know more about how to find and passively invest in real estate syndication deals, that’s one less barrier to entry. At this point, what are you waiting for?
Further reading: How Non-Accredited Investors Can Invest in Real Estate
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