Real Estate Syndications — Are They Right for You?

by | Aug 6, 2020 | Passive Investing, Real Estate Investing 101 | 0 comments

You’ve been eagerly absorbing all the information and have become fascinated with the power of passively investing in real estate syndications. How could you not, right? 

The ability to invest in real physical assets without having to be a landlord, getting a share of the majority returns, and reaping amazing tax benefits is a pretty awesome deal. Plus, the ability to diversify your investments with minimal legwork while making an impact on local communities is attractive, too. 

Even though these traits seem incredible, real estate syndications aren’t for everyone. Every investor is in a different stage of life, has a different financial
and family situation, has a different level of risk tolerance, and maintains
different goals. 

Before investing in a real estate syndication, see if one or more of the below describes you and your current situation.

#1 — You Have More Than $50K of Money to Invest With

While there are some real estate investment platforms that will accept smaller investment amounts, most private real estate syndications begin at a minimum investment of $50,000.

Ensure you have the minimum investment of $50,000, plus your standard emergency fund, plus any other savings you need for your personal situation. For example, a down payment on a new car if you know you’ll be buying one, this year’s family vacation, and education funds for a child who will be starting college soon should all be held aside.

There are a lot of contingencies in place in syndications, but if you aren’t prepared to lose your investment in its entirety and be okay financially, then syndications may not be your thing yet. You might want to go back and implement some serious savings plans and re-visit real estate syndications in couple years.

 On the other hand, if you have all your potential cash-needing scenarios covered, then go ahead and invest with confidence!

Alternatively, if you have funds in an IRA or a former employer’s 401k plan and you’re tired of seeing its value go up and down with the stock markets, you can invest those funds into syndications instead without tying up cash!

#2 You’re Okay Having Someone Else Run the Show

If you’re short on time, but heavy on cash, and want a professional team to manage the property while you reap the rewards, you’ve found the right investment.

Passive investing in real estate syndications is much less hands-on than your typical residential rental properties. In fact, you’ll probably never see the property in person and won’t be involved in any day-to-day decisions.

 You don’t have to be in contact with the broker, monitor the property manager, or receive and evaluate contractors’ bids. Instead, you get a few emails, sign a few legal docs, and carry on with your life while the checks show up. As a passive investor, you’re a passenger on board for the ride. So sit back and have a cocktail!

#3 You’re Looking for a Long-Term Investment

Perhaps you’ve done your research, you know not to look for a get-rich-quick scheme, and you’re interested instead in a steady, long-term approach to building wealth. Unlike stocks or something you can flip within one or two years, real estate syndications typically have a planned holding period of five or more years.

If you’re more of a set-it-and-forget-it type of investor and can plan for your investment capital to be unavailable for long periods of time, passively investing in real estate syndications may be your new infatuation.

#4 Sharing Returns in Exchange for Less Work is Appealing to You

Flipping and other standard rental property investing approaches typically allow all of the profits to go in your pocket — mostly because they’re smaller deals, require some degree of sweat equity, and often have only one party financing and managing the deal (that’s you).

Multifamily real estate syndications are completely different since there could be dozens of individuals involved, which means some profit sharing. The passive investors (limited partners) usually get the larger portion of a 70/30 or 80/20 split, with the general partners getting the smaller percentage.

Group investments like this require a team effort to make work. Part of that includes having a collaboration mentality instead of a competitive one. The general partners actively manage the property (or actively manage the property manager), make decisions about leasing and renovations, and handle marketing and financial reporting. So it only makes sense that they are compensated for their efforts. If profit sharing and the idea that “a rising tide lifts all boats” makes sense to you, this could be the thing for you.

Related article: Exploring Projected Returns in a Real Estate Syndication

#5 You Don’t Need the Money for a While

It’s possible you’re in a part of your life where your kids’ vehicle purchases or college decisions are either several years in front of or behind you, that you’re in a home that doesn’t need a major renovation, or just that you’ve planned well, contributed to savings accounts, and minded your expenses. 

If this is the case, you also likely meet the criteria in #1, and you are going to be okay having your money “tied up” for a while. You’ve worked hard to save, budget, and build a nest egg, and you’re just looking for somewhere to park it for a few years with the possibility of earning some interest. 

Not needing your savings for the foreseeable future is a fantastic feeling, and if this describes you well, investing passively in a real estate syndication might pique your interest even more after realizing how well-positioned you are for this type of investment opportunity. 

#6 You’re Looking for Tax Savings

Anyone would want to add some investment profits to their savings, right? But then there’s the catch — paying the taxes on those profits. Yuck.

But wait, the catch has a catch! Because of the power of depreciation in real estate and the cost segregation studies we have performed on our properties, our passive investors normally don’t have to pay taxes on their earnings until the property sells in the final year. And there are ways it can be reduced or avoided then, too! 

A final thought about this is that people can invest in more than one asset class at the same time. Some of our investors continue with single family home strategies like flipping, which has a high tax rate on profits, while simultaneously investing in our multifamily syndications to reduce their taxes. Talk about a win-win!

Note: Every investor’s tax situation is different, and BluSky Equity Partners does not provide tax advice. Therefore, we highly recommend discussing any strategy you’re considering with a competent tax advisor.

Recap

You’ll love being able to invest your money in real estate without the hassles
of being a landlord, all while having the chance to invest with different sponsors
in different markets and different asset classes. Plus, the tax benefits (and sometimes even the returns) from passive investing can surpass those from personal rental properties.

But, being a passive investor isn’t for everyone. So, if you —

  • Have more than $50k of money to play with
  • Are okay with not having an active role
  • Are looking for a longer-term investment
  • Find collaboration and sharing returns attractive
  • Want to invest your cash (or retirement account) for 5+ years
  • Want to reduce your taxes

…then investing passively in real estate syndications might be a great fit for you.

The beauty of real estate investing is that it’s so incredibly diverse. Perhaps some of the above doesn’t describe you and you want to roll up your sleeves and do the work yourself to learn the ropes. Or perhaps you’re looking for a more liquid or a shorter-term investment. That’s okay, and you can invest in more than one strategy or asset class at once.

There are many opportunities available to invest in great projects and impact local communities, and multifamily real estate syndications are just one avenue. But if you meet a few of the criteria above, this avenue may be a match for you.

 

Further reading: 5 Things You Should Do Before Investing in Your First Real Estate Syndication