What Happens When You Invest $50,000 a Year in Real Estate Syndications?

Jul 27, 2020 | Investing Process, Passive Investing, Real Estate Investing 101

Fifty thousand dollars is a lot of money! Never mind fifty thousand dollars per year. I get it, but hear me out. Once you see the potential results, I strongly believe you might be more willing to put forth the effort to get there.

I’ve seen regular people with regular salaries do this and change their trajectories forever. As with most things in life, it’s not about your resources…it’s about your resourcefulness. You can do anything you put your mind to, and seeing how investing in syndications year after year can help you progress just might help you put your mind to it.

Here’s what could happen when you invest $50,000 a year into real estate syndications. (The chart toward the bottom helps illustrate the numbers.)

Related: Exploring Projected Returns in a Real Estate Syndication

Year 1

While the first year may not be that exciting, it’s definitely an accomplishment to invest your first $50,000. It’s also pretty cool to pick out that first property. Let’s pretend you select to invest in a 180-unit value-add multifamily property in Phoenix, Arizona. We’ll call this “property A.” And, let’s assume the $50,000 investment came from a high-yield savings account or an investment account.

Soon afterward, you begin to receive $1,000 each quarter in distribution checks (averaging ~$333/month), which is an 8% return, about average for our
standard deals.

You still have enough left in your savings to act as a liquid safety cushion in case of an unexpected layoff or similar emergency, as well as some extra that can be used toward the next year’s $50,000 investment. Meanwhile, you’re still working and adding more to your savings.

A nice, modest start at this point.

Year 2

In the early spring, you receive your first Schedule K-1, which is the tax document that shows your income and losses. Through the magic of our tax system, cost segregation, and bonus depreciation, your K-1 for property A shows hefty paper losses, even though you enjoyed nice distributions of $1,000 a quarter since

the deal closed. Those paper losses offset your investment income (distributions) from Property A, and unused paper losses can carry forward to future tax years.

This same year you invest another $50,000 into syndication B. $4,000 came from the distributions you received in year 1 from property A, and the rest of the funds were either already in your savings account or were new savings from the past year. Property B bumps your cash flow from syndicated real estate investments to $2,000 a quarter (average $667 a month) — $1,000 each from properties A and B.

Year 3

This year, in the early spring, you receive two
K-1 tax forms, one for each property. And despite having income from two investment properties, the depreciation offsets it, so
your taxes haven’t gone up. This marks a turning point in your finances because from here forward, you begin looking forward to
tax season!

Soon you invest another $50k into your third deal, property C. $8,000 of it came from the year 2 distributions from properties A and B, and the rest you saved over the last year. Now you receive three distribution checks each quarter, totaling about $3,000 (average $1,000 a month). You’ve boosted your yearly income at this point by $12,000 annually.

Year 4

You receive your year 3 K-1s for properties A, B, and C, and even though you received $12,000 in distributions in year 3, your taxes most likely still haven’t
gone up.

Part-way through the year, the lead sponsors on property A send word that the property renovations are complete and they’re seeking to sell. Because this property is in a hot submarket in the fast-growing Phoenix metro area, the listing gets a lot of attention and is soon purchased.

You receive your original $50,000 investment in property A plus an additional $25,000 in profits, for a total of $75,000. Woohoo!!

You play it smart and invest all $75,000 you received at sale from property A plus the $50,000 you’ve saved in year 4 ($12,000 of which were distributions from properties A, B, and C) into property D — a total
of $125,000.

You now have a total of $225,000 invested across three syndications ($50k in property B, $50k in property C, and $125k in property D), each with a return averaging 8% a year. This should yield about $18,000 annually in cash flow distributions —$4,500 a quarter (average $1,500 per month).

Year 5

By this time, property B (your investment from year 2) has completed its renovations and is sold. You receive your original $50,000, plus an additional $25,000 in profits.

Last year’s deals worked beautifully, so you decide again to roll that $75,000 plus this year’s $50,000 savings ($18,000 of which came from the previous year’s distributions) all into property E, bringing your total invested capital to $300,000 across properties C, D, and E.

Now your distribution checks start really looking good, totaling about $6,000
each quarter (averaging $2,000 a month, equivalent to some people’s net
monthly salaries).

When it’s time to do the previous year’s taxes, you receive K-1s for properties A, B, C, and D. Unfortunately, property A’s K-1 no longer shows a paper loss since it sold for a profit; now it shows the $25,000 capital gain. However, the unused depreciation that’s been carrying forward from properties A, B, and C, plus the first-year depreciation from property D that
was purchased in year 4, more than offset property A’s capital gains, meaning you most likely still owe no taxes on your
investment income.

Years 6 – 7

Now that you’re getting the hang of it, let’s start moving a little more quickly.

Property C is sold in year 6 (the original investment was $50,000), and property D is sold in year 7 (the original investment was $125,000). Each year, you invest the returns you receive from the deals that exited plus an additional $50,000. So in year 6 after the sale of property C, you invest $125,000 in property F, and in year 7 after the sale of property D, you invest $237,500 in property G.

Saving that $50,000 a year is becoming steadily easier because your distributions are growing so large. This gives you more breathing room in your finances, and you’re still earning your salary at work, so you decide to take the family to Hawaii for vacation instead of going to the lake again.

By the end of year 7, you have a total of $487,500 invested. Every quarter, you get distribution checks for the active deals totaling $7,500 in year 6 (about $2,500 per month, or $30,000 per year) and $8,750 in year 7 (a little over $2,900 a month, or $35,000 a year).

Your investment income is now nearing a decent career path’s GROSS salary. It’s like you’ve got an invisible earner in your home generating income, but not adding to your expenses. And because of all the depreciation benefits, you’re continuing to show paper losses, so all this cash flow isn’t being taxed — as long as you’re buying enough new property in the same tax year an older property sells.

Years 8 – 10

Another three years pass.  The kids are in high school and looking at colleges, you’ve checked a few life experience must-haves off the list, and you’re maturing into the life of a confident real estate investor.

You’ve now been investing $50,000 every year for nearly 10 years, plus the profits. The first seven deals have exited, each time leaving you with a healthy return
to reinvest.

Over these 10 years, you’ve saved up hundreds of thousands of dollars while still living off your salary, which is no small feat. You’re smart and money-savvy, which is why you put that into syndications instead of mansions and Maseratis. But you can afford a nice vacation or an occasional expensive dinner out, too. So let’s do the final round of math!

In each of years 8, 9, and 10, syndication deals sold and left you with healthy returns to roll into the next investment. By the end of year 10, you have over $880,000 invested in multiple real estate syndications across multiple markets and asset classes, producing $70,500 in diversified passive income per year. That’s more than the United States median household income!

What Life Looks Like Beyond Year 10

At this point, you earn passive income of over $70K per year, and that figure grows every year. You love your chosen career, so rather than quitting, you opt for a freelance lifestyle, giving you more flexibility to control your own schedule and to take longer trips with your family.

You enjoy fun, once-in-a-lifetime experiences and travel. You snowboard at the best slopes, charter a sailboat in the Caribbean, and take up skydiving, earning your license and buying your own equipment. Good thing for those monthly
distribution checks!

You have the ability to donate often to charities and non-profit organizations that you love, treat your spouse to occasional shopping sprees, and be an active volunteer in your community.

Perhaps the passive income funds your child’s college tuition, an early retirement for your parents, or a down payment on your dream home.

Most of all, you rest easy with the confidence that you’ve created a lasting legacy for your heirs. Someday, they’ll continue to invest and build their own passive income. You won’t have to worry about being a burden on them in your old age.

Disclaimers

You probably already know most of what I’m going to say here, but it’s important
to reiterate.

Real-life investing is not clean and easy like the assumptions made to write this example. You can’t predict exactly when a deal is going to exit, cash flow returns might not be exactly 8%, and you may not be able to find a great deal to invest in right when you’re ready for one.

The scenario we walked through together in this post is based on an average hold time of 3 years before the deal exits. While most of our syndications project a 5-year hold, most of them do exit sooner than that, often right after the renovations are complete.

You should also notice that the example didn’t necessarily include reinvesting the cash flow, which would further accelerate the growth. Rough calculations for capital gains taxes and depreciation recapture at the sale of each property have been incorporated, though the operative word here is “rough.”

In the end, it’s very unlikely you’d see these exact numbers. It’s possible that the numbers could grow more slowly; however, it’s also possible that they’d grow much faster. Some properties would probably do better than the projections, and some may do worse.

This post is not meant to be a prescription. Rather, it’s to demonstrate how diligence and patience, together with compounding returns, can dramatically change the course of your financial future.

Note: Different investors who invest the same amounts in the same deal can 
have different tax consequences based on their unique financial situations 
(e.g., marital status, other investments, jobs, etc.).  Always check with your own CPA or tax advisor on your personal situation.

Conclusions

Investing passively in real estate syndications is NOT a get-rich-quick scheme — quite the opposite, in fact. It’s more of a get-rich-slowly-but-steadily process.

It’s almost like farming. You have to plant the seeds, then wait one or more seasons before the harvest is good.

Dabbling in house hacking, private lending, and out of state rentals might be your entry point. And if so, that’s great, because you’re on to something. Hopefully, this 10-year plan opens your eyes to something that could be even bigger and better.

There’s rarely a well-trodden path, and it’s even less often laid out this clearly.
Real estate is worthwhile, but some investments are wins and others aren’t. This method of $50,000 at a time is a predictable, operable process anyone can implement to begin their syndication journey.

And that’s why we’re investing in these syndications right alongside you, one $50,000 check at a time. And, like you, we look forward to the next ten years using this stable, intentional, and low-hassle path toward growing our passive income and wealth.

Are you ready to get started building your wealth? Click here to join us in the BluSky Investor Club, a group of like-minded people seeking to live life on their own terms by growing their wealth through real estate syndications. We’ll help you learn more and guide you through you’re first syndication when you’re ready for it.

 

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