I've been thinking about getting into REI. RE Syndications sound appealing since I've heard its more passive than typical REI as I could just hire a manager that has way more experience than what I have, and possibly get higher returns investing in expensive commerical RE instead of just SFH or whatever

From what I've gathered, index funds usually return around 7% on average each year. 

From what I've gathered about investing in syndications as a limited partner, it is typical to get around 15% annualized total returns. Is this a reasonable return?

But since being a limited partner would involve a lot more time and effort than index funds, as you would have to find the syndicator, choose what city to invest in, the neighborhood, etc, how is this better than just sticking to index funds?

@Jerry Kim

I don’t think there is a right answer to this. If you’re happy with 7%, no tax benefits, and no due diligence then maybe index funds are right for you. If you’re willing to put in the work to find the right sponsor and get 15% then maybe going passive on syndications is right for you. Really depends on goals, risk tolerance, etc not the investments themselves, in my opinion!

With as cheap and plentiful as cash is, I’m always curious why syndicators give up so much 

@Jerry Kim

I think @Lee Ripma summed it up pretty well for you. This is totally your personal choice. You need to weigh in pros and cons of both to decide which one makes the most sense in your personal situation. Things like time commitment, control over deal, higher tax bracket, and many more should be considered making a decision as to which strategy to take. Here're a few posts to guide you in the right direction:

https://www.biggerpockets.com/member-blogs/10850/84063-private-equity-meets-stock-market

https://www.biggerpockets.com/member-blogs/10850/86626-the-pros-and-cons-of-investing-via-real-estate-syndication

https://www.biggerpockets.com/member-blogs/10850/84064-what-type-of-investor-to-be-when-i-grow-up-active-or-passiv

@Jerry Kim You're talking two very different vehicles. The main difference being that one is leveraged and one is unleveraged. Risk-adjusting your returns is important so you can better compare the two. As has been already mentioned, tax advantages heavily favor real estate investing. Both can be passive, but still require you to do your education up front and make sound decisions. 

Even within the syndication world, no two deals are the same. Some are deep value add that won't cash flow for a couple years, some cash flow day one. Some are financed using bridge loans, some have low fixed-rate debt. 

All that to say, you need to figure out what your risk tolerance is and how real estate can fit into that, not vice-versa. 

Reach out if you need clarification on anything or have questions. 

@Jerry Kim  

Great points made here in the thread. Totally agree with @Lucas Miller . I think a big "a-ha" a lot of us have when we cross that first curve getting into REI is how rental real estate can make money for you in multiple different ways (cash flow, appreciation, equity pay down, tax advantages, etc). Additionally, the fact that it's a hard asset you can see and touch, that you can leverage and insure, and have some level of control...much more than an index fund.

@Jerry Kim

But since being a limited partner would involve a lot more time and effort than index funds, as you would have to find the syndicator, choose what city to invest in, the neighborhood, etc, how is this better than just sticking to index funds?

You wouldn't be choosing the city and area. Perhaps research what is proposed to you, yes. That's a LOT less work than finding the needle in a haystack. 

Regards to why do it?

1. it's a higher rate of return
2. there is an underlying asset
3. tax advantage
4. DIVERSIFICATION!

How comfortable would you feel at 65 with a $5mm portfolio in IBM, or the SP500 index, or a mix of 50% stocks, 25% cash and 25% bond? Me personally I wouldn't mind a good chunk of that 5mm in REAL real estate (not a REIT) earning me passive income. But that's just me.

Originally posted by @Cody L. :

With as cheap and plentiful as cash is, I’m always curious why syndicators give up so much 

They just don’t know what they don’t know. I have never done deals with a pref and give up 70% of the equity. In fact the most I ever offer is 50% equity without a pref. Or just straight pref 6-8%

@Jerry Kim lots of great advice has been provided here. The other thing to consider is liquidity. You can’t get your money out of a syndication until the project cycle is complete. Most have 3-5 year terms and some 10 or more.

@Jerry Kim Yes, getting 15% annualized total returns is very normal for many syndications. There is a due diligence process you should go through when vetting syndicators, and it doesn't take as long as some people think. You could go with a commercial real estate fund model to diversify across properties, operators, and geographies. Selecting quality jockey first (syndicator), then the horse (property), is usually best. Track record is everything.

As far as allocations...invest in what you know best. But it's a good idea to diversify across multiple asset classes.

@Jerry Kim , it's common to see a 15% IRR on pro formas, but that doesn't mean that you'll actually realize a 15% IRR. Especially with us coming to the end of a cycle, returns in the coming year may be quite lower. One can't understate how important compressed cap rates have been to multifamily's success over the last number of years. If cap rates go back up, a lot of pro forma profits will evaporate into thin air.

The 7% IRR you expect from index funds is backed by decades and decades of market history. The New York Stock Exchange has been around much, much longer than even very experienced syndicators, and it returns on average and over a long term a high single-digit return. Public markets are liquid and efficient, which means volatility is visible on a daily basis. (Whereas, in real estate, nobody could see the bottom corroding under us in 2006 and 2007 until it just wasn't there in 2008.) So, pros and cons, but as a longterm investment, little has as strong a track record as publicly traded stocks.

Just injecting a balanced perspective into the (rightly) real-estate-favoring conversation!

@Alina Trigub Great resource post!

@Jerry Kim on top of what everyone else has said, take some time to compare how various CRE asset classes have performed in a down market compared to the S&P 500. Downside protection is a big reason a lot of folks include CRE in their portfolio.

I'd also argue that vetting Operators isn't THAT much more intensive than vetting funds, especially when you know the fundamentals of what to look for and can you streamline the process. Use this to help you out:

https://www.biggerpockets.com/member-blogs/10191/85359-how-to-vet-a-syndication-sponsor