📌6 Incredible Benefits of Passively Investing in a Real Estate Syndication (group investment). 👇
1️⃣ Cash Flow - Real estate syndications typically provide monthly or quarterly distributions which you will receive directly to your bank account. Cash flow will allow you to live a life by design NOW VS. waiting until you retire so you can use your 401K.
2️⃣ Passive Income - Investing in a real estate syndication allows you to make a one time investment in the beginning, and then sit back and watch it grow. You are essentially collecting 'mail box money' on a hands off investment while experienced operators manage the asset.
3️⃣ Returns - Real estate syndications, on average, offer higher returns than other investments. We typically look for opportunities where we can provide our investors at least a 10% cash on cash return, at least 100% return, and at least a 15% IRR (with a 7% or 8% pref).
4️⃣ Experienced Team - Investing in a real estate syndication allows you to leverage an experienced team like we have at Next Level Equity. We do all the work so you can focus on things that matter most to you.
5️⃣ Diversification - With real estate syndications, you are able to invest in many different high growth markets. The investments do not necessarily have to be located in your home city.
6️⃣ Tax Advantages - This is HUGE! Investing in real estate can often help lower the amount of taxes you owe, even while you’re making great returns on your investment.
Did I miss any? What are some other benefits from investing in a syndication?
I recently invested in my 2nd syndication. I also personally own 2 rentals.
I think you've nailed it.
There is a ton of leverage as a passive investor. The amount of time required to passively invest is a fraction of the amount of time required to source and acquire your own property (especially if you have a busy job, etc.). While the returns might be lower (they may not be!), and you have less control, there is an incredible amount of leverage when you trust the syndicating team.
- Buying my 2nd personal investment took a ton of time - find the deal, gather all the paperwork for the lender, answer all their questions, close, clean, list, get tenants, etc.
- Investing in my 2nd syndication required me to look at the deal and the team then wire funds once everything checked out. Way less work/stress.
@Scott Shafran Amazing! Thanks for sharing this Scott. What markets have you invested in so far?
Spot on- it is also a great way to learn about syndication if you are looking to sponsor a deal yourself in the future.
Very agree with this, especially with good track record sponsor and good industry/area to invest.
All good except for #6.
It is grossly overrated. It only helps those who can claim "real estate professional" tax status. Everybody else can only watch their passive losses being suspended for a long time until something gets sold.
right, it's good for GP but not to the LP mostly as their tax structure is different.
I also want to add additional benefits of RE syndication:
There's almost absolutely no way to enter a niche market other than via syndication esp. for sector like MHP, self storage, medical, industrial, NNN or dentist office.
Originally posted by @Justin G. :
@Scott Shafran Amazing! Thanks for sharing this Scott. What markets have you invested in so far?
My 2 SFR's: 1 is in Columbus, OH (it was my first home, turned rental) and the other is just north of Wilmington, NC. Syndication -> Georgia.
Thanks @Justin G. for your blog. I wrote a similar article on my site using each letter of "PERFECT" to make my case for passive investing in syndications.
Passive - not much to do after vetting the sponsor and deal
Equity growth - from principal paydown and appreciation
Reduced risk - from an investment and legal standpoint
Forced appreciation - the best and most reliable kind
Economies of scale - one management company to take care of the multifamily or self-storage asset in generally one location
Cash flow - monthly or quarterly distributions
Tax benefits - all of the tax advantages should be pro-rated for the passive investor. Your cash flow should be tax-free if the sponsor does a cost segregation study. Bonus depreciation may be going away so it may be a good time to stock up on this type of depreciation since it can be carried forward. The multifamily assets that I have invested in have given me huge passive losses in year one.
Syndications have solid returns but don't compare to actively investing in value add deals yourself. But from a passive perspective, a Syndication is tough to beat.
@Justin G. Thanks for sharing these. Indeed real estate is about partnership. Partnering with bigger teams on bigger projects often means more experienced teams. The risk profile often decreases due in large part to this. So I would argue syndications become "less of a risky" investment then say buying into a four-plex for your first deal.
Regarding the tax benefits, it is entirely up to the investor to structure their taxes to best receive the depreciation. The syndication supplies the 100% bonus depreciation benefits, yet it will always be on the investor to work with a CPA to best receive said depreciation.
It is true as mentioned, by @Nick B. , the best benefits go to those who can classify as a Real Estate Professional as they can receive 100% passive loss against ordinary income in these cases. I've seen this play out with married or now joint-filers whereby 1 person is the real estate professional and thus the benefits are used against the W-2 income of the other person. IF the real estate professional currently holds a job/business active in real estate this qualifies in many case however, Mostly this simply requires purchasing an active sfh or duplex in same year to combine the losses under one grouping.
So will the maximum benefits always apply to everyone no, but then again, not everyone invests for the same reason or will take the actions needed. The opportunity is there though. of course consult your cpa ;)
@Chris Levarek Thank you for clearing this up! I really appreciate your thorough response 👍
Great summary @Justin G. ! I'd also add there is an educational aspect you gain as an investor, especially if this is your first time through the process. Many of my investors have told me they wished they had learned about these possibilities many years ago. Once the door is opened to passive investing in RE, they start to think of all the possibilities for future investments and opportunities in adjacent areas as well (debt investing, etc).
@Nick B. , I am not an accountant (gotta CYA) but am both an active and passive investor myself. My view is there are some very real tax benefits regardless of your QREP status. While the cost seg and massive pass through losses may not be realized, simply receiving payouts that get classified as owner distributions on a K-1 already defers taxes (assuming the property is being operated from a tax perspective at a break even or loss). Classifying as a distribution both defers current year taxes and pushes the profit from sale (which from a tax perspective will look at that write down of capital balance) as a long term capital gain. For many investors, this means you deferred any tax on your distributions at the ordinary income rate, and paid it back at a much lower rate.
Take the time value of money for years of deferrals combined with an effective rate at roughly half your income rate and you have a fairly sizable tax advantage for any person. Of course, this assumes the sponsor is classifying your payouts as distributions.
@Justin G. and others... There is one disadvantage to syndications that no one has mentioned here: You lose the thrill of the chase. I mean sure, there is a lot of effort and diligence required to find the right sponsor. And that step should never be skipped. But after that step, investors should be able to sit back and watch their cash flow and equity grow. Then what will an investor do with all that free time?
Before I discovered this strategy, I got the thrill of the chase... but lost money on a significant portion of deals. And pulled out my hair in the process! I LOVE investing in syndications now. This has been the most profitable venture of my 20+ year investment career.
Paul Samuelson, the US's first winner of the Nobel Prize in Economics, said, "Investing should be like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." Effective syndication fills the bill here. But it can be boring. And I'll choose boring every day of the year.
Any benefit can be framed as a drawback in many cases. A lot depends on your goals and what story you're trying to tell.
One of the main benefits I see of people investing passively is it FORCES them to think about the value of their time and how that should be imputed into "return on equity" calculations. The money generally doesn't work as hard as people claim when it gets above about 15% because a lot of that is generally labor that is poorly accounted for.
@Bryan Hancock I totally agree! Thank you for mentioning this.
@Paul Moore Great advice! Investing is definitely a slow process.
It can be boring, but like you said, that's safe. I would choose safe over risky any day to have peace of mind.
Thanks for sharing some of your wisdom from your 20+ years of experience!! Hope to hear more.
@Evan Polaski Thanks for helping clarify this! I appreciate that.
@Scott Shafran How have your syndication deals been performing? Are you happy with your decision and do you see yourself investing again in the future?
All great comments. Couldn't agree more that passively investing is an excellent way to build wealth. Don't sweat the tax issue. The deal should make sense without the tax issues. Remember, the economics of the deal matter most - it has to make money!
Most people have a career and are looking for a place to put their money and investing in a top notch multifamily investment firm is a very smart way to go. Just be sure to vet them.