6 Reasons Real Estate Syndications Are a Smart Investment
6 Reasons Real Estate Syndications Are a Smart Investment
(And How They Can Even Be Better Than Traditional Real Estate)
Unless you live under a rock, you probably know someone (it could even be you) who was made rich by real estate investing. There are countless benefits to investing in real estate- from tax write-offs to constant money flow, access to financial leverage, and protection from inflation.
HOWEVER, Traditional real estate investments have their own risks, as well! Most commonly, properties go vacant, tenants don’t pay rent, and property-related risks can affect you at the most inconvenient time wiping away any potential cash flow you were expecting. That’s not to mention the “worst-case scenario” landlording problems like squatters and nightmare tenants that (for some reason) are highly protected by many state legislatures.
So, what can you do to protect yourself from those risks while reaping all the rewards? Sure, you could move your money somewhere where you’d only get a ~4% return, barely outpacing inflation. But you want real estate level returns!
We have the solution. In 2020, Real Estate Syndications are quickly becoming the go-to fix to many of these problems, and all without taking away any of the benefits. Do we have your attention yet?
1) Reap High Returns Without Exposing Yourself to Personal Credit & Liability Risks
There are usually two sides of the operating agreement in Real Estate Syndications: the “GP Side,” including the managing members who are responsible for the decisions behind the investment, and the “LP Side,” listing the investors who bring only monetary investments to the table. There will never be a circumstance where “LP Side” investors are responsible for making management decisions of the investment. That means there is no risk that a judge could find the “LP Side” investors responsible for decisions made by the “GP Side” during the investment’s performance. (Translation: you are ensured to be free and clear from any lawsuits that could arise because of managerial decisions.)
While a traditional form of protection, such as forming an LLC, is always advisable in personal real estate investments, it seems there is another layer of safety added in Syndications. When you invest in a real estate syndication with a sponsor, you add another barrier of protection between you and any liability resulting from the investment.
Adding another layer of protection between you and the acquired real estate asset allows you to benefit from another person’s expertise with your capital, decrease your liability, and earn a significant return, all as a passive investor. This core concept is the driving force that makes Real Estate Syndications such a great opportunity.
2) Make Money Passively While You Sleep
Perhaps the most appealing aspect of real estate syndications is that you can be a passive investor. The investor is almost always removed from the asset management, or the operational perspective of the investment. (Translation, your invested capital is doing the work, not you.) Upon your investment in a syndicate, a sponsor or manager will handle all aspects of the investments performance. Managers of these sorts of deals are usually paid a portion of returns based on how well the investment performs, so they have an incentive to manage your investment very wisely. (A Win / Win)
This system allows you to be completely passive as an investor. After funding, all you’ll need to do is cash checks. Don’t forget that there is still homework to be done before any sort of investment like vetting the operator, the market, and the deal. The risk of fraudulent activity does increase the more layers of separation between you and the risk, so always be sure that you’re investing safely and wisely. Building relationships with sponsors, checking out the asset in question, and running background checks are all common practices before investing.
3) Leverage the Expertise of Professionals
A major advantage of investing in syndications is being able to invest alongside experienced sponsors who have a track record, and can show you that track record. An additional advantage possessed by syndicates is the relationship they have with vendors, brokers, lenders, and managers. A broker who consistently sells a syndicator, multi-million dollar complexes, will spend considerably more time finding them great deals while also providing valuable market insight. The broker will send the syndicator; off-market deals, profitable value-add deals and will practically become a member of the syndicator’s acquisition team- an amenity that is unavailable to new or smaller investors.
It’s the investing advice you’ve heard your whole life- diversify, diversify, diversify. It’s hard to think that you could diversify in real estate apart from simply owning multiple properties outright. And yet, because even inexpensive properties can range from $100,000-200,000, many investors consider investing in real estate syndications in order to diversify even further and make their portfolio more stable by diversifying across a couple different sponsors, asset classes, and geographies.
Real Estate Syndications allow you to pool your money with other investors, distributing both the risk and reward. This strategy allows you to experience the benefits of diversification within real estate, without shelling out several hundred thousand dollars. For example, if you only have one property in your portfolio and that property becomes vacant, you will receive no income for that month. However, if you own 1% of a 200 unit apartment complex and someone moves out, you’ll still cash flow just fine. This stabilizes real estate investments in your portfolio- also assuring peace of mind for you.
5) Larger Opportunities are Available to You
Let’s talk about commercial real estate. The purchase prices for these assets can range from $5,000,000- $500,000,000! Can you afford that on your own? (Congrats if you can!) Real estate syndications give you the ability to pool your funds with other investors, and that means you are able to get exposure to these high ticket assets, and you can do it without the huge payment you’d normally need.
Did you know that the majority of commercial real estate you see today was purchased using some form of a syndicated structure? It’s true, it can open many new doors for your real estate portfolio. Pooled assets grant you access to invest in shopping centers, mobile home parks, self-storage deals, and more commercial buildings that can offer attractive returns and allow you to diversify out of the volatile stock market.
6) Tax-Deferred Status
When you invest in pooled investments, a whole new world of tax-deferred status becomes available to you. You are able to compound 100% of the investments proceeds for years. You can continue to 1031 exchange forever and eventually pass your portfolio down to your heirs (that’s my plan!). Or, when the property is sold and you elect not to 1031, the investors will have to pay taxes on the gains they receive. Even so, simply allowing your pre-taxed money the chance to compound can completely change your portfolio’s trajectory!