Real estate has been a staple in many of the wealthiest portfolios for decades and most considers it the fastest way to grow wealth. If you want to invest in what the rich do, get involved in real estate! Real Estate is a limited commodity that has a proven track record of lucrative returns, the offer of diversification, and resilience to economic recessions. One may hold a number of real estate assets from land to single family homes, and even multifamily homes and storage buildings.
One type of asset structure that is often over looked, is real estate syndication, specifically for large multifamily apartments, raw land development and self-storage facilities. Being a good real estate investor take lots of time, education, and networking. You also have to learn to either love or out source the property management. Not every investor has the time or desire to search and underwrite hundreds of properties to find a gem to acquire. By getting involved with trusted real estate syndication partners, investors like you can gain access to deal flow and the ability to invest in high quality real estate without the hassles of property management. Here are the top 10 reasons why real estate syndication is a great passive investment vehicle.
One of the biggest reasons investors diversify their real estate investment portfolio is to mitigate risk exposure. The phrase “don’t put all your eggs in one basket” applies directly to this concept, as spreading your investment across a broad spectrum is how investors balance risk and reward in their investment portfolio. What I love best about investing in real estate syndications is that it's relatively easy to build a framework around diversification by niche, region and sponsor.
Niche Diversification - Many investors consider investing in real estate syndications in order to get better diversification within real estate asset classes. Typically each sponsor has a specialty in a specific type of asset class that they have a competitive advantage in. One should be cognizant of diversification in your real estate portfolio, so spreading investments amongst apartments, self-storage, mobile home parks, single family residential, commercial and raw land development is a great way to achieve this. You must understand asset cycles and trends. Some areas like office may not do so well in a down economy where more stable assets like apartments, self-storage and mobile homes may hold up nicely.
Geographic Diversification - Another form of diversification within real estate syndication is geographically. Actively investing out of state can work, but passive investing through syndication deals is ideal for out of state investors looking for better value in top markets. Some of the best deals are out of state in growing markets. It can be very difficult trying to be an active out of state investor due to competition, relationships, market knowledge, etc., but if you align yourself with a reputable, successful operator in that local market you can gain access to some great deals you otherwise wouldn't have had access to.
Sponsor Diversification - Vet sponsors carefully and don’t stay married to one sponsor forever. Ensure they are growing their depth with key management for continuity and that they are staying true to their philosophy and model, which should always remain conservative and tested. When you invest with multiple sponsors you gain a perspective that allows you to sniff out the good deals from the bad deals since you'll see so much more deal flow.
2) Access To Large Investment Opportunities
Some of the best real estate investment opportunities in the world are in commercial properties. However, the purchase prices for this asset class can range from $5,000,000 - $500,000,000! Because real estate syndications give you the ability to pool your funds with other investors, you are able to get exposure to this asset class, without a seven-figure investment. When syndicators create investment opportunities like this, they allow investors with $25,000 - $100,000 to invest in these large scale deals. Therefore when they create the PPM or operating agreement, there will be a minimum investment that can be as low as $25,000. This opens up the doors for all investors to invest in opportunities that they would never otherwise be able to invest in. Once you start using this pooled investment model, you can get exposure to apartment communities, self-storage deals, mobile home parks and many other amazing cash flowing opportunities.
3) Ability To Invest Completely Passively
Possibly the most beneficial reason to consider investing in real estate syndications is that you have the ability to be a passive investor. In most investments like these, the investor is completely removed from the asset, the management, or the operational perspective of the investment.
When you invest in syndicated investments, the syndicator/sponsor will handle all aspects of the deal such as, doing due diligence, locating a profitable property (or properties), hiring and managing the property manager, sending out quarterly reports, handling investor relations, and so on. Investors will pay the syndicator via the performance of the deal with a split of the cash flow and appreciation. (Anywhere from 80/20 to 50/50 split for the investor is common but I typically see a 70/30 split.)
In exchange for the sponsor fee, you are able to be completely passive as an investor. Once you fund the opportunity, the only thing you need to do is sit back, relax, and collect payments in the form of quarterly or monthly cash flow distributions and lump sum payouts at refinancing and disposition.
4) Tax Deferred Status
When you invest in pooled investments that utilize Limited Partnerships and LLCs, a whole new world of tax-deferred status is open to you. This structure allows you to compound 100% of the fund’s proceeds for years, as long as you do not distribute the gains outside of the fund. Under the new law, investors in pass-through entities like commercial real estate will greatly benefit from an additional 20% deduction. For instance, let’s say you are investing in a syndication where the sponsor is purchasing a fully occupied apartment building and holding it for cash flow. Because of depreciation, interest payment write offs, expense write offs, and so on, your annual tax exposure for this opportunity will usually be zero or even NEGATIVE, even if you receive thousands of dollars in distributions from the property’s cash flow. Of course, when the property is sold, the investors will pay taxes on the gains they receive from distributions, but giving your money the chance to compound without paying taxes can compl