We hope you enjoyed the article What is a Real Estate Syndication and 4 reasons to invest in one. We are going to dive into a few reasons why you might not want to invest in a Real Estate Syndication. Everyone has different risk tolerance, control tolerance, and diversification requirements.
1. Liquidity (or lack thereof)
Investing in a Syndication comes with a serious commitment in terms not only of funds but also of time. The typical syndication target hold period is anywhere between 5 and 10 years. This is not to say that the time cannot be shorter, but this will be very dependent on the market and how favorable the exit timeline is. Sometimes, if the numbers make sense, the Sponsors will decide on an earlier exit; however, you need to be prepared to commit your funds for the foreseeable future.
This is very different from what most investors are used to with the stock market. With the stock market, you always have an easy exit. So make sure you are comfortable committing your hard-earned $$$ for the long haul!
2. Minimum Commitment
Typical minimal commitment for a syndication ranges between $25,000 and $100,000. This minimum will be set by the sponsor. Note that some sponsors might have a lower or higher initial minimum commitment for first-time (with the sponsor) investors. If you feel uncomfortable with the amount required, you can always ask the Sponsor for a different minimum on your first investment. Depending on their funding state, they might be willing to go with a lower amount.
One thing to note is that sometimes on crowdfunding sites, you might find a lower minimum, so we recommend that you check them out!
On the plus side – you have to go through fewer due diligence passes as you are investing in bulk!
3. Loss of Control
We hear this a lot from other investors, let’s call them regular investors, about the fear of “giving up control”. Believe us, we understand, and we used to be in the same mindset before we realized that my time and expertise lie in another place. Investing in a Real Estate Syndication by default (almost always) means you are giving up control. This is on purpose, and it is this way so your Sponsor can do what is best for the Investment. This is why selecting a Sponsor to invest with is one of the most important steps you will have to take on your path to financial freedom!
There are situations in which an inexperienced investor might freak out and want to liquidate – this is why the Sponsor is there to ensure that the Investment makes it through both good and bad times.
4. The Unknown
A lot of times when we talk to different investors, they always think that somehow a Real Estate Syndication is too good to be true. You give someone money, they give you regular cash distributions, and then you get a large chunk on sale (if everything goes well, of course). Other times the investors feel like it is too new and unknown. They cannot just go to Google and see what today’s price for their investment is. Yes, it is different and new; however, the potential for growth and diversification should not be dismissed.
That is not to say that Syndication investment is without risk. As with all investments, there is a risk of losing the totality of your investment, which is why it is important to properly evaluate your sponsor and the deal you are planning to invest in.
Conclusion
We hope you enjoyed our counter-view on why you should not invest in a Real Estate Syndication. We do not blame you – there is an investment style for everyone. The lack of liquidity, big initial commitment, loss of control, and the novelty might not be for you. And it is OK! However, if you think this might be something interesting for your future investments, don’t forget to try out Wealth Syndy for your portfolio view!
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Photos by engin akyurt, César Couto, Chris Leipelt, Mikk Tõnissoo, Victor on Unsplash.
