As a Real Estate Investor, you might already be familiar with the standard way of investing – owning real estate directly. You find the property, apply for the mortgage, pay the down payment, close, and then manage the property (whether personally or through a property manager). This is usually the case for most investors who invest in 1-4 unit properties and often dream about going bigger. There is another way, however – Real Estate Syndications. We will go over some of the benefits of investing in syndications and how WealthSyndy can help you evaluate and track your investments.
Definitions
Syndication is a temporary structure that allows multiple entities (individuals or companies) to pool their resources together to share the rewards and risks in an investment. Simply said, a syndication is a group of entities that are investing with the same goal. In this example, we will focus on you – the passive real estate investor. You are interested in committing your money and letting them work for you, not in the day-to-day management of the asset.
There are a few terms you want to understand as part of this article:
- Limited Partner (or investor) – this is you – the passive investor. You commit your monetary contribution and let go. Yes, we know it might not be that easy…
- Sponsor/ General Partner – this is the management body of the syndication. This is one of the most important items you need to concentrate on when deciding on investing – Choosing a Sponsor.
As a passive real estate investor, you and multiple other investors will pool your money with a sponsor in order to acquire and later sell an asset for a profit.
Who can invest?
Before we dive into the benefits, we want to make sure that you understand if you qualify for this type of investment. First, the easy way – Accredited investors. For a detailed breakdown, you can also read Accredited vs. Sophisticated investors and their investment options article.
Accredited Investors
Being an Accredited Investor makes the entry into Real Estate Syndications simpler because the offerings are more abundant. Read our expanded article on the topic for a detailed description, but here is the short version. You are an accredited investor if you:
- Have a net worth of more than $1,000,000, excluding the value of your primary home
- Make $300,000 as a married couple or $200,000 individually
The above list is not comprehensive, so please make sure to check the full requirements. Being in this category of investors allows your Sponsor to proactively solicit and advertise to you. This is usually where you will find the most available deals, also known as regulation 506(c).
Sophisticated Investors
The SEC defines Sophisticated Investors as those who ” have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment “. Definitely a lot of room for interpretation. The biggest drawback is that usually, the number of sophisticated investors is limited to 35, and this is only if the Sponsor decides to create their offering in alignment with rule 506(b). This makes these syndications harder to find.
Real Estate Syndication Benefits
1. Minimal time commitment
As a passive investor, you are hopefully looking at minimizing the time spent managing your investment and maximizing the time enjoying the profits of your investment. This is where real estate syndications shine – yes, you need to commit time to do due diligence in the beginning, but afterward, it is largely set it and forget it. You will receive scheduled distributions, yearly tax statements, and your proceeds from sale upon asset liquidation.
2. Expertise in Asset Management
Choosing your Sponsors is probably one of the most important steps you will have to take in your investment journey. The Sponsor is often the one that makes or breaks an investment. By choosing the right Sponsor, you are choosing your money partner for the next few years and are relying on their expertise to ensure that the asset thrives and performs. The sponsor will do everything from finding the asset, managing it through upgrades and issues, preparing it for the market, and ensuring that the right buyer is found. These skills take years to develop, and as a passive investor, you should not have to worry about the details, this is the Sponsor’s job.
3. Economies of Scale
One of the biggest advantages of investing in Real Estate Syndications is the ability to invest in assets that are more resistant to the effects of vacancies. Let’s take an easy example – a Single Family Home and a 100-unit apartment complex. A month vacancy for an SFH means over 8% of the yearly revenue is lost. A single-month vacancy can wipe out a large amount of the yearly return. The same vacancy will impact the apartment complex by only 0.08% of the yearly revenue.
4. Diversification
Real Estate Syndications come in a lot of different asset classes, locations, and sponsors. This allows you to gain a broader exposure to the market than committing to a single asset class, be it individual homes or commercial assets. As an example, with $200,000 you can invest and buy a single multi-family asset or invest in 2 different assets like Storage and Multi-family, or two different states. You gain a broader exposure, and therefore you basically do not put all of your eggs in one basket.
Conclusion
Investing in Real Estate Syndications can be a great investment choice. These are only a few of the benefits that are available to you as a passive investor. Make sure also to read – Reasons not to invest in Real Estate Syndications.
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Photos by Rodion Kutsaiev, Colin Lloyd, Uwe Hensel, Courtney Cook, Anders Jildén, Emmanuel Ikwuegbu, Jac Alexandru on Unsplash.
