Tag: investing

In some of the most expensive real estate markets in the US, a two-bedroom home may sell for over $950,000. 

IF you were considering buying that thing, you’d have to put hundreds of thousands of dollars down, just to buy a starter home.

In a real estate market that’s overheated, does the traditional narrative of “get married, buy a house, have kids” make sense financially?

Or does it make sense to go against conventional wisdom, continue renting, and invest that money into a real estate syndication instead? 

Here, we’ll explore the math, as well as the potential risks of two paths a young family might take. 

1. Savings up $200,000 to buy a single-family home
2. Renting a home and investing that $200,000 in real estate syndications

Scenario 1 – Saving up Cash to Buy a Primary Residence

The traditional assumption or societal expectation in many cases is that when a young couple gets married, they begin the process of buying a home together. 

Let’s pretend Nikko and Zara just got married. They’ve been planning this for a while, so they’ve been saving and watching their local real estate market. 

They quickly find a beautiful three-bedroom home and put it under contract for $1 million. They plan to put 20% (or $200,000) down. (For simplicity’s sake, we’ll keep closing costs out of this scenario.)

Nikko and Zara get approved for a 30-year mortgage loan for $800,000 at 5% interest. Everything goes smoothly and soon, they have the keys in their hand to their beautiful $1 million home.

One month later, their first mortgage bill arrives for $4,295. They are well-paid tech professionals, so this is well within their budget.

Over time, they have their first baby, experience their first roof repair, have the water heater replaced, and decide foundation repair is in order. Ah, the joys of owning property.

Their high-income professions cover the costs of these unexpected repairs. 

Ten years later, they’ve got two tweens, a bulldog, and it seems like they’re outgrowing what once seemed like a spacious home. 

Of course, Nikko and Zara have diligently paid their mortgage each month, which has also reduced the principal on their $800,000 loan. 

In ten years, they’ve paid out about $515,000 in mortgage payments ($4,295 x 120 months). About $150,000 applied toward principal, which leaves about $650,000 as a remaining balance. 

This also means about $365,000 went toward interest, Ouch!

If they sell now, they’ll receive their original $200,000 down payment back, $480,000 in equity from appreciation, and $150,000 in principal that they’ve paid over the years. Which totals about $830,000 in their pockets at the sale.

$830,000 is nothing to sneer at. Especially when you remember they only started with $200,000!

This is the path of conventional wisdom, remember? So, surely this is the best choice, right?

Scenario 2 – Rent a Home and Invest in Real Estate Syndications Instead

But what about if Nikko and Zara had been rebelling and carved their own path against societal norms? Few people ever even consider this scenario as an option, but maybe they should. 

In this scenario, when Nikko and Zara got married, they were hesitant to drop their hard-saved $200,000 into a primary residence. So, they decided to rent an adorable three-bedroom apartment for $3000 a month instead. 

They knew the $200,000 in savings should be doing something and found a real estate syndication deal they liked in which to invest. 

The real estate syndication (i.e., group investment) was for an apartment community with a preferred return of 8% per year and an estimated equity multiple of 2x over a projected 5-year hold period. This means, between the cash flow distributions and the profits at the sale, they could possibly double their money in just 5 years. 

Three years later Jill was expecting their first baby and they received word that the renovations were complete at the apartment complex. The sponsor team was planning on selling soon. 

By the end of year three, their healthy new baby was born, and they received their original $200,000 investment back, plus $170,000 in profits from the real estate syndication. 

Since they loved their apartment and the real estate syndication deal had gone so well, they decided to stay put and reinvest the $370,000 into another real estate syndication with the same sponsor team. 

Four years later the second real estate syndication sells and doubles the $370,000 capital. By this point they’ve had another baby AND told all their friends how great real estate syndications are. They take their $740,000 and reinvest it again. 

Three years later (which is now 10 years after their wedding and their first go at real estate investing) they have $1.4 million.

Now, of course, we can’t forget the rent that Nikko and Zara have been paying each month – the rent that their parents told them was a “waste of money” and that they’d never get back. 

Over the course of 10 years, assuming a rent increase of 3% per year, they have paid $415,000 total in rent. 

Even still, consider the profits from their real estate syndication investments. Are those payments really “throwing away money?”

The Mathematical Comparison

In both cases, Nikko and Zara began with $200,000 to put toward whatever they wanted. In scenario 1, they used it as a down payment for a single-family home in which to live. In scenario 2, they chose to rent and use the $200,000 as capital toward a real estate syndication investment.

So, how do things shake out?

Scenario 1

Began with: $200,000

Equity after 10 years: $480,000

Principal paid down after 10 years: $150,000

Interest paid over 10 years: $365,000

Net Gain: $465,000

 

Scenario 2

Began with: $200,000

Profits after year 3 (1st syndication): $170,000

Profits after year 7 (2nd syndication): $340,000

Profits after year 10 (3rd syndication): $660,000

Rent paid over 10 years: $415,000

Net Gain: $ 985,000

 

Apparently, if Nikko and Zara were to throw conventional wisdom out the window and invest instead of buying a single-family home, they could come out with roughly $520,000 more in just 10 years.

Let that sink in for a minute. 

That’s an addition of over $50,000 per year, which is like having a 3rd income! That’s the power of passive investing. 

Assumptions & Other Considerations

Of course, for this example, we had to make some assumptions and leave out some details to keep it simple. So, let’s explore those.

1. Home Appreciation Rate: 

These scenarios are assuming an annual home value appreciation of 4% over ten years. It’s highly possible that in a hot market, the average appreciation could be greater. But, that’s not a guarantee. There are also much more stagnant markets in the US. Home prices can dip or appreciate at any time, no matter what the historical real estate data reflects. 

2. Syndication Performance: 

These scenarios assume that the syndication deals were well vetted and led by a strong team that was able to execute the business plan and exceed expectations. We’re also assuming that the market allowed these syndications to cycle in a reasonable period of time. 

This is exactly why we work so hard to make sure the teams we’re investing with are strong operators with proven track records.

3. Huge Home Loan

Another big consideration is the giant mortgage loan Nikko and Zara took on in scenario 1. 

That $4,295 payment seems doable if they’re both employed and have no kids. But if a recession hit, one of them got laid off, or either of them had to take extended time off for any reason, they might struggle to make that payment. 

That struggle could turn into default and, if it went on long enough, they could lose their home. When you consider the risk of a mortgage, it really is more of a liability than the asset mainstream media tells us it is.

4. Liability

Consider scenario 2, where Nikko and Zara invest their $200,000 into a syndication deal. They take no loan, and as passive investors, they aren’t liable to lose any more than their original capital. Sure, that would suck to lose $200,000. But it would suck more to be liable for further losses. 

No additional payments are required on their investments. That money is making money for them – a true asset.

5. Taxes

The tax benefits from real estate syndication investments really put them over the top! 

Conclusion

Like Apple’s tagline, Think Different.

These scenarios aren’t meant to be taken as investment advice. They are simply meant to show you two possibilities or paths that are available with your money. 

One follows the traditional narrative that generations before us believe and preach. The other is rarely even considered an option. 

One way comes with a huge liability. The other provides a true asset. 

Going against conventional wisdom is extremely difficult and there WILL be naysayers.

It’s ultimately up to you to choose your path and have 100% confidence in that choice. No matter which choice you make, may your home be filled with laughter, love, and joy. 

Fifty thousand dollars is a LOT of money. Nevermind fifty thousand dollars per year. I get it, but hear me out. Once you see the potential results, I strongly believe you might be more willing to put forth the effort required to get there.

 

I’ve seen regular people with regular salaries (even teachers!) do this and change their trajectories forever. So, as with most things in life, it’s about resourcefulness, not resources. You can do anything you put your mind to, and seeing the progression of investing in syndications year after year might help you put your mind to it.

 

Here’s what could happen when you invest $50,000 a year into real estate syndications:

Year 1

While the first year may not be that exciting, it’s definitely an accomplishment to invest your first $50,000. It’s also pretty cool to pick out that first property. Let’s pretend you select a 350-unit value-add multi-family unit in Dallas, Texas.

 

Soon afterward, you begin to receive $333 per month in distribution checks, which is about 8%, an average for our standard deals.

 

A nice, modest start at this point.

Year 2

 

In the early spring, you receive your first Schedule K-1, which is the tax document that shows your income and losses from your first investment. We’ll call that Dallas apartment complex from year 1 property A.

 

Through the magic of our tax system, accelerated depreciation, and cost segregation, your K-1 for property A shows hefty paper losses, even though you enjoyed a nice $300 a month since the deal closed. Those paper losses allow you to offset both your investment income and your regular income as well.

 

This same year you invest another $50,000 into syndication B, which bumps your monthly cash flow from real estate syndication investments to $666 ($333 from each property, A and B).

Year 3

 

This year, in the early spring, you receive two K-1 tax forms. This marks a turning point in your finances because from here forward, you’ll begin to look forward to tax season!

 

Soon you invest another 50K into your third deal, real estate syndication deal C. Afterward you begin to receive 3 distribution checks each month, totaling about $1000. You’ve boosted your yearly income at this point by $12,000 annually.

Year 4

Partially through the year, Real Estate Syndication A sends word that renovations are complete on the property, and the sponsors are seeking to sell. Because this property is in a hot submarket in a growing metro area, the listing gets a lot of attention and is soon purchased.

Your original $50,000 investment from Real Estate Syndication A, plus an additional $25,000 in profits is received. Woohoo!

You play it smart and invest all your returns from Real Estate Syndication A ($75,000), plus the $50,000 you’ve saved in year 4, into Real Estate Syndication D.

You now have a total of $225,000 invested, across three syndications, each with a preferred return of 8%. This should yield about $18,000 annually in cash flow distributions ($1,500 per month).

Year 5

By this time, Real Estate Syndication B (your investment from year 2) has completed its renovations and is sold. You receive your original $50,000, plus an additional $25,000 in profits.

Last year’s deals worked beautifully, so you decide again to roll that $75,000 with this year’s $50,000 all into Real Estate Syndication E, bringing your total invested capital to $300,000.

Now your monthly cash flow checks start really looking good, totaling about $2,000 (equivalent to some people’s net monthly salary).

Years 6 – 7

Now that you’re getting the hang of it, let’s start moving a little more quickly.

In years 6 and 7, Real Estate Syndications C and D are sold, respectively. Each year, you invest additional capital of $50,000 to the returns you receive from those exited deals. In each year 6 & 7, you invest $125,000 into Real Estate Syndication F & G, respectively.

Now, you have a total of $487,500 invested. Every month, you get six cash flow distribution checks (for Syndications B-G), totaling $3,250 per month, or about $39,000 per year.

You’re now nearing a decent career path’s GROSS salary value. It’s like you’ve got an invisible earner in your home generating income but not adding to any of your expenses. And because of all the depreciation benefits, you’re continuing to show paper losses, so all this cash flow isn’t being taxed.

Years 8 – 10

Another three years pass.  The kids grow, you’ve checked a few life experience must-haves off the list, and you’re maturing into the life of a confident real estate investor.

You’ve now been investing $50,000 every year for 10 years. The first six deals have exited, each time leaving you with a healthy return to reinvest.

Over these 10 years, you’ve saved up $500,000 in cash, which is no small feat. You’re smart and money-savvy, which is why you put that into syndications instead of mansions and Ferraris. So let’s do the final round of math, shall we?

In each of years 8, 9, and 10, syndication deals sold and left you with healthy returns to roll into the next investment. By the end of year 10, you have over $880,000 invested in multiple real estate syndications across multiple markets and asset classes, producing $70,500 in diversified passive income per year. That’s more than the median household income in the US!

If you were to invest $50,000 a year into real estate syndications, THAT’s what happens.

What Life Looks Like in Year 10 and Beyond

At this point, you earn a passive income of over 70K per year, and that figure grows every year. You love your chosen career, so rather than quitting, you opt for a freelance lifestyle, giving you more flexibility to take longer trips with your family.

You enjoy fun once-in-a-lifetime experiences, travel, swim with dolphins, enjoy yoga retreats, and stay in a glass igloo so you can dream beneath the Northern Lights. Good thing for those monthly distribution checks!

You have the ability to donate often to charities and non-profit organizations that you love and be an active volunteer at your children’s school and in your community.

Perhaps the passive income funds a private school for your children, or a personal chef, or helps fund an early retirement for your parents.

Most of all, you rest easy with the confidence that you’ve created a lasting legacy for your heirs. Someday, they’ll continue to invest and build their own passive income. You won’t have to worry about being a burden on them in your old age.

Disclaimers

You probably already know most of what I’m going to say here, but it’s important to reiterate.

Real-life investing is not clean and easy like it seems from this post. You can’t predict exactly when a deal is going to exit, cash flow returns might not be exactly 8%, and you may not be able to find a great deal to invest in right when you’re ready.

The scenario we walked through together in this post is based on an average hold time of 3 years before the deal exits. While most of our syndications project a 5-year hold, most of them exit quite a bit sooner than that, often right after the renovations are complete.

You should also notice that the example didn’t include reinvesting the cash flow, which would further accelerate the growth. Rough calculations for capital gains taxes and depreciation recapture at the sale of each property have been incorporated, though the operative word here is “rough.”

In the end, it’s very unlikely that you would see these exact numbers. It’s possible that the numbers could be slower to grow, but it’s also possible that you’ll see much faster growth. This post is not meant to be a prescription. Rather, to demonstrate how diligence and patience, together with compounding returns, can dramatically change the course of your financial future.

Conclusions

Investing passively in real estate syndications is NOT a get-rich-quick scheme. Quite the opposite, in fact. Investing in real estate syndications is a long-term strategy that should result in building wealth slowly but steadily over time.

It’s almost like farming. You have to plant the seeds, then wait a season or more before the harvest.

Dabbling in house hacking, private lending, and out-of-state rentals might be your entry point. And if so, that’s great because you’re on to something. Hopefully, this 10-year plan opens your eyes to something bigger and better.

There’s rarely a well-trodden path, and it’s even less often laid out this clearly. Real Estate is worthwhile, but some investments are wins and others aren’t. This method of $50,000 at a time is a predictable, operable, seemingly magical process anyone can implement to begin their syndication journey.

And that’s why we’re investing in these syndications right alongside you, one 50K check at a time. And, like you, we look forward to the next ten years using this stable, intentional, and low-hassle path toward growing our passive income and wealth.

It’s important to expect the unexpected with your real estate portfolio. We can’t predict the future market, but, based on historical data, we know to expect cycles. Market corrections and recessions occur every so often, so it’s important to prepare your portfolio to withstand those fluctuations.

One of the most powerful strategies used to successfully weather economic cycles is diversification. Even within real estate, you can diversify and maximize the long-term growth of your investments. By investing in a variety of different real estate assets, you can lower the risk overall. Here are 5 ways to do this:

#1 – Asset Type

Within the real estate world, there are a variety of asset types to choose from. You can invest in retail, industrial, multifamily, office space, self-storage, and more. By varying the types of properties you invest in, you’re hedging against broader changes to the economy.

#2 – Location

At any given time, one city might be booming while a neighboring area may be experiencing a lull. Smart real estate investors desire properties in growing areas or those expecting growth.

By diversifying across multiple cities, counties, or states you can take advantage of the potential across several markets and hedge your bets against a correction in any one area.

The challenge in diversifying across geographical locations is obtaining the research, connections, and more that you’d need to feel comfortable investing in them. This is what makes passive investing so attractive – you can leverage the expertise of the sponsor team in each market.

#3 – Asset Class

Aside from asset type, there is also asset class, which is a range of moderate-to-luxury unit prices within each asset type. Take an apartment complex, for example, and consider the range between moderately priced units, nicely developed units for the upper-middle class, and finally, the ultimate luxury apartments that are available in some areas.

Certain asset classes, like the more conservatively priced units, do well during rough-patches in the economy. Luxury properties do best during the so-called booming economic years. It’s important to have both in your portfolio so that at any given point in the economic cycle, your portfolio is profitable.

#4 – Hold Length

Real estate syndication investments have an associated hold time which can range between 3 -10 years (or more). Consider varying the hold time of your investments, so you’re not entering and exiting more than one deal at a time.

#5 – Funds

One of the easiest ways to diversify quickly is to invest in a real estate syndication fund. A fund pools together investors’ money to buy a variety of assets within a specified period of time. Funds can be defined by geography, asset type, or asset class.

Conclusion

At certain points in the market cycle, it will feel as if the market will go up forever. Conversely, it may feel like the market will continue a downward spiral forever. We know that neither of these are true and that during one phase of the cycle, portfolios should be diversified in preparation for the next phase.

Keep these 5 ways to diversify in the back of your mind as you explore potential deals. Doing so will help you find various opportunities to diversify your portfolio, no matter the current market cycle.

If you’ve invested in residential real estate before, you have some important, basic lingo like rental income, mortgage interest, and amortization under your belt. When you step into the world of commercial real estate, you’ll begin to see other terms, like “cap rate”, thrown around as if everyone inherently knows what that means.

It’s okay if you don’t know what a cap rate is or what it’s used for. It can be challenging to understand and hard to calculate. As a passive investor, you won’t have to do any of the hairy work to calculate cap rates, but it’s helpful to have a very basic grasp of what they are.

Keep reading to find out what a cap rate is, how it’s calculated, what it’s used for, and what you need to know about cap rates as a passive investor in a real estate syndication.

What Are Cap Rates?

Cap rate is short for capitalization rate and is used to indicate the rate of return expected for a particular property. Investors use the cap rate to estimate their potential ROI (return on investment) for a particular asset.

When someone says a property has a cap rate of 5%, or that assets in a given area are trading around a 5-cap, they are talking about the return on that property.

How Are Cap Rates Calculated?

There are multiple ways to come up with a cap rate, so be sure to always ask how it was calculated.

Most cap rates are calculated by taking the net operating income and dividing it by the market value. Cue the example for clarity –

Cap Rate Example

Let’s talk about a property valued at $1 million. Over the past year, it’s brought in $100,000 in rental income.

After paying $50,000 in expenses, we wind up with $50,000 in Net Operating Income (NOI).

We take the NOI of $50,000 and divide that by the total value of the property.

$50,0000 / $1,000,000 = 5%

This means if we bought that property with $1 mil right now, we could expect to earn $50,000 net income over the course of one year. This, loosely, is your Return on Investment or ROI.

One way to think about it is that it would take 20 years of returns at $50,000 to recoup your $1 million initial investment.

If the property generated $150,000with the same $50,000 in expenses, the cap rate would be $100,000 divided by $1 mil, which would equal 10%. In that case, it would only take 10 years to recoup your initial investment value.

The higher the cap rate, the faster you’d earn back your investment capital, and the better the investment choice. The good news is, you don’t need to know all the specifics in order to see success as a passive investor.

How are Cap Rates Used?

Some investors rely heavily on cap rates and look for investments with cap rates of 8% or higher, for example. However, that’s just one data point (from only 1 particular year) on an asset.  Cap rates don’t take into consideration other factors like loans or the time value of money.

When comparing different properties in the same market, cap rates can be very useful.

As an example, if you’re looking at apartments that have a cap rate of 7%, in comparison to other properties that have cap rates of 6.7%, 7.2%, and 7.5%, your property’s cap rate is right in the middle and fairly comparable to the rest.

If the property had multiple points higher or lower than the others in the area, that should be a red flag.

Cap rates can also be a good general measure of the asset class and corresponding risk in general. Assets with higher cap rates tend to be in developing areas and those with lower rates may be in more established areas. As with most investments, a higher rate means higher risk as well.

What You, As A Passive Investor, Need To Know About Cap Rates?

Now that you’ve slogged through what cap rates are, how they’re calculated, and how they’re used, do you need them?

Not really.

As a passive investor, there are many data points that are far more important. The track record of the sponsorship team on a real estate syndication investment should be the top thing you look at.

Otherwise, the cap rate might carry weight in these two areas:

#1 – Is the cap rate comparable to other assets in the area?

A stong sponsor team will have already evaluated the property to ensure the cap rate is comparable to others in the area, but you could double-check that your property isn’t’ 4% while others are 7%.

#2 – What’s the reversion cap rate?

Here’s one that might throw you for a loop – Reversion Cap Rate.

Sometimes the cap rate is referred to as the exit cap rate because the reversion cap rate is a measure of the cap rate at the sale of the asset, versus the cap rate at the time you purchased the asset.

If nothing else, take this knowledge with you- When evaluating a potential real estate syndication deal, be sure the reversion cap rate is at least 0.5% HIGHER than the current cap rate.

This means that the sponsors believe the property/ market conditions will be WORSE than it is now. In other words, they assume things will be in worse condition than they are now and that the property will sell for a lower price.

If the current cap rate is 5%, then the reversion cap rate should be at least 5.5%. That will be a great indicator of conservative underwriting and that projections include the possibility of the market softening in upcoming years.

Cap Rates – All Said And Done

At the end of the day, the cap rate is a single measurement at a single point in time, based on the current performance of a given property. Cap rates don’t measure the potential of an asset or how much you’ll receive in distributions.

As a passive investor, you definitely want to know what things mean and be on the look for this terminology while choosing an investment. Beyond that, you will find that cap rates are one of the last things to be concerned about.

We’d like to invite you to remember a time when you stepped into a store, only to be instantly overcome with a wave of home-style comfort. Certain retailers take great care in creating an atmosphere and an experience for their customers unavailable elsewhere, and that will keep those customers coming back time and time again.

In many ways, this is just like what we do at New Level Investments.

We find the best real estate syndication deals on your behalf, conduct extensive vetting processes, and provide only the best opportunities available to our investors. Come behind the scenes with us today, for an exclusive look at how it all works and why you should consider working with us.

What We Do

There are three main parts to real estate syndications: sourcing deals, asset management, and capital raising. We source deals in the local Carolinas markets where we are based and have local contacts.

Additionally, we look to partner with local operators in markets outside of where we are based to bring the best opportunities to our investors. We only present deals to our investors that we actually invest in ourselves.

We help people passively invest in group real estate investments. Our capital raising business has two parts: Education and Investing

Education

The education piece of New Level Investments includes the production of articles, videos, online resources, and other offerings created to help you and your friends learn the value of real estate syndications and their benefits.

Investing

Once people are informed on how syndications work and are interested in real estate syndications becoming a part of their portfolio, we help find that perfect deal.

Every step of the way, from discovering the investment opportunity, to signing the legal documents, wring funds, and communication throughout the lifecycle of the project, New Level Investments is here for you.

We expect and are happy to answer your questions, share information with you, and become your ally throughout your syndication journey.

How It Works

So you’re probably wondering how we get paid, right? Well, we earn income based on the percentage of the profit splits allocated to the general partnership.

You see, we invest as general partners in the deals we present to our potential passive investors. Most deals result in a 70/30 split (70% to passive investors, and 30% to general partners, also called sponsors) of profit at the time the asset is sold.

For sourcing deals, obtaining financing, managing the asset, educating our investors, guiding them through the process, and managing investor relations, we share in that 30% profit split.

Investors never pay us direct fees and we never even touch your money. Once you sign the PPM (private placement memorandum), you wire funds directly to the property account. You never pay money directly to New Level Investments.

Why Work With Us

The world of real estate syndication investing has many different sponsor/operator teams, and we aren’t the most experienced or the biggest. So why would you want to do business with us?

Simple. Because we’re focused on YOU, the investor.

There are teams in place acquiring, underwriting, and managing the assets to make the property perform. Their daily grind consists of renovations to the property, coordinating with contractors, and tenant retention.

Our daily focus consists of serving YOU – ensuring that you have all the details so you can make an informed decision, so you can invest wisely, create passive income for your family, and reach your investment goals. We don’t see products, we build relationships.

We do the behind-the-scenes research, vetting, and due diligence so we don’t waste your time with risky or low-performing deals. Since our focus is on you, we can provide that full-service experience you’d dream of while continually bringing you more and better deals.

Explore Your Options

On behalf of all of us at New Level Investments, we invite you to feel your way around the syndication world. In fact, if you’re accredited, check out RealtyMogul and RealtyShares. If you’re curious about our partners, we encourage you to sign up with them and let them know we sent you!

Your projected returns are the same since we don’t add any fees on top in order for you to invest with us. So, it’s completely in your hands and based on your comfort level.

When you decide you’re ready to invest with us, sign up for the New Level Investments Club and take your portfolio to a new level!

Before you’re fully committed to, and after you’ve become interested in a real estate syndication, you need to know several details about actually investing in these deals.

The process of investing in a real estate syndication is very different from picking a stock or a mutual fund online. Furthermore, unlike typical investment properties, there are hold times, barriers to entry, and a whole set of expectations that you need to know about prior to committing to a deal.

As a smart investor, you’ve got to know exactly why you’re choosing a particular investment in addition to the required credentials, the process, what’s involved, and how long you should expect to wait until payout. Guess what? You’re in luck!

 

That’s precisely what you’re about to read!

How long does a real estate syndication last?

Unlike an online stock, ETF, or mutual fund that can be exchanged daily or more, real estate syndications come with required, projected hold times. While each real estate syndication is different, we typically see hold times of 5-7 years, sometimes longer.

Real estate syndication deals have to allow time for property renovations, management changes, occupancy rate increases, and even market conditions to adjust. This means that you should plan to invest your capital for 5-7 years (or the timeline stated on the investment summary & memorandum), because you will not be able to take your money out until the asset is sold.

Who can invest in real estate syndications?

Now you might be wondering if there’s any red tape.

Is just anyone allowed to invest in this sort of thing? It seems pretty exclusive.

Well, you’re kind of correct. A large majority of real estate syndications are open to accredited investors only, though some are also open to non-accredited, sophisticated investors (i.e., investors who can demonstrate that they understand real estate syndications and their risks).

In order to be considered an accredited investor, you must meet at least one of two requirements.

• You must have at least $1 million in net worth, not counting your primary home.
• You must make $200,000 per year as an individual, or $300,000 jointly with your spouse, have made this amount or more for each of the last two years, and intend to make this amount or more this year.

If you meet either one or both of these requirements, then you are an accredited investor.

If you’re not yet an accredited investor, there are still some real estate syndication opportunities out there for you. However, you may need to look a little harder for them. This is because the opportunities for non-accredited investors cannot be publicly advertised, hence the feeling of secrecy you’re getting.

What’s the process for investing in a real estate syndication?

So maybe you’re accredited, or maybe you’re not, but you’re really wondering HOW someone invests in these elusive real estate syndication deals you’re reading so much about.

Here are the basic steps for investing in a real estate syndication:

• The sponsor announces that the deal is open for funding, usually via email.
• You review the investment summary deck and decide to invest.
• You submit your soft reserve, telling the sponsor how much you’d like to invest.*
• The sponsor holds an investor webinar, where you can get more information and ask questions.
• The sponsor confirms your spot in the deal and sends you the PPM (private placement memorandum).
• After signing the PPM, you wire in your funds or send in a check.
• The sponsor confirms that your funds have been received.
• The sponsor notifies you once the deal closes and lets you know what to expect next.

*Real estate syndications are almost always filled on a first-come, first-served basis. Thus, sponsors use a soft reserve to help them determine who’s interested in investing.

By submitting a soft reserve, you are telling the sponsor you’re interested in the deal and want to invest X amount. The soft reserve does not guarantee you a spot in the deal, nor does it lock you in. You can always back out or change your mind later.

Pro tip: If you’re thinking about investing in a deal but aren’t sure whether you want to invest $50,000 or $100,000, go ahead and put in a soft reserve for $100,000. This holds your spot in the deal.

If you decide later that you only want to invest $50,000, you can easily decrease your investment amount. However, if you had put in a soft reserve for $50,000 and later wanted to increase it to $100,000, you might not be able to increase your soft reserve amount if the syndication is already over-subscribed.

What happens after I invest in a real estate syndication?

So, you’re sure you want to invest in a real estate syndication, you do your research, and you lock in a deal. Now what?

After you’ve sent in your funds for a real estate syndication deal, your active participation is done. Now you can sit back and wait for the cash flow to start rolling in.

Depending on the particular deal, you may receive either monthly or quarterly cash flow distributions, and they may start immediately, or not for a few months.

Regardless, you should start receiving monthly updates as soon as the deal closes. These monthly updates will include information on the latest occupancy and progress on the renovations.

Every quarter, you will receive a detailed financial report on the property, and every spring during tax season, you will receive a Schedule K-1 for your taxes, which will report your share of the income and losses for the property.

As your projected hold date approaches, the monthly information you receive may include information about a sale. Once the asset sells, you can expect your original investment capital to be returned, plus any percentage of profit due to you.

Now You’re In The Know…

At this point, you’ve gone from curious, to interested, to knowledgeable about passively investing in real estate syndication deals. All that’s left to do from here is to actually find a deal and get involved! You’re fully informed about who can invest, the hold time, the process, and what to expect. Plus, we’re here for any questions or guidance along the way.

 

Happy investing!

Once you get wind of real estate syndications and you begin thinking about the possibility of investing passively in them, it’s natural to simultaneously have questions… lots of questions.

Investing in real estate is a big deal and you SHOULD have and ask ALL the questions. Furthermore, real estate syndications aren’t broadly popularized, so, not only will your friends probably not have any answers to your questions, but they likely will have no idea what you’re even talking about.

For this exact reason, it’s important you find a trusted, knowledgeable resource to get your questions answered and do plenty of your own research. In an attempt to make this easier on you, we’ve addressed 4 big questions today:

• What types of properties can I invest in using syndications?
• What risky downsides are there to syndications?
• Where and how do I find syndication deals?
• Can I invest in syndications online?

The answers to these 4 simple questions are going to clarify so much for you… we can feel it! Ready? Let’s dive in!

What are the different types of real estate syndications?

Real estate syndication deals are available on multifamily properties, self-storage, manufactured home parks, land development, hotels, student housing, warehouses, and more. Some real estate syndications are for ground-up construction and others are for buy-and-hold (i.e., buy an asset that’s already stabilized, and hold it for a number of years).

A great example of a value-add multifamily deal is an apartment community whose units haven’t been updated in ten years. The kitchens are all dated, the carpets are worn, and the landscaping needs some work.

By making those improvements, we can increase the rents, which increases the income of the property and thus, the overall value.

What are the risks of investing in real estate syndications?

You’re no dummy, you already know any type of investment is a risk. Syndications aren’t immune to risk either.

One of the biggest risks lies in the execution of the business plan. Before the deal, you’re wooed with glossy marketing packages and the sponsors will answer your questions with lofty ideals.

However, when the rubber meets the road, the sponsor team needs to be able to execute on the business plan in the face of unforeseen circumstances. Investing with sponsors who have a proven track record and who prioritize capital preservation helps ensure that they will protect your investments and do what they say they’re going to do.

Changing market and economic conditions are always a risk. No one can predict what market conditions will be like at the end of a project’s hold time.

This means, if the projected hold time is 5 years, check to make sure that the loan term is for at least that long, and ideally longer than 5 years, so there’s a buffer in case sponsors need to hold the property longer than intended.

At the end of the day, as a limited partner passive investor, you’re concerned with your personal liability. The good news is your liability in real estate syndication is limited. At worst, you could lose your original investment capital, but you could not lose more than that (e.g., you can’t lose your house).

Where can I find real estate syndication opportunities?

The only publicly advertised real estate syndication deals are for accredited investors only. So, how does a “normal person” find real estate syndication deals?

You can do a Google search, but how do you know that the opportunities that pop up are legitimate ones, put together by experienced teams with strong track records, who will safeguard your money over a period of several years?

You don’t.

The best way to find real estate syndication opportunities is to get out there and talk to people in the real estate syndication space. This community is quite small, and once you get connected, you’ll easily be able to find sponsors and real estate syndication opportunities that fit with your investing goals.

How do private real estate syndications compare to real estate crowdfunding sites?

Maybe one of your friends claims they invested in a syndication deal for just a few thousand bucks. This is because recently, real estate crowdfunding sites like RealtyMogul, RealtyShares, and Fundrise have helped make it possible for millions of people to invest passively in real estate.

Real estate crowdfunding sites can be a good place to find real estate syndication offerings. However, there are a few things you should keep in mind.

First, most of these platforms require that you be an accredited investor in order to invest in their real estate syndication offerings.

Some of these platforms do offer REITs (real estate investment trusts) as an alternative for non-accredited investors. Typically, you can invest in these REITs with a low minimum investment (you can invest in Fundrise’s eREIT for just $500).

Just be aware that REITS are not real estate syndications. Rather, it’s a fund, which is likely what your friend actually invested in.

When you invest in a REIT, you’re investing in a company that buys real estate; you don’t have direct ownership of the underlying asset yourself, like in a real estate syndication. You would likely still get good returns, you would be investing in a bunch of assets rather than a single one, and you wouldn’t get the same tax benefits as with a real estate syndication.

Regardless, if you’re just starting out, you should definitely check out some real estate crowdfunding sites, to see what they’re all about.

In Conclusion

All in all, it’s important to understand the risks, the terminology, the options available, and how to find the deal that fits your goals and investing style best. Real estate syndications aren’t for everyone, but they can be a fabulous addition to anyone’s portfolio. Now that you know more about how to find and passively invest in real estate deals, that’s one more checkbox checked and one less barrier to entry. At this point, what are you waiting for?

Many real estate investors “get their feet wet” through some form of residential real estate. Whether those initial investments are flips, standard rental homes, or even duplexes, that’s a great start. But we recently met someone who’d been in the real estate investing game for over 10 years and had never heard of a “real estate syndication” before.

Actually, that’s pretty common. Until somewhat recently, SEC regulations did not allow for real estate syndication opportunities to be publicly advertised. This made it so, you had to be part of the “inner circle” (i.e., you had to know someone who was doing a deal) in order to invest in one.

Luckily, the SEC now allows certain opportunities to be publicly advertised, which opens the gates for more people to learn about and invest this way.

But maybe you’re new to this term too and are wondering things like:

• What is a real estate syndication?
• How does a real estate syndication work?
• Why should I invest in a syndication deal?
• What would an example real estate syndication look like?

 

A Real Estate Syndication – What’s That?

Let’s start with the basics. The term syndication means pooling resources. A real estate syndication is when a group of people pool their funds and expertise together to invest in a real estate asset together. Instead of buying a bunch of small properties individually, the group of people come together and buy a larger asset together.

Let’s pretend you have $50,000 for investing, beyond other savings and retirement funds. You could invest it in an individual rental property, but that would also require time to find a property, negotiate the contract, do the inspections, run the numbers, get the loan, plus find the tenant and manage the property.

But it’s likely you don’t have the time or energy to deal with such an obligation. This is where most people assume real estate investing is too hard and too much work, so they stop there.

Real estate syndications are the alternative that allow you to still put your money into real estate, without having to do the work of finding or managing the property yourself. Instead, you can invest that $50,000 into a real estate syndication as a passive investor. So you contribute $50,000, maybe a friend has another $50,000 to invest, someone else puts in $100,000, and on and on.

By pooling resources, the group would now have enough to buy not just a rental property, but something bigger, like an apartment building. As a passive investor, you don’t have to do any of the work managing the property. A lead syndicator or sponsor team does the day-to-day management (i.e., all the active work), and in return, they get a small share of the profits.

When done right, real estate syndications are a win-win for everyone involved.

 

How Does A Syndication Deal Work?

Now you’re interested in the “behind the scenes” details of a syndication to see how this all really shakes out.

First off, there are two main groups of people who come together to form a real estate syndication: the general partners and the limited partner passive investors.

The prior section mentioned a team that would take care of all day-to-day management (so you don’t have to!) in exchange for a small share of the profits. That syndication team is made up of general partners (GPs). They do all the legwork of finding and vetting the property and creating the business plan. Essentially, they do the work that you would be doing as the owner and landlord of a rental property, just on a massive scale.

The limited partners (LPs) are the passive investors (others like you), who invest their money into the deal. The limited partners have no active responsibilities in managing the asset.

A real estate syndication can only work when general partners and limited partners come together. The general partners find a great deal and put together an efficient team to execute on the intended business plan. The limited partners invest their personal capital into the deal, which makes it possible to acquire the property and fund the renovations.

Together, the general partners and limited partners join an entity (usually an LLC), and that entity holds the underlying asset. Because the LLC is a pass-through entity, you get the tax benefits of direct ownership.

Once the deal closes, the general partners work closely with the property management team to improve the property according to the business plan. During this time, the limited partner investors receive regular and ongoing cash flow distribution checks (usually every month).

Once all the planned renovations are complete, the general partners sell the property, return the limited partners’ capital, and split the profits.

 

Why Should You Invest In A Syndication?

Okay, now that you’ve got a decent understanding of how real estate syndications work, let’s talk about what’s in it for you. There are a number of reasons that passive investors decide to invest in real estate syndications.

Here are a few of the top reasons:

• You want to invest in real estate but don’t have the time or interest in being a landlord.
• You want to invest in physical assets (as opposed to paper assets, like stocks).
• You want to invest in something that’s more stable than the stock market.
• You want the tax benefits that come with investing in real estate.
• You want to receive regular cash flow distribution checks.
• You want to invest with your retirement funds.
• You want your money to make a difference in local communities.

A real estate syndication is a nearly perfect way that a busy professional can invest in large-scale, physical real estate assets, without the commitment of time or excessive mental energy, while also positively impacting the community and earning interest and tax benefits. This opportunity for passive income is sounding better and better.

 

An Example Real Estate Syndication:

Okay, so you’re interested, but you’re still like, “Is this real?” Here’s an example of what a real estate syndication deal would look like.

Let’s say that Jane and John are working together to find an apartment community in Dallas, Texas. Jane lives in Dallas, so she works with real estate brokers in the area to find a great property that meets their criteria. After looking at a bunch of properties, they find one, listed at $10 million.

John takes the lead on the underwriting (i.e., analyzing all the numbers to make sure that the deal will be profitable), and they determine that this property has a ton of potential.

Since Jane and John don’t have enough money to purchase the $10-million property themselves, they decide to put together a real estate syndication offering. They create the business plan and investment summary for prospective investors and work with a syndication attorney to structure the deal.

Then, they start looking for limited partner passive investors who want to invest money into the deal. Each passive investor invests a minimum of $50,000 until they have enough to cover the down payment, as well as the cost of the renovations.

Once the deal closes, Jane works closely with the property management team to improve the property and get the renovations done on budget and on schedule.

During this time, Jane and John send out monthly updates, as well as monthly cash flow distribution checks, to their passive investors.

When the renovations are complete, Jane and John determine that it’s a good time to sell and the property goes for $15 million after just 3 years. Each passive investor receives their original capital plus their split of the profits according to the original deal. In this case, a 70/30 split was agreed upon at the outset of the syndication (70% to investors, 30% to the Jane and John).

At this point, each passive investor has received monthly cashflow checks during the renovation and hold period, plus their initial capital investment back once the property sold, plus their portion of the profit split after the sale…a pretty sweet deal for little-to-no work!

 

In Conclusion

Now that you know the ins-and-outs of a real estate syndication, including what it is, how it works, how little effort on your part it requires, and how simple it could be to begin receiving your first passive income check, definitely don’t wait 10 years to make a move.

We always recommend you research until you’re comfortable and that not all your eggs are invested in one basket, so to speak. Now that you’re armed with this knowledge about real estate syndications though, you’re miles ahead of most other investors. Keep at it!