Have you ever heard of passive real estate investing through syndications?
Real estate syndications are a type of crowdfunding real estate investment.
The way it works is a team of full time real estate professionals called the general partner or sponsor finds and negotiates to purchase new investment opportunities that they then present to their investor base.
Their group of investors, called the limited partners, then pool their capital into a single entity called a syndicate to invest in more expensive real estate assets than any individual investor in the syndicate could likely have purchased on their own.
The passive investors do not have to do any work, that is all taken care of by the general partner team.
In most cases, you need to be what is called an accredited investor in order to participate in these opportunities.
You are automatically an accredited investor if you earn $200,000 or more annually if you’re single or $300,000 annually for a married couple.
The other way of qualifying is having a net worth in excess of $1 million, but this number must not include the equity in your primary residence.
If you meet these qualifications, congratulations!
You don’t need to do anything to “claim” your accredited status — you are already an accredited investor and are free to participate in real estate syndications.
While many people have learned about this method over the past 10 years, most people are still left in the dark.
That’s unfortunate because passive investing is the most appropriate way for investors that do not have the time to dedicate themselves to managing their real estate investments full time to still benefit from all the amazing benefits of real estate ownership, such as the tax benefits, regular cash flow distributions, and returns that have consistently outperformed stocks and bonds.
The general partner group will handle sourcing, negotiating, underwriting, performing due diligence, acquiring financing for the debt portion of the capital stack, pooling together all the investors in the limited partner group, scouting and hiring best-in-class property managers for the market, asset management, cash flow distributions, and circulating tax documentation during the hold period.
The passive investors’ main responsibility is judging new offerings that syndicators present to them.
Truly Passive Investing
You can probably see why passive investing through real estate syndications is quickly becoming the most popular option for busy people to pick fruit from the bountiful real estate tree without having to water and tend to it daily.
The truth is, it wasn’t until the passage of the JOBS act in 2012 that it became legal to advertise real estate syndications.
Prior to that, you had to have a pre-existing relationship with a syndication group in order to invest in their offerings.
You can imagine that this structure created a bit of a good ole’ boys club and regular people were left out in the cold and shut out from the world of real estate syndications.
Different Than Buying a Home
Now, you’re all probably already familiar with the procedure when you’re buying a residence.
You’re scouting out your favorite cities, towns, and neighborhoods, comparing school systems, seeing how far your commute is, and figuring out what you’re pre-approved for.
It can be time consuming, but the process is simple enough: you or your broker will tour through enough homes and eventually you’ll choose one of them as your forever home.
It’s an almost romantic experience, like falling in love for the first time (both the ups and the downs involved with that).
When we’re talking about investing passively in a real estate syndication, most people aren’t familiar with the process and what they need to do to get involved in this world.
The purpose of this article is to shed some light on that process for you, so that if syndications are an investment route you’re interested in pursuing, you’ll have a game plan to start making some passive investments.
1. Real Estate Asset Classes:
Before you go jumping headfirst in to the first real estate offering you come across, you should do a little research and choose a real estate asset class that makes sense for you. The classic real estate asset classes are as follows:
- Apartments (Multifamily)
- Industrial
- Retail
- Office
- Hospitality
We tend to focus on multifamily as the data suggests this is the asset class that produces the most impressive risk-adjusted returns.
Pay attention to not only the average returns, but also the Sharpe Ratio, which measures risk-adjusted returns.
Multifamily blows the other asset classes out of the water!
For a real-world look into why multifamily housing is a much safer investment than the other asset classes, take a look below:
Even in the dog days of the great recession, the multifamily sector more or less shrugged off external pressures and kept on trucking.
Delinquencies rose, of course, but almost imperceptibly so when compared to single family homes.
This is why multifamily housing, especially workforce multifamily housing aimed towards middle-income earners, is an incredibly recession-resistant investment vehicle.
Anyways, as you can probably tell, I’m passionate about the magic of multifamily investing, but the goal of this article isn’t to convert you.
You should choose the asset class that you find the most compelling.
A few more “alternative” asset classes that lie somewhere in the middle between the classical divisions are:
- Mobile Home Parks
- Self-Storage
- Flex Space
- Life Sciences Facilities
2. What do you Hope to Achieve with your Real Estate Investment?
You need to be sure that your expectations are in line with the investment vehicle you choose.
If you’re looking for long-term wealth with minimal work and were considering the fix-and-flip model, I would suggest you slow down for a second and take a few deep breaths.
You will achieve exactly the opposite of that by flipping houses!
You might be thinking “well, that’s pretty obvious…,” but I’ve noticed a strange phenomenon when people decide to invest in real estate.
Less is More
Their goals and the methods that will supposedly allow them to achieve those goals are often completely contradictory.
For example, many investors are after financial freedom and having LESS work for more money.
Then, they turn around and start buying single families or duplexes that they self manage and drive themselves into the dirt by doing exactly what they wanted to avoid: doing more work than before.
The same is true when you’re investing in a real estate syndication. The investment period is typically around 5 years, so if you’re looking for a get rich quick scheme, you need to look elsewhere.
Make sure that the syndication method jives with what you are looking to achieve as an investor.
3. Identify Target Markets:
Once you’ve reviewed the asset classes and confirmed that investing passively through a real estate syndication is the route that makes the most sense for you, you need to decide what markets you would like to target.
Now, the syndicators themselves will be scouting out the deals in the various markets and will choose which markets to focus on.
In this step you’re just doing some broad research on what markets are seeing growth and make sense for investment.
That way, when you go to review offerings from real estate syndication companies, you will already have your own opinions and conclusions from which you can better understand and review new investment opportunities.
Things to look out for when reviewing markets are total population, total population growth or retraction over the last ten years, median household income, rental and pricing trends over the past three years, major area employers, and any new major investment dollars going in to the local economy (whether it be new industry or new development).
4. Research Real estate Syndication Groups:
Next, you’ll need to find a company that offers investors the chance to participate in real estate syndications.
You will want to make sure that the company is targeting the asset classes and markets you have chosen to go after. Of course, if you find a compelling offering that you hadn’t considered, it’s perfectly OK to change your mind at this step.
It’s just a good idea to take things in order and do a little homework on your own first before getting to this step. That way, you will have formed your own opinions and are a bit better equipped to review syndication offerings.
5. Choose an Investment that Works for You:
Now that you’ve identified some real estate syndication companies that you would enjoy investing with, your next task is to choose the syndication offering that fits your goals.
Even within the same asset class, the structures and strategies that different syndicators use can vary widely, so don’t assume they are all the same.
Perhaps you like multifamily as an asset class, but now you’re reviewing an offering for a new construction class A multifamily in comparison to a 1980’s-built value-add opportunity.
No option is wrong and it’s common that investor will dabble in a few different types of offerings to see what they like best. Take a close look at the financial assumptions and projections, how the debt is structured, and the duration of the expected hold period.
6. Commit to Your Chosen Offering:
Once you’ve found a deal that you would like to invest in, it’s time to make a commitment.
As we mentioned earlier, real estate syndications are exploding in popularity, but there are only so many companies with the experience and resources necessary to present these offerings.
As a result, getting a spot in these offerings can be surprisingly competitive at times.
For this reason, investors are allowed into the deal on a first-come, first-serve basis. When a deal has more investor dollars looking to participate than are available for investment, that deal is considered “oversubscribed.”
Both our own offerings and the offerings of some of our friends in the space are typically oversubscribed well before the deadline.
That’s why you should do your homework in advance. You should know what type of investment fits your criteria and be ready to pull the trigger when the time comes.
Most offerings allow you to submit a soft reserve for the amount you choose to invest.
This is just a verbal commitment to a dollar amount and there are usually no penalties associated with changing your mind afterwards.
If you think you will invest, go ahead and submit your soft reserve so you do not get left on the sidelines.
7. Review the Offering Materials:
Make sure to carefully review the offering’s executive summary, investment summary, private placement memorandum, and any other associated materials the general partner team has produced for the opportunity.
One thing that we always tell people is make sure the general partners have REAL experience in the real estate industry beyond just dollars and cents investing.
There are lots of great marketers out there who are good at selling themselves and raising money, but never really cut their teeth actually building, buying, selling, and managing real estate.
Our company has experience in literally every aspect of the real estate industry: new construction, sales, investments, syndications, asset management, and property management.
I wouldn’t necessarily feel comfortable investing to purchase a 100+ unit apartment complex with a guy who wouldn’t even know how to build a single family home!
There are a couple of specific provisions you should also look out for. Here are a few tips that are often overlooked by new investors:
- Reporting Requirements: The operating agreement will stipulate what reporting is provided to the investors. This is typically done quarterly.
- Distribution Requirements: There should be clearly defined rules stating the manager has to distribute cash flow in regular intervals.
- Indemnification Clause: There should be language stating that if the general partner commits fraud, willful misconduct, or mismanagement, the general partners are liable. It’s a red flag is this language is not included.
8. Wire your Funds:
Now that we’ve chosen our offering and signed the PPM, we’ve committed to the deal. It’s time to wire your funds for your chosen investment amount. When the asset is purchased, you become one of the official owners of the property(ies)!
9. Enjoy the Benefits:
As an investor in a real estate syndication, you will get to enjoy all the benefits of real estate passively.
You will receive regular cash flow distributions according to the structure of the syndication. You will also receive annual K1 reporting so you can take advantage of those sweet depreciation deductions.
See our Benefits of Depreciation & Cost Segregation Studies for Real Estate Investors Explained for an in-depth look at that topic.
The general partners will also provide you with monthly updates on the property, as well as regular asset management reporting, which is typically sent quarterly.
10. Capital Events:
Most real estate syndications have a holding period after which the asset is sold. At that time, your final cash flow distributions will be distributed prior to the sale, then, following the sale, your initial equity contribution will be returned to you, along with your share of the profits according to the deal structure. Now you can do it all over again with a larger pool of cash to invest with!
Conclusion
Investing in a real estate syndication can seem a little bit daunting when you’re first getting started, but it’s a really a simple process with a lot of moving parts. Once you’ve identified all of the steps in the process, you’ll feel a lot more capable of getting involved yourself. There’s no better time than today to start your own research and see if real estate syndications are for you.
