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 5 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 use my IRA or 401K to invest?
- Can I invest in syndications online?
The answers to these 5 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?
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.
Can I use my IRA or 401K to invest?
The majority of income earners put their savings into an IRA or 401K throughout their working years to prepare for retirement and take advantage of tax advantaged savings. When it comes to wanting to invest $50,000 or $100,000, you may look at your portfolio and see the retirement slice of the pie is where your wealth is.
Did you know that many real estate investors invest in syndications with IRA or 401K funds? You can convert your retirement accounts to a self-directed IRA or 401k to invest in many different assets outside of the stock market.
This gives you maximum control, often called checkbook control, of your investments. Another great addition to your investing toolbelt.
Any money that these investments make for your self directed retirement account must go back into that account, compounding the growth of your wealth. Always consult a tax advisor prior to taking this step, as there are some implications to taking this path.
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.
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?
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