It's an uncertain time for investors right now with the tide of inflation impacting spending at home, and eyebrows being raised with post-pandemic moves at the federal level. However, this uncertainty doesn't mean you have to run scared of investment. It just means you have to do your due diligence. Take, for example, the real estate market. You might be timid right now because of interest rates or signs of a seller's market. However, now's a good time to get in on real estate syndications.
What are real estate syndications?
In simplest terms, real estate syndication is when a group of investors pools money together for a common purpose: jointly purchasing a large piece of real estate. Apartments, lots, and other real estate assets are some of the investment opportunities available through real estate syndications. Commercial real estate investing has been changed by the realm of syndication, effectively creating a crowd-sourced real estate fund for shared amounts of capital for a stake within the property.
Within syndications, there are two key players: the syndicator and the passive investor. A real estate syndicator, otherwise known as a general partner (GP), is responsible for structuring and operating this syndication. This includes underwriting the deal for the property, completing due diligence, finding investors, and negotiating with the property's seller. Essentially, the syndicator’s role is to execute the business plan and deliver strong returns to the passive investors.
A passive investor effectively provides the capital needed to make real estate deals come to life. In exchange, they'll receive shares in the property. By owning this property, passive investors receive regular passive income distributions, as well as a return on their investment upon selling it. Syndication allows investors to achieve equity pay down, as well as appreciation and real estate tax benefits.
What are the pros and cons of investing in syndication?
Opting into syndication in real estate investing may seem overwhelming, but for most, it's the best way to get in on a variety of benefits. Passive investors can earn monthly or quarterly passive income distributions from their investments. You're also entitled to a return on your investment through appreciation, as well as real estate tax benefits. Plus, investing does not place any responsibility on you as a property manager. Say your syndication invests in an apartment building. An investor is not required to manage tenants or repairs to the building. That responsibility falls under the general partner.
However, like any other investment, there is an inherent risk that comes with exploring the realm of commercial real estate. Of course, the most challenging and risky decision for any individual investor is to choose who they join forces with in these real estate syndications. After all, you want to be certain that investor capital is flowing, and that everyone is holding up their end of the syndication deal. Be sure that you're working with trustworthy syndicators before jumping into the investment, doing due diligence to get everything in place organizationally.
Why should I invest in real estate syndications now?
Investing in real estate syndication deals is a great way to get in on deal flow. Investors have access to this deal flow and the ability to invest in real estate without the hassles of property management. Investing in commercial real estate properties within apartment syndication deal creates access to more lucrative investment opportunities. Plus, the past performance of syndicators is a great way to know who to work with on a joint venture in the future.
One of the current issues plaguing the economy right now is the surge in inflation across the United States. When inflation occurs, it lowers the value of capital you have on hand, as well as your assets like stocks and bonds. However, real estate is actually an inflation hedge. That means that it will maintain or increase in value over time. During a period of inflation, property values and rents soar, even in times of economic downturn. With more tenants in multifamily properties, this scenario becomes even more favorable to investors.
Best of all, you'll have access to tax advantages in an investment environment that is sheltered from the IRS. Real estate tax deductions are passed on to investors when they get in on a real estate syndicate at a minimum investment. As an equity holder, you'll be able to compound money for years without paying taxes until a property is sold. A property can easily show a loss for tax purposes even though it's generating a positive cash flow. This makes for a smart investment that is extremely tax efficient.
How do I know if I'm eligible as an investor?
Before investing in real estate syndications, passive investors are required to meet certain standards to be able to put their capital into a syndication deal. You must be an accredited investor. To be classified as an accredited investor, you must have an annual income of at least $200,000. This basic threshold is increased to $300,000 if you and your spouse are entering an investment deal. You'll also earn classification as an accredited investor if your net worth exceeds $1 million.
Depending on the syndication offer set forth by the Securities and Exchange Commission (SEC), certain real estate syndications may only be offered to accredited investors, such as a 506(c) offering. A 506(c) provides exemptions from registration for companies when they offer and sell securities. These companies rely on these exemptions to raise an unlimited amount of capital.
Many real estate syndications are also available to sophisticated investors. These are investors that must have in-depth knowledge and experience in the real estate field, making them eligible to become passive investors because of what they bring to the table for a real estate project. This is usually welcomed by syndications as a method of diversification among those involved as equity partners in the deal.
Think of real estate syndications as a crowdfunded platform. You want to know where you are dedicating your own money before casually throwing your hard-earned cash at something.
About the Author:
Annie Dickerson and her partner Julie Lam are founders of Goodegg Investments — an award-winning real estate private equity firm — and creators of the Real Estate Accelerator Mentorship Program. They are authors of the book Investing For Good and hosts of the popular Life & Money Show podcast: https://goodegginvestments.com/