For many of us, the start of a New Year comes with fresh New Year's resolutions and goals. This frequently includes reviewing your investments and making adjustments to your strategy and make sure it's aligned with your current situation and goals.
If you're interested in real estate and are looking for ways to add more passive income to your portfolio, real estate syndication could be a great addition to your overall investment strategy.
Like any other investment, it's important to do your homework before committing your funds. How does real estate syndication work, what are the pluses & minuses, and how do you choose the right sponsor?
What Are Real Estate Syndications?
Real estate syndication is a way for a group of investors, known as a syndicate, to pool their money together to invest in larger real estate projects. These projects can include the acquisition, renovation, and management of properties such as apartment buildings, office buildings, self storage, shopping centers and more. A good operator will have a strong track record and a strong network that will allow them to gain access to larger, more exclusive deals that individual investors usually don't have access to.
In a real estate syndication, the syndicate is typically led by a sponsor, or General Partner (GP). The sponsor is responsible for identifying and evaluating potential investment opportunities, raising capital, managing the day-to-day operations of the property, and eventually sell the asset.
The investors, typically referred to as Limited Partners or LPs, bring capital to the deal. Investors are typically made up of accredited investors, institutions, or a combination of both. By definition, the LP's involvement in the property is "limited". They receive income distributions from the GP in regular installments (typically monthly or quarterly), with a return on investment coming from the property's eventual sale.
It's important for accredited investors to carefully evaluate the terms of any real estate syndication in which they are considering participating, and to thoroughly research the sponsor and the specific investment opportunity.
First of all, consult with a licensed financial professional to discuss your specific situation before jumping in. Once you're comfortable with investing, here are some potential next steps to take in your due diligence.
Make sure the sponsor is investing in the types of properties and the markets that interest you.
Reach out to your network to see if there's anyone that has any firsthand experience and recommendations for syndicators.
Follow & interact with syndicators and their teams on social media.
Reach out to talk with syndicators directly to learn more about their philosophy, people and business. (Shameless plug, if you'd like to learn more about Blue Lake Capital, click here and fill out our potential investor form, our investor relations team would love to connect with you!)
Once you've done your due diligence, you'll feel more comfortable investing with a real estate syndication that aligns with your goals.
Syndications vs. Other Investment Options
Syndications aren't the only way to invest in real estate, of course. If you've looked into real estate before it's likely you've considered buying rental properties or investing in Real Estate Investment Trusts (REITs).
Owning rental properties has a lot of benefits, including property appreciation, tax benefits and, if you're an effective operator, regular monthly cash flow.
Owning rental property is hardly a source of passive income, however. You'll have to deal with tenants, collect rent, fill potential vacancies, address any issues with maintenance and upkeep, and so much more.
REITs are comprised of income-producing real estate properties across various asset classes and sectors. It's easy to own a REIT since they're publicly traded on the stock market, making this a very liquid asset that provides passive income through regular dividends.
One of the downsides of REITs is that investors don't provide the tax benefits of participating in syndication or direct ownership. REIT investments are taxed the same way other equities are, and the value of the REIT share price is subject to market fluctuations
Compared to owning rental properties or investing in REITs, syndications can provide the best of both. They provide regular cash flow like REITs with the property appreciation and tax advantages of owning real estate, just keep in mind that syndications are typically illiquid and can have high minimum investments.
What Type of Returns Should You Expect?
Syndications usually provide returns to its LPs in two ways. They pay investors through regular cash flow created by rent and, ultimately, investors receive their original investment back along with any appreciation when the property sells.
Returns can vary depending on a number of factors. Typically, a syndication will last at least 3-5 years and provide a strong annual yield. The yield can vary depending on current market conditions and property performance but will normally be paid out in monthly, quarterly or annual distributions. This is what's referred to as a cash-on-cash return.
A good sponsor will help increase value in a property through renovations, improvements, and adding amenities that will help attract high quality tenants. This will result in earning higher rents and drive appreciation of the asset. When the sponsor decides it's time to sell the property, the LPs will benefit from that appreciation.
There are a lot of variables that can impact the returns & timing of a syndication. For example, during COVID, a lot of groups were initially on the sidelines waiting to see what was going to happen. At that time, we continued to bet on multifamily real estate; that was a bet that paid off for us and for our investors.
These days, conditions have changed. We can't expect to see rents increase as much as they have the past few years, finding & negotiation good deals is much harder, and having strong underwriting is critical, along with a strong focus on operations to try and maximize the properties value. This makes your due diligence process even more important.
Is Real Estate Syndication Right for You?
Does this sound like you?
You're interested in real estate investing but don't want to be actively involved in managing a property.
The idea of passive income and the tax benefits that come with syndication is very interesting to you.
You're an accredited investor who can commit to the minimum investment, in most cases anywhere from $25,000 - $100,000 and up.
You don't need immediate access to your funds and are comfortable with a multi-year holding period.
If you found yourself nodding your head in agreement, it's possible that investing in real estate syndication could be a good addition to your overall investment strategy:
Before joining a real estate syndication, do your due diligence. It's crucial to thoroughly research the offering, as well as the individuals or entities managing the investment. It's also important to carefully read and understand the terms of the syndicate agreement or PPM before committing.
There are a lot of options when it comes to investing in real estate, including owning rental properties and investing in REITs but, for the right investors, joining a syndication can provide benefits that other investments can't.
If you're an accredited investor, make sure you're comfortable meeting the minimum investment criteria and that you won't need access to those funds right away.
If you meet the criteria and generating passive income and potential returns though property appreciation interests you, real estate syndication could be a key piece of your overall investment strategy.
The information provided here should not be considered financial advice. As with any investment, it's crucial to make informed decisions and consider if it aligns with your personal financial goals and risk tolerance. Make sure to consult a financial professional before taking any action.
Despite the current economic challenges, we're keeping our deal flow active. Multifamily real estate an asset class that remains strong and, from our view at least, is still a very solid investment. If you're interested in getting involved with multifamily syndication and want to find out more about Blue Lake Capital specifically, please reach out, we've got big plans for 2023!
Be well, be strong, and keep pushing forward!
Invest with Blue Lake Capital
If you are interested in learning more about passively investing in multifamily properties, click here to schedule a call with the Blue Lake Capital Team.
About Ellie Perlman
Ellie is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.
Ellie started REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.