Updated: Jan 9, 2021
There’s a good reason real estate has been part of successful investment portfolios for years. It’s a limited commodity that has been proven to provide lucrative returns over time. A person may hold several real estate assets including lots, single family homes, commercial properties or multifamily properties. One asset structure that is often overlooked is syndication, especially for multifamily properties. One of the reasons for investing with syndicators is having an extensive access to deal flow. Passive investments offer access to deal flow and the change to invest in high quality real estate without having the most common hassles such as property management. Here are the top five reasons to invest with a syndicator.
Diversification is the primary reason to invest in real estate syndication, especially if you are planning your financial future. Passive investments mean you are pooling your money with other investors to purchase multifamily properties. There is a real strategy behind passive investing. Instead of buying a single-family dwelling for $75,000, you can invest the same $75,000 with a group of investors. Now, you don’t own one hundred percent of a single property, you own ten percent of all the profits generated from cash flow and the properties appreciation. By diversifying this way, you limit exposure to vacancy, maintenance and other expenses that pertain to single properties. For instance, if you own a single property and it goes vacant, you have zero income for the month it sits empty. On the other hand, if you own ten percent of 10 properties and one goes vacant, you’re still 90% occupied and can still receive 90% of your expected rent.
Access to More Opportunities
A second reason for participating in passive investments is the access you’ll gain to larger investment opportunities. Commercial properties can be a huge investment, but it’s not always reasonable to pay the purchase price which can be between $5 million and $500 million! Syndicators allow you the opportunity of pooling funds with other investors, so you get exposure to this asset class without having to donate seven-figures. Syndicators create large investment opportunities such as these and they can determine a minimum investment which may be as low as $25,000. This allows you the exposure to larger investing opportunities that might not otherwise become available to you.
There is a distinct advantage to investing passively, meaning the syndicator takes care of all the details and as an investor, you are removed completely from the management, asset and the general operations of the investment. The syndicator handles all these aspects. It is common for the investor to pay the manager through a performance fund which is split between the appreciation and the cash flow. Common splits for investors are 80/20 or 70/30. In exchange for the fee, you can be completely passive.
Passive investments let you utilize LLCs and limited partnerships which opens up a new status of tax-deferred for you. You can compound every cent of the fund’s proceeds for several years as long as the gains are not distributed outside of the fund. Depreciation often provides several write offs like interest payments or expenses. This means your annual tax exposure may be zero, or negative even though you are the recipient of thousands in distributions from cash flow. When the property is sold, investors pay taxes on the gains they received.
High Returns with Low Risk
Finally, as a passive investor, you can enjoy high returns without being exposed to personal liability or credit risk. When investing with a syndicator, you are not required to sign on the loan. The syndicator takes care of that. The lender will offer the syndicator funds because of their track record, credit worthiness and experience in the field. Your maximum risk is the money you put in the investment.
Passive investing is for those who are looking to build long-term wealth and creating a stream of passive income. It’s basically a wealth-building strategy which is easy to get started as well as sustain for the long haul.
About the author
Ellie is the founder of Blue Lake Capital LLC, a real estate company specializes is multifamily investing throughout the United States. She is also the host of a weekly podcast called "That REllie Happened?! Unbelievable Real Estate Stories with Ellie". She started her career as a commercial real estate lawyer, leading real estate transactions for Israel’s largest development company. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100,000,000. Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations. She graduated from the MBA program at MIT Sloan School of Management and holds Masters in Law from Bar-Ilan University in Israel.