Any time “investing” is brought up, peoples’ minds flash between images of Warren Buffet, memories of the Great Recession, and those #goals filed in their “someday” folder.
Unfortunately, 60 percent of Americans find investing to be scary or intimidating, according to a new independent market survey. Alternatively, 60 percent also recognize that “someday” they will need greater financial security than what they currently have.
Too many people are putting off to tomorrow what they should be doing (or investing) today.
For the next several minutes, set aside any preconceived notions you may have, and take an honest look at the risks associated with investing.
Let’s take a close look at investing in stocks versus real estate, the four basic risks of investing, how commercial multifamily real estate investments mitigate risk, and why the stock market can be much riskier than real estate.
A Primer on Risk
As with any investment, there’s an element of risk. Just as you could have been hit by a bus this morning, unexpected things come up in life, the stock market, and in real estate.
The key is not to look for investments that are risk-free (that doesn’t exist), but to understand the risks thoroughly, determine your threshold for risk, and ensure that you’re doing everything you can to mitigate risk.
When it comes to investing in real estate, most people are fairly familiar with the process of buying a single-family home or rental property. You choose the market and neighborhoods, determine how many bedrooms and bathrooms you’re looking for, get together with a lender and a broker, tour potential properties, and then make an offer.
However, when it comes to investing in a real estate syndication (group investment), the process can be entirely foreign, especially if you’ve never invested in syndications before.
For this reason, let’s explore the syndication process together, from start to finish, so you can invest confidently in your first real estate syndication.
Here are the basic steps of investing in a real estate syndication:
1. Determine your investing goals
2. Find an investment opportunity that fits
3. Reserve your spot in the deal
4. Review the PPM (private placement memorandum)
5. Send in your funds
One of the best analogies for a real estate syndication is to think of it as an airplane ride. There are pilots, passengers, flight attendants, mechanics, and more, who all work together to get the plane safely to its destination.
In this analogy, the pilots are the sponsors of the syndication, and the passengers are the passive investors. They’re all going to the same place, but they have very different roles in the process. If unexpected weather patterns emerge, if an engine has issues, or any other number of surprises, the pilots are the ones who are responsible for the flight.
The pilots will likely update the passengers (“Just to let you know, folks, we’re experiencing some turbulence at the moment…”), but the passengers don’t have any active responsibilities in making the decisions or flying the plane.
A real estate syndication is much like this. The passive investors, sponsors, brokers, property managers, and more, all share a vision to invest in and improve a particular asset. However, each person’s role in the project is different.
In this article, we’ll talk about exactly who those players are, as well as their respective roles in a given real estate syndication.
People in a Real Estate Syndication
Here are the key roles that come together to make a real estate syndication
If you’ve ever experienced owning single-family or multifamily homes, you know that these investments require time and energy.
Investing in residential real estate can be challenging because, typically, you as the investor wear many hats throughout the seemingly never-ending process. Responsibilities include finding the property, funding the deal, renovating the property, interviewing tenants, and even performing maintenance.
The trouble is, it doesn’t stop there. You have to repeat most of the process over again when your tenant’s lease is up.
Why Investing in Multifamily Rentals Can Be a Lot of Work
Small multifamily rentals have some advantages over single-family homes. For example, if one tenant moves out, the tenants in the other units are still there to help cover the mortgage. Plus, it’s much easier to manage one property with multiple tenants than to manage multiple properties with one tenant each.
But, even with a property manager on board to help with your rentals, bookkeeping, strategic decisions, and maintenance/repair costs are still in your court. You’re basically running a small business, which can be challenging if you’re working a full-time job.
The Case for Passive Real Estate Investments
On the flip side, there are fully passive investments in commercial real estate. These are professionally managed and operated investments so you don’t have to deal with any of the three scary T’s - Tenants, Toilets, and Termites. Oh my!
According to Forbes, once investors begin to understand passive commercial real estate investments, it’s common for them to move toward syndications. Here’s why:
The vast majority of people spend their lives working full-time jobs to earn a “steady” paycheck.
Meanwhile, the wealthy have somehow unlocked the secret to working less while making their
money work for them.
So what is it that the wealthy know that the rest of us don’t?
One of the biggest secrets that the wealthy tap into is the incredible power of real estate. Real
estate has the ability to generate passive income and provide a path toward building wealth.
Every dollar invested in real estate works for you in these five ways:
Do you remember the 5 paragraph essay structure from elementary school? Having guidelines
to introduce a central idea, provide 3 supportive paragraphs, and close with a strong conclusion
provides freedom and structure all at once.
The Five Phases of a Value-Add Multifamily Syndication
Similarly, each real estate syndication goes through a progression of stages with a clear
beginning, middle, and end, which ensures individual investors operate as one, according to a
clear business plan.
One of the most common questions that we get asked is, “If I were to invest $50,000 with you
today, what kinds of returns should I expect?”
We get it. You want to know how hard real estate syndications can make your money work for
you, and how passive real estate investing stacks up to the returns you’re getting through other
types of investment vehicles.
In order to help answer that question, you should first know that we will be talking about
projected returns. That is, these returns are projections, based on our analyses and best
guesses, but they aren’t guaranteed, and there’s always risk associated with any investment.
The examples herein are only meant to provide some ballpark ideas to get you started.
In this article, we’ll explore the 3 main criteria you should look into when evaluating projected
returns on a potential real estate syndication deal.
Three Main Criteria
Each real estate syndication investment summary contains a barrage of useful data. Focus on
these core concepts:
I’m often asked about the best way for someone to get started in real estate investing. If you’ve been wanting to get into real estate investing but are sitting on the sidelines and not exactly sure how to jump in, you are not alone.
There are TONS of ways to get involved in real estate investing, which is why those who do it love it, but it’s also why those who haven’t yet taken the plunge are left feeling completely overwhelmed and intimidated.
If you’re one of those spectators on the outside looking in, rest assured that there are many ways to get involved. In this article, I will walk you through how to diagnose where you are, what you want out of investing in real estate, and the best way(s) for you to get started.
Here’s an overview of what we’ll cover
1. Get a Macro View of Where You Are
2. Determine Your Why
3. Decide How Hands-on You Want to Be
4. Assess Your Risk Tolerance
5. Determine How Much You Want to Invest
6. Decide Which Types of Real Estate Investments to Pursue
7. Recap and Takeaways
Use the Real Estate Investing Roadmap
Download this one-pager to help guide you through the steps below. There are spaces to organize and record your thoughts for each step.
Did you know that you could invest in real estate without the headaches of tenants, toilets, and termites? It’s true – you can get all the benefits of investing in real estate, without any of the hassles of being a landlord.
In this article, you’ll see what passive real estate investing means and find out if you should be an active or passive investor.
What It Means To Be An Active Investor
When most people think of real estate investing, they think of rental property investing – buy a single family home, find a renter, and collect monthly rent income. Sounds easy enough, but the reality can be quite different.
Even with a professional property management team on board, you as the landlord still have an active role in the investment.
The property managers may take care of the day-to-day issues, but you will still need to be involved in strategic decisions, including whether to evict tenants who aren’t paying, filing insurance claims when unexpected surprises happen, and sometimes having to put in additional funds to cover maintenance and repair costs.
What It Means To Be A Passive Investor
On the flip side, you have passive investing, which are the “set it and forget it” type of real estate investments. You invest your money, and someone else does all the heavy lifting.
The great part about passive investing is that it’s totally passive – you don’t get any calls from the property manager, you don’t have to screen any tenants, and you don’t have to file any insurance paperwork.
However, being a passive investor also means that you relinquish some of your control in the investment and trust someone else (i.e., the sponsor team) to manage the property and execute on the business plan on your behalf.
Once you decide to dive into the real estate investing world, it won’t be long before you hear the term “Accredited Investor.” Once you notice how many passive commercial real estate or crowdfunded investment opportunities are publicly advertised and therefore limited to accredited investors only, you may get curious.
Even if you’re a total newbie, it’s important to know the difference between a sophisticated investor and an accredited investor and if you’re one of them.
Neither of these titles requires an application or an approval process. You can find out whether you’re an accredited investor based on a few simple criteria.
What to Look For
To be an accredited investor, you must:
1. Have had an annual income of $200,000 (or $300,000 for joint income) for the past two years, and expect to earn the same or higher income this year.
2. Have a net worth of over $1 million, not counting your primary home.