When you first learn what real estate syndications are and how passive investing works, your first question might be, “What’s the catch?”
Receiving a check in the mail for doing, seemingly, nothing sounds too good to be true. What are the hidden risks of investing in real estate syndications? What goes on behind the scenes of a real estate syndication?
This is a good thought process because it means you’re not blindly jumping in. Instead, you’re thinking critically and doing your own due diligence. Kudos to you.
What Are The Pros & Cons of Real Estate Syndications?
Just like for every purchase, investment, or decision, there are pros and cons to real estate syndications as well. Each one may matter to you … or not. It completely depends upon your investing goals, time-frame, and financial position.
If you’ve spent any time on the site at all, you’re familiar with our perspective on real estate syndications.
We think they’re awesome, that people should be interested and trying to invest in them, and we can’t wait to continue to share about them so that more people have the opportunity to learn about these types of passive investments.
However, we also know that real estate investments are a big investment and are not the perfect choice for everyone. So, here are the top four reasons why someone should NOT invest in real estate syndications.
Before you’re fully committed to and after you’ve become interested in a real estate syndication, you need to know several details about actually investing in these deals.
The process of investing in a real estate syndication is very different than picking a stock or a mutual fund online. Furthermore, unlike typical investment properties, there are hold times, barriers to entry, and a whole set of expectations that you need to know about prior to committing to a deal.
As a smart investor, you’ve got to know exactly why you’re choosing a particular investment in addition to the required credentials, the process, what’s involved, and how long you should expect to wait until payout. Guess what? You’re in luck!
That’s precisely what you’re about to read!
If you’ve invested in residential real estate before, you have some important, basic lingo like rental income, mortgage interest, and amortization under your belt. When you step into the world of commercial real estate, you’ll begin to see other terms, like “cap rate”, thrown around as if everyone inherently knows what that means.
It’s okay if you don’t know what a cap rate is or what it’s used for. It can be challenging to understand and hard to calculate. As a passive investor, you won’t have to do any of the hairy work to calculate cap rates, but it’s helpful to have a very basic grasp on what they are.
Keep reading to find out what a cap rate is, how it’s calculated, what it’s used for, and what you need to know about cap rates as a passive investor in a real estate syndication.
Have you ever known a new parent? They likely have stashed packages of baby wipes everywhere.
In the purse, the diaper bag, multiple places in the baby’s room, in the master bedroom, in the car… it’s likely that anywhere she and the baby might be, a stash of baby wipes is near.
The purpose, of course, is to prepare for those unexpected moments that accompany having a new baby. That new parent might not know exactly what to expect, or when a surprise spit-up will happen, but they know to expect the unexpected.
Whether or not you have a background in real estate investing, commercial or residential, is irrelevant.
There are just things you need to know about syndications that are different than any other type of deal you’ve likely been involved in or had exposure to.
Your grandpa owned a few properties? Cool.
Your dad used to flip homes for profit? Cool too.
Now you’re interested in approaching real estate a little differently? Awesome.
So, it’s natural to wonder about the returns, minimum investment requirements, taxes and more when it comes to real estate syndications. Today we’re going to address these 4 technical details:
We love details too and commend you for digging into the not-so-surface elements of
this type of investment.
Many real estate investors “get their feet wet” through some form of residential real estate. Whether those initial investments are flips, standard rental homes, or even duplexes, that’s a great start. But we recently met someone who’d been in the real estate investing game for over 10 years and had never heard of a “real estate syndication” before.
Actually, that’s pretty common. Until somewhat recently, SEC regulations did not allow for real estate syndication opportunities to be publicly advertised. This made it so, you had to be part of the “inner circle” (i.e., you had to know someone who was doing a deal) in order to invest in one.
Luckily, the SEC now allows certain opportunities to be publicly advertised, which opens the gates for more people to learn about and invest this way.
But maybe you’re new to this term too and are wondering things like:
You’ve been devouring all the information possible and have nearly become enamored with the power of passively investing in real estate syndications. How could you not?
The ability to invest in real, physical assets without being a landlord, getting a share of the majority returns, and reaping amazing tax benefits is a pretty shockingly sweet deal. Plus, the diversification opportunities with minimal legwork while making an impact on local communities is pretty attractive.
Even though these traits seem impossible to pass up, real estate syndications aren’t for everyone. Each investor is in a different stage of life, has a different level of risk tolerance, and maintains different goals.
Before investing in a real estate syndication, see if one or more of the below describes you and your current situation.
Any time a potential investor is reviewing real estate syndication investment opportunities, they’ll likely come across the term “equity multiple”. Even if they’ve purchased a primary home or a residential rental property before, it’s unlikely they’ve heard of equity multiples.
When it comes to passively investing in real estate syndications however, it’s an important phrase to know and understand.
Have you ever heard about or explored the opportunity to sponsor a child through a non-profit program such as Children International? Contributions through these organizations change children’s lives exponentially in areas of health, education, and even safety.
As you may know, when you choose to help a child through such programs, you receive updates about the child regularly, including notes they’ve written and even pictures of them. You get to have a supportive hand in their growth from afar while never having to enforce a bedtime or wash the ice cream off the child’s shirt.
Investing in a real estate syndication is very similar in this aspect. As a passive investor, you would receive regular updates on the progress of the project after the deal closes, but you don’t have to field phone calls from tenants when an issue arises.
Typical Real Estate Syndication Communications and Touchpoints
There are 5 key communications you should receive at important intervals once you invest in a
real estate syndication. From the closing date, through the hold period, until the asset sale, here’s what to look for: