Too many investment opportunities are being peddled today by fiduciaries who rely on the fees generated with complex investing vehicles.
So, why haven’t they told us about Real Estate Syndications? Because syndications are the opposite and have many benefits, mainstream advisors won’t let you in on. And I’m not saying this just because it’s what we offer our investors.
Syndications have been a well-kept secret for a long time. However, syndication opportunities can allow investors to allocate a portion of their financial portfolios into tangible assets with simple, transparent business models and experienced operators.
Real Estate Syndications provide passive investors with benefits other investment vehicles simply can’t.
Let’s walk through the top ten reasons you consider investing in one!
You Are Investing In A Hard Asset
Although Real Estate Syndications may be like a black box, they are investments grounded on a hard asset and use straightforward business models. We prefer these types of investments to others, such as bonds, mutual funds, stocks, and Real Estate Investment Trusts (REIT). Investors purchase shares of specific companies of REITs, stocks, and mutual funds. Alternative Real Estate Syndication investments offer share ownership of tangible assets. These assets are found on the public record and can be financially checked. Running these checks is just one way to ensure the investment is what the deal provider says.
You Get Paid First In Regular Intervals
Operators do not take it lightly when investors trust them with hard-earned capital. As a result, most sponsors and syndicators offer investors a preferred rate of return of 6-10%. The preferred return is called the first tier or Tier 1 of the return structure. Any cash generated from the asset or proceeds from a sale or refinance must meet the preferred rate of return first.
There is a litany of business strategies, asset classes, and markets that real estate entrepreneurs use to their advantage. Some business plans are riskier than others where cash is not generated in the first (or even second year). Other types produce cash flow on day 1. No matter the plan or market, it is always the goal to stabilize the asset and streamline the business plan to generate cash flow on a monthly or quarterly basis, depending on the operator. It’s our goal to prioritize monthly distributions by leveraging technology and high professionalism in accountancy and financial services.
Real Estate Syndications Offer Diversification
As a passive investor, you can place capital to maximize diversification; we’re not only talking about geographies. Below is a list of ways syndication offers diversification to your portfolio.
- Geographies
You invest outside your local market and into larger, more stable metropolitan areas.
- Products
Real Estate Syndications allow us to diversify into all types of assets, including Multifamily Apartment buildings, Self-storage facilities, industrial warehouses, office, and retail spaces, built-to-rent communities, hotels, short-term rentals, and others.
- Business Plans
Investors can invest in business plans offering different risk and reward structures. For example, executing a value-add strategy is riskier than investing in a fully leased Multifamily asset in a prime location or an industrial asset with a proven business customer. However, sponsors should aim to provide opportunities with returns on a risk-adjusted basis, which is not directly correlated with the returns.
The investors have the opportunity to have proven and successful operators who’ve reduced the risk profile due to rinse-and-repeat processes coupled with continuous improvement.
- Management Styles
Tried and true operators who focus on the basics have worked for decards leveraging old-school techniques or investing with an operator who strives to be on the cutting edge in terms of operating procedures, people tools,
- Tenant Types
Each asset class in commercial real estate provides different products to different tenants. For example, the tenant needing space to operate their small business is much different than a couple needing a comfortable apartment. The location also drives different tenant types. Phoenix, for example, attracts couples with high incomes (+$150,000) and one or two animals and chooses to rent for flexibility. On the other side, you could invest in nearby geography with a median income of $45,000 with a declining population.
Lastly, it’s important to note the average investor is usually under-allocated in equity ownership of real estate outside their local market. Our investors have all of their “eggs in one basket.” We strive to provide sound opportunities outside client localities to derisk their financial exposure.
What happens when a drought or flood wipes out the annual harvest? This is why investing outside of local markets is so important. Investors can place their capital into great opportunities in stable and outside agriculture that generate consistent cash flow and support their families.
Syndications Reduce Your Financial Risks
Passively investing in the right real estate syndications can reduce financial risk in three primary ways.
Firstly, investors can directly partner with expert operators in commercial real estate, people who have been doing this for decades. We partner with operators with a long track record and a competitive advantage or market niche they dominate. Moreover, experience operators have developed systems and processes to achieve scale economies.
Secondly, the sponsor putting forth a deal should have a brand they’re upholding. Having a brand is their reputation, their life’s work. So being in good standing is always on the line for each opportunity.
Thirdly, passive investors benefit from multiple deal vetting processes. The opportunities should only be the ones that have been back-tested and passed all financial stress tests and due diligence checks. We use a due diligence checklist of over 100 questions to ensure deals and operators pass the sniff test. However, this doesn’t mean the risk is taken from any business plan. The adage, higher risk, higher reward, still applies. However, these processes and checklists allow us to reduce risk while keeping the same reward structure when a great deal comes across the table.
You Get The Tax Benefits
Investing passively in real estate syndications provides an avenue to become real equity owners. Unlike investing in a Real Estate Investment Trust (REIT), you only buy company shares. However, as equity owners, passive investors receive the tax advantages real estate provides, such as depreciation and interest expense write-offs. In addition, operators leverage cost segregation to increase the allowable depreciation amount further. As a result, it is not uncommon for investors to see a loss on paper but receive cash in the bank with cost segregation studies.
You Have The Ability to Invest in Preexisting Investment Vehicles
There are many ways to use funds already set aside to invest in real estate syndications. A few of them are Self-Directed IRAs (SDIRA), Solo 401Ks, and trusts. Depending on your state’s rules, with the help of your CPA, using preexisting retirement funds could be an option to invest in a real estate syndication. You should always check with a tax professional familiar with your financial situation and the applicable tax laws to see which choice might be most beneficial to you.
Distributions and any benefits from the investment apply to the entity, meaning the deposits will go back into your retirement or business accounts. If investing this way, it’s important to keep funds separate – you don’t want unexpected taxes or fees from the accidental withdrawal/use of retirement or business funds.
Similar to almost everything in life, this strategy has pros and cons. However, we like to have more tools in our toolbelt than not.
You Benefit From Two Types of Appreciation
There are two types of value appreciation or the expected increase in financial value over a specific time when it comes to commercial real estate.
The first is known as Market Appreciation which is straightforward. Market Appreciation happens when the asset is located in a geographical location that is in strong demand for many reasons. One of the most common reasons is job growth, livability, affordability, and lifestyle.
The second type is known as Forced Appreciation. Forced appreciation occurs when the operators add value to the asset and business plan by raising rents, lowering expenses, renovating spaces, adding amenities, providing services, or even implementing technology to ensure a quality customer experience.
Only Your Invested Capital is at Risk
Although real estate syndications offer passive investors the ability to pool money and take down more significant assets, limited partners usually do not have voting rights in the deal. So, for example, passive investors can’t decide when an asset should be sold or when rents should increase. Structuring the business entity as such limits the liability of each investor to only the capital they invested.
If a worst-case scenario occurs, such as a tenant suing the general and limited partners, only the invested capital of $100,000 would be at risk. The courts could not go after any other assets owned by the individual investor. They can’t take away your personal or business assets.
You Benefit From Principal Pay Down and Interest Expense
Syndicators bring a great advantage with principal pay downs. In addition, they assist you in investing in larger properties with multiple tenants. With every family paying the mortgage, having a property with several tenants means the mortgage value multiplies.
And you receive the multiplied value on your investment thanks to the syndicators for carefully investing in larger properties.
Real Estate Operators Offer The Best Investing Opportunities
Passive investors in real estate Syndications benefit from being limited partners in deals. Being a limited partner means you can access top-tier operators, brokers, lenders, and deal finders across the country. These experts have spent decades mastering their craft and building relationships with everyone from the contactor to the local government official. The culmination of these relationships provides increased access to deal flow when compared to an investor who does one deal every few years.
Disadvantages of Real Estate Syndications
It would be remiss not to state the inherent disadvantages of Real Estate Syndications.
- Your capital is locked into the asset during the hold periods, usually 3-10 years. However, there are short-term fund solutions. Contact Casey for more information.
- You’ll most likely invest as a Limited Partner. Limited Partners have no control of the operations. However, this can be advantageous as it lets the experts manage the business plan without emotion.
- Many syndications require limited partners to be accredited, whereby a third-party company verifies income thresholds and net worth calculations. We don’t like people getting into our business either. Luckily, a simple letter or email from your CPA could suffice. Learn more here.
- Investing in Syndications does require you to do some upfront work. We highly recommend you perform your due diligence by
- Reviewing the Executive Summary, Operating Agreement, and Private Placement Memorandum
- Attending the Webinar and Q&A session
- Consulting with your legal and accounting professionals