Real estate syndications are primarily unknown to you because 95% of transactions involve 506(b) offers. The investor and syndicator must already have a substantial relationship for the investor to qualify under SEC regulation 506(b). It is frequently referred to as a “friends and family raise” because of this. Nowadays, conferences, mentorship groups, and local meet-ups are where passive real estate investors can connect with real estate syndicators and form these kinds of partnerships. The second regulation to qualify under is 506(c). This exemption allows only accredited investors to invest in the deal, but the sponsors can advertise, among other activities.
The syndication industry began in 2012 when the Jobs Act was passed and was recognized by the SEC in 2015.
One thing to keep in mind: We assume you are well-off and have enough financial and intellectual resources to invest in real estate syndication. The $50k you’re investing should be different from the last $50k you’ve had in savings.
Dedicate time to self-education
The jargon of each sector is unique, and real estate syndication is no exception. Learning the terms used in real estate syndication does take some time. I’d say that learning the fundamentals takes approximately 30 minutes, and learning the advanced material takes about two hours.
Think about this 56% of US citizens buy in stocks, but how many of them are aware of EBITDA and its relationship to the stock price? I would think under 1%. I dare suggest that investing in a real estate syndication is more transparent than investing in equities.
In that sense, knowing the terminology of real estate syndication for two hours is time well spent because it will significantly increase one’s financial literacy.
The amount of work is the final obstacle. Here’s the catch: passive investors must devote time in networking, education, and evaluation to meet syndicators.
If that sounds like too much work for passive investors, consider the alternative: finding, networking, and making offers on residential real estate properties across the US is just as much work, if not more so. This is not even considering the hassle of managing and maintaining the properties yourself.
My final point is that the amount of work one puts in directly correlates with the results one receives. The labor is switched from evaluation to maintenance in real estate syndication, which offers the most significant return for your time spent on each unit.
Benefits of real estate syndications for investors
Hands-off income streams
Only some people can operate a large firm, just as not everyone can build companies like Cargill or Pioneer. Certain economies of scale are required to reduce expenses, operations, and staff. You do not need to make daily operational decisions because real estate syndicators handle all of the management and ongoing operations of the real estate assets. You choose the best jockeys to carry out these activities only for business reasons.
Real estate is highly localized and dispersed. I’ve always wanted to invest in an Airbnb in Yellowstone, but I need more knowledge, time, energy, and the network to choose the right property and locate a manager to run it.
Real estate companies are likely capable of handling it. However, a Floridian real estate agent needs to learn more about the Yellowstone market (and likely doesn’t want to). An operator in Yellowstone completely understands the specifics of the neighborhood market.
Results that are above average
Similar to how hedge funds compare to mutual funds, individual real estate syndication compares to REITs (real estate investment trusts) since syndicated agreements typically have fewer costs, less red tape, and higher returns than REITs. The fact that returns are unrelated to the stock market is another benefit of real estate syndication. REITs trade on public markets. They can therefore incur significant declines in value even when the intrinsic value of the real estate they hold has stayed constant or increased because they are well connected with the general market.
You may quickly and effectively diversify into various asset classes and markets using real estate syndications without putting in a lot of work. Still, you will have less control if you invest in a rental property as a sole equity owner.
Remember that real estate syndications are long-term investments as well. Therefore, real estate syndications are not for you if you’re looking for a quick flip or a way to make fast money. After the asset has been fully repaired and stabilized, there is a holding phase. A typical syndication can take anywhere from 3-10.
Why should I trust the small dogs?
Real estate investing is becoming more accessible and commoditized because of real estate syndication. Why not delegate the work to those passionate about it, so you can focus on spending time with your loved ones and excelling at what you do best? You’ll reap the rewards (regular income flow without the responsibilities of being a landlord) if you let the best capital allocators do the work. Finding the most excellent allocators who can carry out work on your behalf takes priority over completing all the actual labor yourself.
Commercial real estate companies versus real estate syndications
Large commercial real estate companies are typically bureaucratic businesses that rely heavily on generating large amounts of capital for their revenue. They resemble the global McDonald’s. It runs like a well-oiled machine, and the returns are steady and modest. On the other hand, real estate syndications are akin to quaint cafes that might provide far tastier menu items and have a backstory. You have to put in some work and effort to find it, and it might not be as consistent as McDonald’s.
For every significant commercial real estate company, you can imagine, I can name ten real estate syndicators. These guys and gals are experts in their respective local markets, work hard to find good deals, go to conferences, constantly learn, and perfect their trade to get the best returns for their passive investors. I know many more sponsors like them because I am a real estate syndicator.