What is Real estate syndication?
In simple words, it’s a way for you and other investors to pool your money to invest in real estate together to generate passive income. Think of it as crowdfunding for real estate, but on a much larger scale than the typical online crowdfunding deals. It is a group investment in a property that is too large for any one of the investors to purchase alone. You’ll know exactly what you’re buying with your money, you can ask questions about the property, and discover the details upfront before committing capital. As an investor, you have the right to receive a portion of the profit from the entity that owns the property. A sponsor, also known as a general partner (GP), invests a smaller amount (typically 5-20%) than the limited partners (LPs or investors) but the GP provides the expertise: scouting for deals, acquiring a property, and managing the day-to-day operations, both financial and physical. You invest in a real estate syndication on the private market by contacting the sponsor.
What are the Various Roles in a Syndication?
Sponsor and Limited Partners
There is a person or company that organizes this investment and that is responsible for managing the whole operation on behalf of the investors. They do EVERYTHING. They are interchangeably known as the Sponsor, Operator, General Partner (GP), or Syndicator. (I’ll use those terms interchangeably in this post as well).
Investors are known as Limited Partners (LPs) or Members depending on the legal structure. They only provide the money to do the deal and make passive income from the investment.
Passive Income with Real Estate?
While there are many ways to create an income stream from real estate, we’ll focus on the way to generate the passive income you’re craving and move you one step closer to financial freedom. Enter real estate syndications that have all the freedom of passive income with none of the responsibility. Many people confuse real estate syndications from the operator’s perspective as passive investments, but there are significant differences between syndicating and investing in syndications. Syndicating doesn’t create passive income, investing in syndications does.
But Blake, I took a multifamily or syndication course or attended an online bootcamp and they said I could create passive income by buying B to C class, value-add multifamily investments that are 1970 or newer, garden-style, in appreciating markets. That’s exactly the problem. This market and asset class is crowded with new “multifamily investors” that have never owned multifamily, some that haven’t even owned real estate yet, and they want to call themselves multifamily operators and investors. When everyone does the same thing, that creates more competition and raises the barriers to entry. Despite what the gurus tell you, multifamily is a crowded space for operators. Let’s see why.
What you need to know about Syndication:
- Syndicating real estate is a full-time venture. You can split it among the team members, but there is still a ton of stuff that has to be done – capital raise, find deals, create relationships, manage your asses, run financial reports, meet with property managers, file returns for your investors, jump through SEC hoops, etcetera, etcetera.
- The fees are also really high to create offerings, so despite the multifamily course ads that say you can invest in multifamily with no money out of pocket, it’s a stretch.
- Ask yourself, do you have any business taking other people’s money to run a deal. Do you actually know how to run and manage the deal once you have it?
Investing passively in real estate is where you really get passive income. You don’t have to become a syndicator to earn passive income in real estate. In fact, the influx of self-deemed “multifamily investors” has made it harder for true investors – the ones who actually know how to find, fund, and manage deals – provide good investment opportunities for their investors. If you truly want passive income, take a step back and actually be passive. Focus on finding the right sponsors not becoming a sponsor yourself.
Advantages of Investing in a Syndication
- You know the exact property you’re investing in, as opposed to REITs and RE Funds and you can see the exact strategy the syndicator is planning to use.
- Pass-through tax treatment, in particular, depreciation and interest expense.
- Can participate in a 1031 exchange.
- Can allow for diversification – Because you’re only buying a small share, you may have the ability to invest in other opportunities at the same time instead of having all of your funds tied up in one property.
- Access to large investments with professional management.
- Liability protection and protection from personal credit risk.
- Very passive investment – The majority of the work is done upfront by vetting the opportunity and sponsor.
You need to keep in mind the followings two things:
- The goal is passive income –
It’s always good to bring in a little extra money on the side, right? Making money outside your day job can give your net worth a boost—not to mention give you some extra peace of mind. Maybe you’ve also heard about passive income and that renting out a property is a popular way to do it. But renting that property comes with managing the property, which is not passive.
- Don’t get caught in pursuing someone else’s goals, or goals you feel are socially pressured –
We unconsciously take on other people’s wishes for us. It can be difficult to tell the difference between something we want for ourselves and something social media pressures us into thinking we want. Adopting other’s aspirations without examining whether we actually want them is a great way to end up feeling empty and unfulfilled because you didn’t actually pursue or accomplish your own goals. It can be hard to tell where your dreams stop and someone else’s start so be crystal clear with your goals and make sure your actions reflect your goals.
Wrapping it Up
Multifamily Syndication is a great space to get into. However, make sure you are ready and willing to do what needs to be done to be successful in the space before you decide to add to the noise. A great option is to invest passively and see if the asset class is right for you. There is great wealth to be made in real estate, and I believe there is still great wealth to be made in multifamily. But it’s for those who set themselves apart and rise above the crowd. If your goal is to create passive income, consider the stiff competition you are going to face as an operator in today’s market. There is nothing wrong with investing passively, in fact, it may show more introspection and discipline to get in that way. And you will likely make more, especially time adjusted, for your involvement as a passive investor in today’s market.