When most people think of real estate investing, they think of buying a single-family home, renting it out, and collecting monthly rent checks, just like in Monopoly.
And while this property management sounds as easy and hassle-free as Monopoly would lead us to believe, the reality can be quite different. Because in reality, toilets break down at 3 am, tenants don’t always pay on time, and you have mortgage payments to make.
For many people, the road ends here. They figure real estate investing is just too hard and involves too much work, even when you have a property manager in place. There are too many decisions to make, too much paperwork to deal with, and too many surprises from month to month, especially if you have to pay a property management fee.
But for people like you who dig a little deeper, there are many other options in the world of real estate investing that might be a better fit.
Real Estate Group Investments
One such example is real estate group investments, also known as real estate syndications. Through real estate syndication, you invest your money in real estate together with a group of other passive investors in a limited partnership, yet you don’t have to do any of the day-to-day work of managing the property. You get to just sit back and collect steady cash flow.
Sound like a fantasy? That’s what I thought too, until I invested in my first multifamily real estate syndication. The rest, as they say, is history.
In this article, we walk through the basics of real estate group investing, or real estate crowdfunding, as it’s sometimes known, what it’s all about, how it works, whether it’s right for you, the returns you can expect, the pros and cons, and more.
Real Estate Investing
Have you ever walked downtown and marveled at all the huge buildings and thought to yourself, “Wow, the people who own those buildings must be filthy rich?”
Believe it or not, 90% of those big commercial buildings are owned by normal people just like you and me, and in this article, I’ll share with you exactly how they do it, and how you can do it too.
Our investors have used the investing strategy I’m about to show you to build wealth for their families and to create ongoing passive monthly income without having to do any work. And that cash flow has allowed them to work less and spend more time with their families, which is what investing should be all about, right?
Okay, let’s dive in.
When I was growing up, my parents were perpetual renters. They never bought their own home. They just continued to rent, year after year. It never occurred to me that someone actually owned those apartment complexes we lived in. I just assumed some big corporation owned them. Certainly not individual people.
Boy, was I wrong. The vast majority of large commercial real estate is owned not by single individuals, but by groups of investors. Often, these groups are called real estate syndication groups.
You might have heard of a news syndication or a TV syndication before, which is essentially when content gets pooled together. A real estate syndication is similar, in that it’s a pooling of resources.
Instead of you taking your money to buy an individual rental property, you pool your money together with a group of other investors, and you buy something together. Only now, instead of a single-family home, you’re buying something much larger, like an apartment building. Because you’re investing together, you share in the ownership, as well as the returns, which we’ll talk about in just a bit.
Real Estate Syndication
Let’s walk through an example. Let’s say that the lead syndicators, also referred to as the sponsor team, find an apartment complex listed for $10 million dollars. They need $2.5 million dollars for the down payment and, say, another $1.5 million dollars for renovations to improve the property. So altogether, they’re looking at raising capital in the amount of $4 million dollars upfront, to pursue this investment opportunity.
It’s very unlikely that an individual person (or often even a limited liability company) has enough money to plunk down $4 million dollars in real estate investments. So instead, the sponsor team decides to form a real estate syndication and invite accredited investors to join the project.
Maybe I put in $100,000 of my own money, you put in $50,000, and so on. The sponsor team are the general partners, because they have an active role in managing the project and managing the acquisition fee. In this example, you and I are limited partners providing capital only and we are not responsible for any component of the business plan. Depending on the total amount needed, sometimes a real estate syndication can include hundreds of passive investors.
The Legal Side Of Things
The group then creates an entity, often an LLC, and the investors all join that LLC. The group would also engage a real estate syndication attorney to create a private placement memorandum, which is a legal document that spells out things like how the accredited investors are tied to the investment, the risks involved, the acquisition fee, anticipated passive income returns to investors, things like that.
Now, because the LLC is a pass-through entity, you will get the benefits of direct ownership in that underlying real estate asset, which makes it much more beneficial than a real estate investment trust (REIT), and we’ll dive into this in a bit.
Real Estate Syndications Are Long-Term Investments
One important thing to know about a real estate syndication is that they are a long-term investing passive income strategy. Not long-term like 100 years, but more like 5 to 10 years. Let’s say you were to invest in a real estate syndication with a projected hold time of 5 years. Once you invest your money, you should expect to not see that original investment capital again until the real estate syndicate property is sold.
This means that if you were to invest $50,000, you shouldn’t plan to pull that money out next month or next year. This makes a real estate syndication different from stocks and bonds, which are much more liquid investments. You should only invest in a real estate syndication with money that you don’t need for a good long while.
Minimum Investment Amount
Speaking of which, how much money can or should you invest? The minimum real estate investment for each different real estate syndication can vary. The minimum investment we see most often is $50,000 dollars. This means you could invest any amount at or above $50,000, typically in increments of $5,000 dollars into a real estate syndicate.
And what about the returns, you’re thinking? How much money could you stand to make through investing in a real estate syndication? Great question. And of course, the answer is, it depends on the individual syndication and how it’s structured. But, let’s take a look at an example of a real estate syndicate to give you a general benchmark for what to expect.
Let’s say you were to invest in an apartment building real estate syndication with a projected 5-year hold, annual monthly returns of 8%, 20% average annual return, and a 2x equity multiple. Let’s break down what all that means.
Real Estate Property Return Example
Let’s say that real estate investors each put $100,000 dollars into this syndication. With a projected annual return of 8%, that means that real estate investors in commercial properties could expect to get 8% of their original investment per year. In this case, that would be $8,000, paid out at $666 per month. Over the 5-year hold period, this comes out to $40,000 in returns.
And then, there’s the profit from the sale of the property in year 5. With an equity multiple of 2x, that means that you’re projected to double your money during the 5-year hold time, when you add up both the monthly income and the profit from the sale. In other words, by the end of the real estate syndication, you would have gotten your $100,000 dollar original investment back, $40,000 dollars in returns during those 5 years, plus another $60,000 dollars in profits from the sale of the commercial real estate asset.
When you add all that up, your original $100,000 dollars would have turned into $200,000 dollars in the span of 5 years. Another way to think about that is to take the $100,000 in profits from the commercial real estate and divide by the 5-year hold period, giving you an average annual return of 20%.
Okay okay, I know that was a lot. Take a moment to look out the window, breathe, and give your brain a break.
All right, ready for a bit more? So now you know what a commercial real estate syndication is, what it’s used for, how it works, and what the projected returns are. Just a few more pieces of information that are important for you to know.
Investing With Retirement Funds
One is that you can invest in real estate syndications with retirement funds. That’s right, the money that’s sitting in your retirement funds – you can use those to invest in real estate syndications.
Now, you need to first roll these funds into what’s called a self-directed IRA account, but that rollover process is fairly straightforward. Once you roll your funds into a self-directed IRA account, you can use those funds to invest in real estate syndications.
Real Estate Group Investing Taxes
Another important thing to know is that, because you’re investing in an LLC, which is a pass-through entity, you get all the tax benefits of investing in real estate, which can include substantial write-offs.
We don’t have enough time to get into them in this single blog, but I highly recommend you talk to your CPA to learn more about the tax benefits of investing in real estate syndications.
Is Real Estate Group Investing Right For You?
And finally, you might be asking yourself whether real estate syndications are the right investing strategy for you. Here are some things to consider.
Because this is a long-term investing strategy, you should only invest in a real estate syndication with money that you won’t need for several years. Also, if you only have $50,000 dollars in your bank account, please don’t invest all of it into a commercial real estate syndication as a passive investor.
You should focus first on making sure you have an emergency fund, adequate savings, and some other types of more liquid investments, before investing in a long-term project like a real estate syndication.
Who Are Real Estate Syndicates Best For?
What real estate syndications are really great for are for helping you put your money into real estate without having to deal with the property management hassles of being a landlord. You get to just put in your money, and then sit back and collect cash flow distribution checks.
Real estate syndication can also be really great for diversification and building a real estate portfolio since you don’t need to take the time to build up your own team of limited partners or go out to look at individual properties. A real estate syndication can make it really easy to make real estate investments in a number of different asset classes and geographies.
The last thing I’ll leave you with is the importance of finding good sponsor teams to invest with. Anyone can make a real estate syndication work look good on paper, so you need to look beyond the projected numbers and really dig into the sponsor’s track record to see how each passive real estate deal is performing and whether they’re able to do what they say they’re going to do.
Real Estate Investment Opportunities
So there you have it. Now you know what real estate syndication deals are, how they work, whether they’re a good fit for you, the projected returns you can expect, and things to watch out for.
I discovered real estate syndication and passive investing just a few years ago, and they have been a complete game-changer for me and my family. We now have passive cash flow coming in every month, and, unlike with our rental properties, we don’t have to do any work to get it, so it’s truly passive, which means I get to spend that extra time with my family.
All right, I’m sure that, while this article has answered some high-level questions, it might have spurred a lot of new questions for you. So, comment below and let me know what questions you have.
If you’d like a more comprehensive walkthrough of passive investing through real estate syndications, be sure to grab a free copy of our new book, Investing For Good: The Surprising Strategy For Building Wealth While Also Making An Impact.
And finally, if you found this information interesting, share it with your friends, and be sure to subscribe to the Goodegg Scramble below. I’m Annie Dickerson with Goodegg Investments. Thanks so much for reading, and I hope you have a sunny-side-up day.