Often, after we give our investors a basic overview of what real estate syndications are and how passive investing works, their first question is, “So, what’s the catch? This sounds too good to be true.”
And hey, we totally get it. Because we were on Skeptic Island too, when we first started out as newbie passive investors.
If you’re asking whether this is too good to be true, that means you’re thinking critically about real estate syndications as a potential investment vehicle and doing your own due diligence, which means you’re a pretty smart and savvy investor. Kudos.
So, you want to know the real honest truth? Are real estate syndications really too good to be true? Or are there hidden downsides and risks that you haven’t yet discovered? That’s exactly what we’ll cover in this article. Ready? Let’s do it.
Let’s start with the obvious. Real estate syndications are not perfect.
Just like every other investment vehicle out there, real estate syndications come with pros and cons, and you have to weigh each one for yourself, based on your personal investing goals.
Here are a few pros and cons of real estate syndications to get you started.
Pro: As a passive investor in a real estate syndication, you don’t have any active responsibilities. That means that you don’t have to deal with tenant turnover, renovations, or middle-of-the-night emergencies.
Con: As a passive investor, you don’t have any control over the investment. Often, you don’t even get a vote. The sponsor team is responsible for the day-to-day operations and strategy behind the investment, so you have to put your trust in them.
Pro: Most real estate syndications are long term investments, with projected hold times of 5 years or longer, so you can put your money in and not have to think about it for a while.
Con: Because real estate syndications are long term investments, you can’t pull your money out at will like you could with stocks and mutual funds.
Pro: As a passive investor in a real estate syndication, you just sit back and collect regular cash flow checks. Often, these checks get direct deposited into your bank account, making it truly low-muss, low-fuss.
Con: As one of many investors in a real estate syndication, you are sharing in the overall pot of returns. Often, you’ll see an 8% preferred return with a 70/30 split thereafter. In other words, the first 8% of all returns go 100% to you and the other passive investors, and then the rest is split 70% to the passive investors and 30% to the sponsor team. This is unlike rental property investing, when you as the sole owner get 100% of the returns.
As you learn more and more about real estate syndications and passive investing, keep a running list of the pros and cons. Often, because there are two sides of the coin, every pro has a corresponding con. Again, you’ll have to weigh each one to see where you land.
While passive investing might sound like an amazing investment vehicle, real estate syndications are not right for everyone in all walks of life.
Major Life Events
Because private real estate syndications typically come with a high minimum investment (usually $50,000 or more) and will hold your money for a long period of time (typically 5 years or more), they are not the best fit for everyone.
Let’s say, for example, that you have a child who’s going off to college soon, or you’re planning on doing a big home renovation project, or you’re thinking about a career change or going back to school.
Any major life change comes with the potential for major shifts in your overall financial picture, thus making it not such a great time to get into a long-term investment like a real estate syndication.
Accredited vs. Non-Accredited
If you’re an accredited investor, you’re eligible to invest in pretty much any real estate syndication. To qualify as an accredited investor, you either have to have over $1 million in net worth, not counting your primary home, or make $200,000 per year (or $300,000 together with your spouse), have done so for the past two years, and intend to make the same amount this year.
This is a pretty high bar, so it’s completely understandable if you haven’t yet reached accredited status yet.
If you’re not an accredited investor, there are still some real estate syndications that are open to you, but you’ll have to dig to find them, since they cannot be publicly advertised. This means you’ll have to put in some extra work to network with people and find opportunities that are open to you.
The Trust Factor
Being a passive investor also involves a certain level of trust. If you’re the kind of investor who wants to be in control of everything and make all the decisions yourself, you’ll probably be pretty uncomfortable as a passive investor, and here’s why.
As a passive investor, you’re not in the “situation room,” so to speak. You don’t get to make the big decisions about budget and timelines and renovations. You get a monthly update about the progress of the project, along with a cash flow distribution check, and that’s about the extent of your ongoing involvement. If you’ve never done that type of backseat investing, it might take some getting used to.
Okay, let’s talk about the elephant in the room, losing money.
You want to know, could you lose money if you were to invest in a real estate syndication. And the answer is, yes. You absolutely could. Is it likely? Not if you invest right. But it’s always a possibility.
Real estate syndications, just like stocks and mutual funds, are an investment, and no investment comes with a full guarantee. There’s always a chance that things could go awry. And yes, that includes the possibility of potentially losing some or all of your investment.
There, I said it. You could lose some or all of your original investment.
As a passive investor, that’s something that you will need to get comfortable with. So if you’re starting to sweat just reading these words, then maybe real estate syndications aren’t the right fit for you, at least not yet.
Because here’s the honest truth. There are people who have lost money investing passively in real estate syndications.
It hasn’t yet happened to any of our investors in any of the deals we’ve done (knocking on all the wood I can find right now), but I do know of people who have invested with less experienced operators or in less savory submarkets who have lost money.
So are real estate syndications too good to be true? Absolutely not. Are the projected returns guaranteed? Definitely not.
You could absolutely lose money. But it’s extremely unlikely if you invest right. And that brings me to my last point.
If you want to be a true passive investor, the kind that fully trusts in the investment and doesn’t worry about a thing, doesn’t lift a finger, and just enjoys the passive cash flow checks, then you have to invest smart.
What does that mean? Well, for one, you have to do your own due diligence, like you’re doing right now. You have to think critically about each piece of information that you’re provided and take the time and energy to do your own independent research and draw your own conclusions.
You have to put in the time up front to research and vet the sponsors and markets that you’re investing with and in. You have to put in the time to come up with questions that will make you feel truly confident in the investment, and then you have to find the courage the ask those questions and read between the lines when you get the answers.
Being a successful passive investor is not an entirely passive journey.
There’s a sh*t ton of work you have to put in up front to educate yourself and get yourself comfortable with how the whole thing works, before you can confidently sink $50,000 or more of your hard-earned money into a real estate syndication that someone else will be operating on your behalf.
And only then, only after you put in all the work to educate yourself, connect with the right people, and do your own due diligence, will you truly be a passive investor, the kind that sleeps soundly at night while their cash flow checks get deposited automatically into their bank accounts.
I hope that by now, you see for yourself that real estate syndications, while totally awesome, are not perfect, and they’re not for everyone.
Just like any other investment vehicle, real estate syndications come with pros and cons, potential downsides, and a good amount of time investment up front.
But, if you make it through…if you put in the work and you have those conversations and you ask your questions and you do your research…I believe that you’ll find passive investing to be a truly one-of-a-kind type of investment experience, one that you’ll be raving about to your friends as you show off your latest cash flow checks.
And when they ask you whether it’s too good to be true, you’ll laugh quietly to yourself as you send them the link to this article.