Ever since I discovered the power of investing passively in real estate syndications (group investments), I’ve been singing its praises. I mean, how could I not? You get to invest in real physical assets, without the hassles of being a landlord.
You get to share in the majority of the returns, and you get pretty amazing tax benefits. You get to diversify into different markets and asset classes without having to do the legwork, and you get to make an impact on local communities through your investments.
But, all that being said, investing passively in real estate syndications isn’t the right solution for everyone, just like investing in the stock market or fix and flips or crypto isn’t for everyone. Every investor is different, is in a different stage of life, and has a different level of risk tolerance and different investing goals.
In our conversations with potential investors, we’ve talked with everyone from those who are thinking of taking out a loan to invest in real estate syndications (don’t do it) to those who have high incomes and are attracted to the tax benefits of real estate syndications.
It’s easy for anyone to get lost in the potential returns and the glossy marketing packages. But before you invest that $50,000, make sure that real estate syndications are truly a good fit for you.
If one or more of the following describes you, then you might want to think twice before investing passively in real estate syndications:
- You have less than $50k of “play” money
- You want to have an active role
- You are looking for a short-term investment
- You want to keep 100% of the returns
- You want to be able to access the money as needed
#1 – You have less than $50k of “play” money
This one isn’t a hard and fast rule, but it’s a good rule of thumb to start with. While there are some crowdfunded real estate investment platforms that will accept smaller investment amounts, most private real estate syndications start at a minimum investment of $50,000 or more.
If your bank accounts have a total of $51,000, you should NOT invest $50,000 into a real estate syndication. Before you sink that amount of money into a long-term investment like a real estate syndication, you should make sure that you don’t NEED that money and that you’re prepared to lose that money.
We make sure there are a lot of contingencies in place in the investments we pursue, but still. An investment is an investment, and no one can predict the performance of an investment with 100% accuracy.
Fires happen. Floods happen. Local and federal policy changes impact communities and behavior. There are lots of unpredictable things that could impact an investment, and if you’re not prepared to lose ALL of your investment (yes, all of it), you shouldn’t invest it in a real estate syndication. It’s a very small possibility, but it’s still a possibility.
And that reminds me. Please do NOT take out a loan to invest in a real estate syndication. Please, please, please. I know, it’s tempting because the returns look so good and the risks are relatively small. But, if something goes wrong and you lose your original investment, you would now be in debt and would be on the hook to pay back that loan, and that’s the last thing we want to happen.
#2 – You want to have an active role
If you’re new to real estate investing, have time to devote to your investments, and want to roll up your sleeves and learn by doing, then investing passively in a real estate syndication might not be the best fit for you.
As a passive investor in a real estate syndication, you will not be piloting the plane. Rather, you will be a passenger in the back. All the major decisions (shifts in the business plan, marketing and branding, when to sell, etc.) will be made by the pilots (i.e., the general partners).
As a passive investor, you won’t have direct contact with the broker, you won’t be applying for the loan, you won’t be getting bids from contractors or working with the property manager. Instead, you’ll have access to an investment summary deck, legal docs that describe the risks and potential benefits of the investment, and monthly and quarterly updates on the progress of the investment.
You might never see the property in person, and you definitely won’t be involved in the day-to-day minutiae of tenants and maintenance and budgeting.
So, if you’re looking for an opportunity to learn the real estate business from the frontlines, you might want to consider investing in rental properties or fix-and-flips, joint ventures, or even leading your own real estate syndication instead.
#3 – You are looking for a short-term investment
Real estate syndications are not a get-rich-quick scheme. Rather, they’re a get-rich-slowly-but-steadily approach.
If you’re looking to be in and out of the investment within a year or two, then real estate syndications are likely not the best investment for you.
Sure, there are real estate syndications we’ve invested in that have exited in under two years, but you should view that as the exception, rather than the rule. Most multifamily syndications project a hold time of five or more years, and you should plan accordingly, to have your money invested for the full projected hold period.
#4 – You want to keep 100% of the returns
In a real estate syndication, there can sometimes be hundreds of passive investors in a single deal. Together, those passive investors typically get the majority of the returns (usually we see a 70/30 or 80/20 split, with the larger portion going to the passive investors). However, there will always be a portion of the returns that will go to the general partners.
Why? Because the general partners are the ones doing the heavy lifting. They work with the property management company, they monitor the renovations, they handle unexpected situations, they spearhead marketing efforts, they prepare financial reports, and so on.
Without compensation, the general partners would have no incentive to work hard on the project. Personally, I like when a deal is structured to reward the general partners handsomely when the investment does well. That aligns the general partners’ interests with those of the passive investors. When the investment does well, everyone wins.
If you’re uncomfortable with fees or profit sharing structures and would prefer to keep 100% of the returns for yourself, then rental properties or fix-and-flips might be a better fit for you.
#5 – You want to be able to access the money as needed
If you’re thinking of buying a home in the next couple of years, if your child is going off to college soon, or if you’re thinking of undertaking a major home renovation project in the next few months, and you think you might need access to the capital you’re planning on investing, you likely shouldn’t invest that money into a real estate syndication.
An investment in a real estate syndication should be considered illiquid for the lifecycle of the investment. That is, if the projected hold time for the project is five years, you should plan to keep your money in the deal for the entire five years. If there’s any reason you might need that money sooner than that, you shouldn’t invest that money.
While we always do everything we can to help investors when unexpected circumstances come up (e.g., family and health emergencies), it’s really on a case-by-case basis, and we can’t guarantee that you can pull that money out of the investment early.
Listen. Real estate syndications are the best thing since sliced bread. Just my humble opinion.
I love being able to invest my money in real estate without the hassles of being a landlord. I love being able to invest with different sponsors in different markets and different asset classes. I love being able to invest with my retirement funds. Plus, the tax benefits (and sometimes even the returns) I get from passive investing can surpass those that I get from my personal rental properties.
But. Being a passive investor isn’t for everyone, just like sliced bread isn’t for everyone. So, if you…
- Have less than $50k of “play” money
- Want to have an active role
- Are looking for a short-term investment
- Want to keep 100% of the returns
- Want to be able to access the money as needed
…then investing passively in real estate syndications might not be the best fit for you. At least, not at this stage.
Perhaps you want to roll up your sleeves and do the work yourself first to learn the ropes. Or perhaps you’re looking for a more liquid or a shorter-term investment.
The beauty of real estate investing is that it’s so incredibly diverse. There are so many opportunities out there to invest in great projects and impact local communities. Commercial real estate syndications are just one avenue. They just happen to be our favorite.