How To Become A Passive Investor In Commercial Real Estate
The process of investing in a commercial real estate syndication opportunity should now be much less intimidating.
In a real estate syndication, once youve signed the PPM and wired in your cash, you can sit back and relax youre a passive investor, remember? Your active involvement is all upfront during the time youre choosing a deal, reviewing the investor materials, reserving your spot, reading and signing the PPM, and wiring in your money.
As a limited partner in a commercial real estate syndication, all you have to do throughout the hold period is collect cash flow distributions, receive periodic updates from the sponsor team, and, once the business plan is executed, collect profits from the assets appreciation at the sale.
Dont get too overwhelmed if this all seems too complicated. Thats what were here for, and well be there every step of the way as you start your first real estate syndication. As you evaluate and invest in additional properties, the procedure will become second nature to you.
How Is Syndication Different From Real Estate Crowdfunding
Real estate syndications are also often confused with real estate crowdfunding, which has become increasingly popular since the Jumpstart Our Business Startups Act was passed in 2012 and updated in 2016.
According to Title III of the JOBS Act, non-accredited investors can participate in real estate crowdfunding projects with a cap on how much capital can be invested within a 12-month period.
If a non-accredited investor makes more than $107,000 per year and has a net worth above that amount, they can invest up to 10% of their income or net worth, whichever is less, up to a maximum of $107,000 in one calendar year.
But if a non-accredited investor makes less than $107,000 per year or has a net worth below that amount, they can invest either 5% of their income or net worth or $2,200 in one calendar year, whichever is greater.
Rookie Real Estate Investing Mistakes Often Include:
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What To Expect After Investing In Syndications
After you invest in a real estate syndication you will be able to receive quarterly updates via emails or webinars. These updates will provide you with vital information about the projects status and performance levels. You will also receive K1 tax documents on a yearly basis, so that you can properly file your taxes based on the syndications performance as well as your own investment.
Where To Find Real Estate Syndication Opportunities
The unprecedented access to both accredited and unaccredited investors provided by the JOBS Act has resulted in many online real estate crowdfunding platforms.
Some of these platforms may only offer real estate syndications for accredited investors, while others may offer real estate syndications and crowdfunding deals for both accredited and non-accredited investors:
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* This is strictly for illustrative purposes. Investors are advised to do their own due diligence to determine investment platforms based on their individual needs and objectives
Real estate crowdfunding marketplaces vet investment opportunities before theyre made available to investors, which is a big selling point for anyone who doesnt have the time or know how to source their own deals.
And in order to build trust and keep investors interested, some crowdfunding platforms only offer what they judge to be the most qualified, promising projects. Fundrise, for example, only shows around 1% of the deals they analyze to their investors.
The downside to these investment platforms is that they are very hands-off and DIY. If you arent too sure what youre doing, theres little way of knowing whether youre investing in a great deal, a good deal, or a bad one.
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Disadvantages Of Real Estate Syndication
Now, there are always disadvantages associated with real estate syndication. Consider the following:
- The deal may not generate a profit
- Owning real estate is not nearly as liquid as other investment options
- Although working with other investors will increase your purchasing power, it can also add complications and headaches that will need to be managed and worked through
How To Invest In Real Estate Syndication
If youre curious how to invest in real estate syndication, unfortunately, there is not a blueprint for investing in real estate syndication deals. There are various ways one can get involved.
There are passive income groups or websites online that promote real estate syndication. One can also network within their friends and family base to pool money together and purchase property.
Investing in real estate syndication is rather easy to do, but finding the right investment is the hard part. There are numerous variables one must consider to find a good deal. Having a mentor, or studying this investment strategy in great detail, will be critical for your success.
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Things Every New Investor Should Do Before Investing In Their First Real Estate Syndication
Multifamily Investor | Construction Company Owner | Member at Forbes Real Estate Council
When you first begin to consider real estate syndication as an investment option, it can feel lonely, intimidating, or even like youre going in blindfolded.
We personally have experienced fears around investing in a property we have never seen, had concerns about how we would get our money back, and doubt around the inability to log into an account and see my money.
These fears were addressed head-on through research. Every article we read and every conversation we had built my certainty until we began to feel confident toward taking the plunge.
If youre considering your first syndication and feeling hesitant, we recommend doing your research, connecting with other investors, reading through previous deals, and taking your time.
What Does A Property Syndicate Invest In
A property syndicate can invest in a single property or a group of properties. Generally speaking there is more risk when investing in a single property syndicate though it can provide a regular cash flow, tax benefits and the potential for capital gains.
A property syndicate tends to be closed-ended . The property could be commercial, retail, industrial, rural or even residential.
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Need A Little Guidance On Commercial Real Estate Syndications
Me and my team are always available.
In fact, as you may already be aware, weve run a commercial real estate syndication in greater Nashville, TN for over 3 years.
If the idea of an opportunity to build long-term, generational wealth while taking advantage of truly passive income is interesting to you, wed love to talk.
Brief History Of Real Estate Syndication
Historically speaking, a real estate entrepreneur or a sponsor could publicly advertise and solicit private funding from anywhere up until the initiation of the Securities Act of 1933. After which, all new private offerings were required to be registered with the Securities Exchange Commission . The SEC passed this rule to protect the investors from fraud, but it also seemed to stall the syndication process, making it far less efficient.
However, the SEC offered a few exemptions that allowed sponsors to skip registration under specific conditions:
- Raise money through private solicitation and avoid registration or
- Register with the SEC, wait for approval, and then solicit public funding.
The first option almost always seemed more efficient to the sponsors, and despite the securities act regulating public solicitation, private syndication continued.
The general solicitation rules were further relaxed by the JOBS Act of 2012, which allowed investors to participate as long as certain criteria were met and each investor was accredited. An accredited investor is someone who has:
- An annual income of $200,000 for the past two years
- A net worth of at least $1 million, excluding their private residence
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Here Are The Five Basic Steps Of Investing In A Real Estate Syndication:
Step #1 Determine Your Real Estate Investing Goals
Consider both your short- and long-term investment objectives while deciding whether to participate in a real estate syndication. Will you need to use the money within 2-3 years? Or are you looking for a longer-term investment that will grow in value over time?
Some reasons why people invest in real estate syndications include diversification of their investment portfolio and an opportunity to participate in the potential gains that come with real estate appreciation.
Maybe youve always wanted to get into commercial real estate investments but dont have enough money on your own to buy such a large asset. Real estate syndication investments are a great way to participate in million-dollar property deals with only $100,000 of investment capital or less.
Consider the amount of money youll be investing, the length of time you want it to stay invested, the tax advantages youre looking for, and whether youre investing for ongoing cash flow to offset your salary, long-term appreciation, or a combination of both.
Step #2 Find a Fitting Investment Commercial Real Estate Opportunity
Once youve determined your investment objectives, look for an opportunity that supports those goals.
What Is A Real Estate Syndication
The most logical place to start a discussion on how to invest in real estate syndications is to define what one is.
Individuals interested in a commercial real estate investment have two challenges: commercial properties are very expensive and commercial properties are very time consuming to manage and require a lot of expertise to do so effectively. For these reasons, it is uncommon to see commercial investment properties owned by individuals. They are more commonly owned by institutional investors or syndicates.
For a more comprehensive article on real estate syndication, please view our article What Is A Real Estate Syndication?
To this point, a syndication is a commercial real estate deal structure that allows individual investors to purchase a fractional share of a commercial property in exchange for a pro-rata fractional share of the cash flow and profits that it produces.
To accomplish this, there are two parties involved in real estate syndication.
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Questions You Should Be Asking Your Real Estate Syndication Company:
- What is your background in the industry? How many years of experience do you have underwriting and operating deals?
- What type of deals do you have experience with? How many have gone full-cycle?
- What have been the investor returns on your previous syndications?
- Have any of your real estate syndications underperformed? If so, why?
- Whos on your team to ensure this deal is successful .
- What is your business plan for the syndication, and has this been implemented in your prior deals ?
- Can you provide referrals of investors that have participated in your previous deals?
Only after you have researched the background and experience of a particular real estate syndication company, its time to examine their real estate offerings.
When examining a potentially good deal, here are some of the aspects that you should dig into in the offering memorandum:
When examining offerings from real estate syndication companies, its important to have an idea of some red flags that you should look out for as an investor. To make it easy we put together a list of warning signs you should look out for below.
A Real Estate Syndication Example
Real estate syndications are structured so that the Sponsor is motivated to ensure the investment performs well for everyone. The more the Sponsor invests in the deal, the more aligned the sponsor is with Investors.
Lets look at an example of a preferred return.
Lets say youre a passive investor who invests $50k in a deal with a 10% preferred return. You could take home $5k each year once the property earns enough money to make payouts possible.
After each investor receives a preferred return, the remaining money is distributed between the Sponsor and the investors based on the syndications profit split structure.
If the profit split structure is 70/30 investors net 70% of the profits after receiving their preferred returns and the sponsor nets 30% after the preferred return.
For example, after everyone receives their preferred return in a 70/30 deal, and there is 1 million remaining, the investors would receive 700k and the Sponsor would receive 300k.
Below are some examples of various real estate syndication deals on the Fundrise platform. Today, Fundrise mostly focuses on private eREITs, diversified real estate funds. This way, non-accredited investors can invest in long-term, diversified real estate portfolios. I believe investing in a diversified eREIT is the way to go for most investors looking to gain exposure and earn income 100% passively.
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A Real Estate Syndication Whats That
Lets start with the basics of the term real estate syndication, which essentially is the pooling of resources within a group of investors to purchase a particular investment such as a piece of real estate. The advantage of a syndication is that it enables this group of investors to purchase a much larger asset to potentially capitalize on high returns. This is not to be confused with real estate crowdfunding.
Lets say you have $50,000 to invest. You could invest those funds in purchasing your own residential rental property, but that would require you to have to view multiple real estate deals, run the analysis on the dozens and dozens of deals you find, locate that one good deal, compete with other buyers who may be bidding up the price, then if you are granted the contract you must negotiate well to stay in contract, conduct the inspections and obtain the financing.
Then likely you will need to hire contractors to do some work on the property, so youll need to fund that as well. Then once that is finished and the property is ready to be rented out, then youll need to find a good tenant through background checks, credit checks, interviews and references and then you will need to become or oversee a property manager for your new real estate acquisition. Being an active real estate investor is ALOT of work, which is why we love passive investing in real estate.
What Is Real Estate Syndication A Guide For Investors
When developing a real estate investment portfolio, its always suggested to have a diverse selection of properties to generate profit. If your real estate investment portfolio consists only of single-family homes, you might consider investing in an apartment building or commercial property. Heres the downside: these properties are expensive and often require a very high level of management expertise. But dont let that deter you. If you want to invest in bigger, better propertiesand you lack the necessary capital or experiencethen you might consider participating in real estate syndication.
In this article, well explore what estate syndication is, why real estate investors should potentially consider a real estate syndication, as well as how to profit from one. With Fortune Builders helpful and comprehensive guide for understanding real estate syndication, real estate investors can be one step closer to making profitable investments and rounding out their real estate portfolio.
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Less Money Out Of Your Pocket
Same point here, but from a different angle. The combined power of a group of investors is always going to be much greater than the knowledge you can acquire on your own. And that combined power also means less money from you up front, as well as greater returns on the back end, had you invested that same amount on your own.
Why Participate In Real Estate Syndication
Considering a real estate syndication can be a lucrative maneuver for those looking to capitalize on their interest or experience in real estate. Especially for those who already have property management experience, a real estate syndication can lead to passive income, tax-saving benefits, as well as generally limited downsides in the case of a good working relationship between syndicators and investors.
Daniel Hedegaard from CoolParcelIn gives his opinion that real estate syndication enables investors to aggregate their financial and intellectual resources in order to invest in properties and projects that they could not otherwise afford or manage on their own.
Now that weve explored the definition of a real estate syndication, do you think this would be a good professional move for you? Here are the top reasons why you might participate in real estate syndication:
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You dont have enough capital to buy a certain type of property
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You have money to purchase a property, but you dont have the expertise to manage it
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You want to acquire more properties and build your wealth
Any real estate investor, beginning or seasoned, can benefit from real estate syndicationso long as you know how it works.
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