Tag Archives: syndication

Understanding the Capital Stack

Understanding the CAPITAL STACK - What's Critical for You to Know

The order in which distributions are paid in a real estate syndication investment is called the capital stack, and your clarity on this concept is critical because it’s important for you to know where you fall in order of priority for returns as they get paid out. If you invest at a Class B level and Preferred, Class A investors receive distributions first, you want to know why, don’t you?

Understanding the waterfall effect in which returns are paid in a real estate syndication will also allow you to select real estate investment syndication deals in which the capital stack is favorable toward your investing goals. Your knowledge of the risk and priority at each tier is a vital piece of knowing why and when you’ll receive distributions. 

Here I’ll share what the capital stack is, why it’s essential, and how it impacts you.

 

To achieve your investing goals, it’s critical that you know the different ways an investment will pay out different classes of investors.

 

 The Waterfall

The way the capital stack works is called a waterfall. Imagine a list of everyone participating in the deal with the debt and equity partners categorized into groups – with those with the lowest returns and the highest risk at the top. When cashflow is available to pay out, it gets distributed like a waterfall, starting with those at the top and trickling down to those with higher returns and lower risk toward the bottom.

 

A waterfall structure is outlined in each deals’ PPM (Private Placement Memorandum) at the beginning of a deal. It explains who, how, and when each partner, whether general or limited, gets paid during the real estate syndication deal. 

 

Some investor classes receive only cashflow, while others participate in cashflow distributions and capital returns profits when the property is refinanced or sold. So, before you invest, you want to understand where your potential investment class is positioned in the waterfall structure and to know which payout types apply to you and how they contribute toward your financial goals. 

 

  • Are you solely focused on creating passive income in the form of monthly or quarterly cashflow? 
  • Are you mostly interested in appreciation on the property and “winning big” at the sale of the property?
  • Are you desiring a mix of both – a little support in the cashflow department plus some longer-term gains?

As we explore the types of waterfall structures and capital stack styles, keep in mind that any common equity or preferred equity partner is not in a position of debt. Also, cashflow distributions are always paid out to partners after the expenses, fees, and debt are paid on the property. 

The Impact

The capital stack affects investors in three main ways: 

 

  • Cash on cash
  • IRR (Internal Rate of Return / Yield)
  • Velocity

Cash on cash returns are the before-tax earnings an investor makes on their invested capital, also referred to as cashflow or distributions. If you’re in the preferred tier, you may have more significant cash on cash returns because preferred investors have a higher priority, thus get paid first within the pool of investors. 


IRR refers to the Internal Rate of Return and is a metric used to measure the deal’s profitability (cash and equity) over time. It’s a handy way of calculating your return on an investment while accounting for the time value of money, a concept that the value of money is different over time – a dollar today is worth more than a dollar in 10 years. 

 

Velocity is your ability to invest in more deals at a faster rate. As an example, when a deal gets refinanced, you may get some capital back if you’re participating in a capital returns position (not everyone gets their capital back – more on that in a minute). You can take that returned capital and invest in another project. This way, you’re effectively getting returns on two real estate syndication deals when maybe you only had enough for a single deal to begin with. 

 

Now consider that you would have a clear idea about each of these concepts and how each position in the waterfall or capital stack impacts each class. In that case, you’re able to make better investment decisions to support your personal financial goals and achieve them faster. 

The Capital Stack

As an investor, you always want to do your own research on the property, vet the sponsor team, and you definitely want to know who gets paid what, and when each payout is supposed to happen. It’s nice to know what to expect and be utterly comfortable upfront so there’s no confusion as to when you’re getting paid, right?

 

Well, the capital stack in a real estate syndication investment is where debt and equity partners are ranked in order based on an inverse relationship between risk and priority. The highest priority, lowest risk partners are toward the top of the capital stack, while the lower priority, higher-risk partners are toward the bottom. 

 

At the top, you’ll always have what we call Senior Debt. This includes mortgages and loans to finance the property. Just as you’d never miss a house payment, the senior debt is the highest priority, and they get paid first. Mortgage-type loans typically have a meager rate of return (2-4% for the past several years) in exchange for being top priority.  

Next, there are second-level, mezzanine-type loans like second mortgages and bridge loans. These are also debt positions and are ranked as a higher priority and lower risk than our limited and general partner investors. 

 

Continuing down the waterfall, you’ll see preferred equity (limited) partners come next. They are prioritized after debt payments but before the general partners. After the property mortgage, expenses, and fees are paid, preferred investors have “dibs” on distributable cashflow. There may be a higher investment required at this tier, and there are limited positions available at this level. Still, preferred investors often have a higher projected cashflow than other investors down the waterfall. 

 

Following the Preferred Equity Partners are the Common Equity (general) partners. This tier comes with the highest risk and the lowest priority. These investors are likely participating in capital returns and cashflow distributions but fall after the preferred level, typically with a split of earnings up to a certain percentage of cashflow. 

 

There are two main types of capital stacks – single and dual-tier. Just as you might imagine, the dual-stack is a little more complicated.

 

Single-Tier Stack

In a typical single-tier stack, Senior Debt is at the top, carrying the lowest risk and ranking highest in priority. A great example of this is a mortgage at an approximate ~70% loan-to-value ratio. 

 

Then you’ll see the Common Equity – Class A preferred return below the senior debt carrying a little higher risk and a slightly less priority. This would likely be the limited partnership level in a single stack, which might be earning a 7-8% preferred return with a 70/30 split beyond that. These limited partners (you) are likely participating in capital returns and would receive a portion of the profit after the sale too. 

 

The last level in a single-tier stack is Common Equity – Class B. These are likely the general investors who carry the most risk and are last on the priority list. They have no preferred return and only receive their 30% split of the 70/30 distributions if the property cashflows greater than the 7-8% preferred that the Class A investors are projected to receive. 

 

Dual-Tier Stack

The dual-tier stack is a little more complicated. Still, it’s becoming more popular because this waterfall structure can provide higher cashflow to class A investors with the tradeoff that Class A are not participating in capital returns. 

 

First up again is the Senior Debt and includes any mortgages or loans on the property. After this is where it gets fun!

 

Next, there’s a Preferred Equity – Class A level. This group receives projected cashflow at a preferred return only. This might be 9-10%, for example, with no payouts beyond that and no capital return. This is perfect for investors who are only looking for consistent cashflow distributions. One caveat might be that this Class A Preferred Equity status likely comes with a more considerable up-front investment with limited shares available. For example, less than 30% of the deals’ shares might be available for a minimum $100,000 capital investment.

 

After the Class A level, you have the Common Equity – Class B investment level, which may include preferred returns, splits beyond the preferred percentage, and capital returns participation. For example, maybe a $50,000 capital investment would earn a projected ~ 7% preferred return, 70% of the 70/30 split, and capital returns at the sale. 

 

Trickling down the waterfall, the last level would be the Common Equity – Class C. These investors carry the highest risk and the lowest returns because they receive cashflow after other tiers. An example of payout at this level might look like 30% of the 70/30 split and capital returns after the sale in exchange for a $50,000 investment.

 

Conclusion

As always, the capital stack and the waterfall schedule are outlined in the PPM (private placement memorandum) and are available to you as a potential investor before you commit to the deal. But, the PPM details might seem like gibberish if you aren’t clear on the capital stack, how it works, or where you fall in priority for distributions. 

 

Now that you have a solid explanation and a few examples, your confidence in reading any PPM and selecting a real estate syndication deal that is in alignment with your investing goals will skyrocket!

 

I’d love to share upcoming deals with you, but first we need to talk so I can hear about your investing goals and help you determine capital stacks that will be favorable for you. I have a couple deals in mind with different tier structures and would be happy to help direct you toward the one that will move you toward your goals more efficiently. 

SIgn up today at our Passive Income Investors Group to get the “inside scoop” on our past and upcoming deals. Once you apply to join the club, I’ll get on a call with you so we can see if we’re a good fit to invest alongside each other on any future real estate syndication deals! I can’t wait! I absolutely love helping investors like you create Passive Income…for life!

Cap Rates – What You Need to Know

What's Key to Know About Cap Rates ...and what's not!

Many investors get into real estate syndications after dabbling in the residential real estate space and realizing it can be a long, hard road to scale and that there’s a massive opportunity to earn better returns without being a landlord. But…the transition from residential to commercial real estate investments can bring about a number of new and more complicated terms and calculations to consider. 

 

As a passive investor in commercial real estate syndications, you just need to know how to calculate it for yourself and have clarity as to how the cap rate pertains to your financial and investment goals.

 


You may have heard about 7-caps from the cool kids, the fully-spelled-out capitalization rates from the proper, and cap rates from those who don’t have a minute to waste. These all mean the same thing though.

 

As you move deeper into passive investing and learn the amazing benefits of commercial real estate syndications, your confidence in evaluating slide decks and analyzers for each potential investment opportunity will grow. And in doing so, you’ll expand your vocabulary, become comfortable with terms, scrutinize past and present deals, and learn how uncomplicated investing passively in real estate can be. 

 

In the blink of an eye, “cap rate” will be part of your daily conversations, and not only will you know exactly what it means, you’ll know when and why it’s important and whether it’s good when cap rates compress!

 

It’s okay if cap rates are hard to understand or challenging to calculate. As a passive investor, you can inhale a deep calming breath because you won’t need to calculate or use them very often. Inhale…exhale…

 

In this post, you’ll learn what cap rates are, how they’re calculated, when you’ll want or need to use them, and what they reveal about an investment opportunity. You’ll want a certain level of comfort with cap rates and, by reading this article, you’ll learn how they apply to your investing goals and deal evaluations.

Cap Rates Defined

 

Cap rates, as they are so often referred to, are short for “capitalization rate”.  Quite simply the term quantifies and normalizes a property’s income earning power against the market value of that asset. Cap rates are used in commercial real estate to measure the expected rate of return generated by an investment property. 

 

No matter whether we’re talking stocks or real estate, it’s assumed that a higher cap rate equals a better ROI (return on investment), which would theoretically equal a better investment choice. However, there are some nuances as to how the cap rate is calculated, and cap rate discussions can get murky. 

 

As a passive investor in commercial real estate syndications, you just need to know how to calculate it for yourself and have clarity as to how the cap rate pertains to your financial and investment goals.

 

Commercial Real Estate Cap Rate Calculations Decoded

 

Anytime cap rates are being discussed, make sure you ask how they calculated the cap rate. You want to make sure you’re comparing apples to apples, and you’d be surprised at the number of various ways people calculate cap rates. 

 

Cap Rate = Net Operating Income / Property Market Value

 

Net operating income, or NOI for short, divided by the property’s market value is the most popular way to calculate the cap rate. Sounds simple. Right? Let’s take a look… 

 

A 7% Cap Rate Example And What It Means

 

Pretend that we’re looking at a value-add multifamily complex priced at $1 million that brought in $100,000 in gross income over the past year. Let’s also pretend that expenses for the year on this property were $30,000, giving us a net operating income (NOI) of $70,000. 

 

We take $70,000 (NOI) and divide that by the $1 million market value and arrive at 0.07.

 

This means the cap rate for this property is 7%, and if we were to buy this property for cash right now, we could expect to earn $70,000 in net income over the next year. 

 

So, in general, this is your projected return on investment (ROI). And although it shouldn’t be the only metric you review, it’s an indication of how profitable your investment may be. 

 

I love flipping these numbers into applicable life/length metrics to help me understand them more clearly. Check this out:

 

A 7% cap rate essentially means it would take about 14 years to recoup your $1 million in capital initially invested ($70k goes into $1M ~14.3x). To give you even more perspective, a 6% cap rate on that same $1 million investment would require about 16 1/2 years to recoup your investment, and an 8% cap rate would take about 12 1/2 years. 

 

See the trend there?  A higher cap rate on a similarly valued property yields a higher NOI which pays you back faster. 

 

What Kind Of Cap Rate Should You Look For?

 

If you’re all about cash flow, a higher cap rate may seem more attractive.

Higher cap rates mean you’re getting more income for lower initial investment, and you’ll recoup your capital invested within a tighter timeframe. 

 

A lower cap rate means your investment is higher, and the returns are lower. It will take more time to recoup your initial investment, but if you’re exploring more of a buy-and-hold strategy, it’s possible to come out better in the long term. 

 

So, what’s a “good” cap rate for commercial real estate investments, then?

 

There’s not actually a straight answer here. As much as I hate to be vague, it really depends.

 

What’s good in one market may not fly in another. There are variables to consider like potential market growth, other properties’ cap rates in that same market, the property value versus net operating income, if property expenses can be reduced as part of a value-add deal, your desired cash flow, and many more variables. 

 

We suggest evaluating several properties in your specific target market (or better yet…submarket) to get the best apples-to-apples comparison. 

How Should Commercial Real Estate Cap Rates Be Used?

 

Since the cap rate is only a single measurement taken at a single point in time, relying heavily on cap rates isn’t really a great strategy. (Side note – relying on any 1 metric heavily is not a great strategy!)

 

Some investors look exclusively for deals with 8% cap rates or higher, but considering cap rates are based on today’s market value and NOI and don’t consider leverage or time value of money, there are definitely other, more defining metrics that should be given attention alongside the cap rate.

Compare Properties Across Your Target Market Using Cap Rates

 

The best way to put a cap rate comparison to use is when looking at several properties in a particular target market. Let’s assume you’ve decided my home town of Fort Worth, Texas is your target market for a value-add apartment complex. Then, ideally, you could compare a few properties within that immediate market or sub-market.

 

If you see one with a 6.8% cap rate, another at 7%, and another at 7.3%, you know that all three are pretty comparable. You could confidently dive deeper into the 7% deal knowing you’re right on track with returns and purchase prices of other properties in that same area. 

 

On the other hand, if you discover a wide discrepancy between cap rates on similar properties in the same market, that could be a red flag. I’d recommend diving into the deals’ metrics deeper, find out how the cap rates were calculated on these properties, if there’s anything wrong with the property, or if the property is somehow being valued incorrectly. As with most metrics, it can also be tricky if there aren’t a lot of data points to see clear trends. 

 

Potential Risk Can Be Indicated By The Cap Rate

 

You can also use the average cap rate of a market to measure an asset class’s risk. Higher cap rate properties tend to be riskier and located in developing areas, while properties with lower cap rates are generally less risky and located in more stable regions. It’s not uncommon to see A-class luxury or new build properties with low cap rates (5-ish) and B & C class properties in the same market trading at higher rates (7-ish). Risk and reward.

 

And if you’ve ever heard about cap rates compressing, all that means is the cap rate is decreasing in response to higher property prices and lower rates of return. This is common in California, for example, where the demand is high, so people are willing to pay more to snag a property even if returns are a bit lower. And in major metro areas across the U.S. the trend is the same lately. 

Why Should Passive Investors Care About Cap Rates?

 

Now that you’ve seen how to calculate the cap rate, learned what a cap rate even is, seen a few examples, and have a firm grip on how you could use cap rates to compare properties within a target market, what about cap rates really matters to you as a passive investor?

 

Sorry to break it to you, but cap rate specifics aren’t going to change your life. 

 

There are many more important numbers and metrics that will make a bigger impact on your investment game! When it comes to vetting a potential investment property, you’ll want to pay more attention to the experience and integrity of the sponsor team, the overall market in which you’re investing, and that the distributions support your investing goals. 

 

Two aspects regarding cap rates will primarily matter to you:

1 – Is the cap rate comparable to other assets in the area?

 

You’ll know you’re working with a great sponsor team when you see they’ve already ensured the cap rate for the property in which you’re investing is in alignment with comparable properties in the same target market. Sure, it’s safest to double-check a few numbers, but with a solid, well-vetted sponsor group, that’s about all you need to do. 

2 – What’s the exit cap rate?

 

Wait! What? Right when you start to relax about this cap rate thing, I’m throwing in a twist.

 

It’s not a big deal, though, because with all you’ve learned about cap rates already, learning about the exit (or reversion) cap rate is going to be a piece of cake!

 

The exit cap is simply the projected cap rate at the asset sale, or disposition. This usually varies from the cap rate at the time of purchase. 

 

And here’s the most important detail out of this entire article – ready?

 

When considering a commercial real estate syndication opportunity, you want the exit cap rate to be a minimum of 0.5% higher than the cap rate at which you invest or buy the property. 

 

“Why”, you ask? Well before you invest, you want to see that the general partnership is assuming the market conditions at the sale will be less favorable than the current market. You want to invest in a property with conservative underwriting such that the property might sell for a lower price when compared to the net income, 3 – 5 years into the future.

 

As an example, if the current cap rate on your real estate investment opportunity is 7%, you want to make sure the exit cap (or reversion rate) is 7.5%. So, even after all renovations are made, efficiencies are increased, the occupancy rate is high, and rents are raised, you want the sponsors to expect a lower sales price compared to the higher net operating income (NOI).

 

No one knows what the market will look like in the future, so projecting that it will be a little softer at that time is much safer than not.

What Do Cap Rates Ultimately Mean for Passive Investors?

 

In general, cap rates are just 1 element of evaluating a commercial investment, but it’s a great foundational piece. 

 

Cap rate is just a single metric pulled based on the current value of the property. The rate may be different in 6 months or a year, and drastically different a few years from now. Knowing all the ins and outs of cap rates doesn’t help you project the potential of your investment or help you calculate the cash flow you may receive. 

 

But really all you need is a fundamental understanding of cap rates and to be aware of the reversion rate when exploring a potential real estate syndication investment opportunity. 

Want To Learn More?

 

If there’s anything I’ve learned in this life, it’s that there’s always more to learn. So if you’re ready for a deeper dive into metrics that DO matter and you’re interested in comparing deals alongside us, we’re here to show you the way.

Passive Real Estate Investing

 

Passive investing in commercial real estate syndications is a great way to generate monthly cash flow, grow your retirement funds, and harvest the benefits of long term appreciation on physical assets. 

 

If you’re interested in learning more about how you can invest in real estate alongside us without becoming (or remaining) a landlord, you’re invited to join our Passive Income Investor’s Group. 

 

Inside we share exclusive deals, helpful definitions and articles, debunk investing and real estate myths, and SO much more. We’d be thrilled to have you as part of the team and to get to share our members-only resources with you!

Level Up! Transitioning from SFR to MF

Scaling Up! Transitioning from Single Family Rentals to Multifamily

It’s no big secret that most real estate investors start out investing in single-family homes. Whether you go for the flips, rent out properties as you outgrow them and move into something new, or scope out rentals in hot markets…it doesn’t matter. But there comes a point where you’re ready to switch into multifamily properties, and if you’re like most, it may not be clear exactly how to do it.

 

So maybe you have a few rental homes, and you’ve scaled to your max in residential rentals. With all your time, energy, and money tied up in your existing rental properties, it might seem downright impossible to imagine owning multifamily properties too.

 

Let me reassure you, you can make the move from single-family landlord to multifamily real estate investor. In this article, you’ll learn the advantages and disadvantages of each type of real estate investment, why it’s important to understand how properties are valued, and two methods you might use to make the move from single-family landlord to multifamily investor.

 

The Advantages Of Owning Single-Family Rental Real Estate

 

Firstly, financing for single-family real estate investments is relatively easy to access, and the purchase process is pretty familiar because it’s how you probably bought your own home. You can obtain up to ten loans for residential real estate based on your credit and income, just like any other personal financial deals. Residential real estate can be purchased easily with a low down payment and a bank loan, private financing, or even 100% cash. 

 

Another advantage of single-family real estate investments are the various exit options. You can sell it on market at retail prices, do a lease-to-own deal with your tenants, sell it to an investor, or hold and rent it out.  On top of that, you can buy one single-family rental at a time or vary the property management companies used, allowing you to diversify in a purposeful way. 

 

So, let’s extrapolate that out over ten years. Consider that you’ve purchased a single-family home every two years in varying neighborhoods and cities within a metroplex. Your portfolio of residential rentals consists of various ages and styles of single-family homes, some large and some small, and you use three different property management firms to help you handle them all. Cool, it seems like you’ve diversified as much as possible, and you’ve probably learned some great lessons along the way! 

 

So what might be some disadvantages of owning single-family investment properties like this?

 

The Disadvantages Of Owning Single-Family Rental Real Estate

 

With rental real estate, when things are good, they are fantastic, and when things get rough, they can become real bad real quickly. So, consider this, the more roofs you own, the greater likelihood of needing to replace one (or more) of those roofs. The more doors you own, the more water heaters, air conditioning systems, and basements or attics you own. For this reason, CapEx (capital expenditures) can be high. 

 

Furthermore, each property carries its own insurance, tenant lease, warranties, taxes, and management fees; plus, you must maintain bookkeeping for EACH property! I’m sure you can see how this might get out of hand quickly if you aren’t super organized or if you don’t have help with the record-keeping portion of these investments. 

 

When it comes to expanding your investment strategy with single-family real estate, you’ll discover there are a couple of little-known or little-considered hindrances that will curb your ability to reach the next level. For one, there is a cap on the number of conventional loans a single person can have on their credit. You can circumvent this for a while if your spouse is on board because each of you can have ten loans, giving you up to 20 loans total, but then what? You’ll reach a point where you can’t expand further. 

 

The other hindrance that we’ve all probably faced when trying to sell personal residential real estate, is that the value of your property is determined by the value of the neighbors’ property. Sure, you can make improvements in your single-family home, but “comps,” as they’re commonly referred to, are usually the most significant determining factor of your property value in the single-family realm. Unfortunately, with single-family real estate, you can raise rent and reduce expenses, but that doesn’t directly impact the value of your property.

 

The Advantages Of Owning Multifamily Rental Real Estate

 

Now, as you look to level up from single-family rentals, there are, of course, advantages and disadvantages of owning multi-family real estate too. So, you might be wondering, what’s different about multifamily investing from single-family investing?

 

One noticeable difference is that a multifamily real estate deal can transfer ownership of multiple units in a single transaction. Talk about simplification!

 

Whereas you probably have a file cabinet full of documentation for those five properties we were talking about earlier, the purchase of 2-20 (or more!) units all at once would significantly cut down on paperwork. 

 

Similarly, since each multifamily property contains several units, it’s easier to form and leverage a team. A contractor, broker, property manager, and other service-oriented trades will jump at the chance to have a multifamily property owner as their client. Conversely, it’s much harder to find reliable help on each individual single-family property and to get them to prioritize performing work at your place. 

 

The most significant advantage of owning multifamily rental real estate is your ability to control the property’s value. Commercial property is valued based on the amount of income it creates, so your rental income directly relates to the property value. 

 

You can assert control over the value by reducing costs, capturing efficiencies, and adding income streams to the property. These value-increasing opportunities might look like installing waste-reducing showerheads in the units, energy-efficient bulbs in all light fixtures, and providing paid lock-box options for residents. With multifamily real estate, you can increase rents and decrease expenses, and directly impact (increase) the value of your property.

 

The Disadvantages Of Owning Multifamily Rental Real Estate

 

On the flip side, yes, there are disadvantages to owning multi-family real estate, and most of them are in direct opposition to the advantages of owning single-family real estate. 

 

Perhaps the most considerable disadvantage to owning multifamily rental real estate as an investment is that you have limited exits. Not just any ol’ person on the street will be willing (or even able to) purchase the property. Your sale will likely be limited to other investors or corporations. 

 

Some other disadvantages have to do with the diversity of markets and property managers. If you own a single property with 50 doors, you aren’t diversified in either the market or property management. You have all your eggs in one basket. *This is where syndications help because you can own a percentage of several multifamily properties instead of a single, multi-unit property.

 

Another challenge to owning multifamily property lies in obtaining financing. Generally, multifamily properties have a heftier price tag, and your standard lenders cannot finance that large of a loan on your personal credit. It’s likely you’ll need partner investors and to intentionally establish a solid track record of positive credit history as an LLC before you could qualify to finance the purchase of a multifamily property. 

 

Several of the disadvantages above filter down to one single, essential foundation of successfully owning multifamily rental property, and that is your tenant base quality. A high-quality tenant base who consistently pays rent on time, cares about the property, and remains loyal long-term will boost your odds of being profitable and your chances of significantly increasing the property value.

 

How To Transition From Single-Family to Multifamily Rental Real Estate

No matter how you slice the pie, it’s tough to become a millionaire off single-family rentals alone. Multifamily investing is the key to reaching that next tier of wealth, freedom, and experience. There are a few ways to do this, but the most common are “Stacking” and “Leverage.”

 

One gradual, potentially safer method to upgrade is to “stack” your real estate investments, doubling the number of doors you purchase with each transaction. In stacking, you start with a single-family home, and suppose every two years, you buy another piece of real estate. Well, every two years, instead of purchasing another single-family home, you buy a duplex, and then a quad, and then an 8-plex, and so on. In just ten years (in the blink of an eye), you’d own 31 units!

 

The other option is to leverage your earnings over time from your single-family investments into a multifamily real estate syndication deal. If you own five single-family properties, and each one cashflows $200 per month, you have $12,000 each year to funnel toward a syndication opportunity. Since the typical minimum on a syndication deal is about $50,000, you’ll quickly achieve that in less than five years, even with capital expenditures and maintenance on your five properties!

 

Is Becoming A Multifamily Millionaire In Your Cards?

 

With our experience in single-family rentals AND multifamily deals of all types, we always advise you to take a step back and look at your goals. Why are you investing? Does it make sense for you to personally own and manage 31 doors over five properties? Does it make sense for you to be more hands-off and collect disbursements without being a landlord?

 

Any choice is a great one, because you’re choosing your personal, family, and financial goals over everything else and using real estate investments to help you get there. If you’re interested in learning more about syndications because the “Leverage” route sounds interesting to you, we invite you to join our Passive Income Investor’s Group.


Once you join, you’ll learn all the nitty-gritty details about real estate syndication deals, learn everything you need to embark upon your first syndication deal, and get to interact with other fellow investors like yourself. We look forward to helping you learn how real estate syndications can help you achieve your investment goals! We are passionate about helping investors generate Passive Income…for life!

New Definitions for Accreditation

Expanded Access! Updated SEC Definition for Accredited Investors

Are you part of “the in-crowd”?  Remember back in school when at some point we all started associating in smaller groups, our little tribes…cliques?

 

There were jocks, nerds, cheerleaders, theater kids, band geeks, freaks and countless other divisions of people either by interest, attitude, or even ethnic group you could imagine; and it was pretty much unheard of for anyone to move from one clique to another. 

 

Geeks and drama nerds didn’t get invited to the jock/cheerleader parties (or vice versa). As adults we think we left all that drama behind, but did we really? 

 

At first glance, the world of investing seems much the same way, like an exclusive party that only certain people get invited to attend. The rich get richer, right? Most people haven’t heard about some types of investments because you have to “qualify” to even be told about the opportunities.

 

Luckily, in August of 2020, the SEC issued an amended definition of what it means to be an accredited investor, expanding the pool of people who can qualify to participate in the exclusive “party” of some investments, including real estate syndications. 

 

Most real estate syndication deals are only available to accredited investors, but there are some that are available to what’s known as sophisticated investors. So before you can even get access to an investment, you need to know which clique you’re in (sophisticated or accredited) and how to leverage your assets to gain access to the investment opportunities you deserve. In other words, you at least want a chance to be invited to the party! 

 

So, you might be wondering – Am I an accredited investor?  And do these new rules help me in some way? Well let’s dive in and figure it out!

 

Accredited Investor – the Old Definition

 

According to the SEC, you must qualify as an accredited investor by meeting at least one of a set of monetary requirements, deeming you financially stable enough to invest in private placement investments, such as real estate syndications.

 

You could qualify as an accredited investor with an individual income of over $200K per year or a joint income of over $300K per year. If you don’t meet the income requirements, the net worth requirement is + $1M in assets, not including your primary residence.

 

Remember, you don’t have to meet both requirements. If you do, great, but only one is required. 

 

If you don’t meet either of these requirements, don’t give up yet! It’s possible the amended definition of an accredited investor might include you, or you might fall into the non-accredited, sophisticated bucket of investors, which is also great news because there are some investments that have seats on the plane for you.

The New/Expanded Definition Of Accredited Investor

 

The August 2020 update expanded the exclusivity to extend beyond just an income or net worth requirement. Highlights of the updated definition include spousal equivalents and qualifications based on licensure, knowledge, and professional investment experience. 

 

As of the recent amendment, the joint income requirements not only qualify legally married, traditional couples but also include “spousal equivalents,” allowing non-traditional couples to pool their income and assets to meet the income or net worth requirements from the original definition. This breaks down barriers for LGBTQ+ couples, and allows all spousal equivalents to qualify as accredited investors just as any traditional partners would. Hooray for inclusivity!

 

This update also provides that professionals with certifications, experience, or knowledge of investment securities and the associated risks, such as those licensed with a Series 7, 65, or 82, or who are knowledgeable employees of a private fund may qualify as an accredited investor. This means that even if you don’t meet the income or net worth requirements, but you’re knowledgeable of or experienced in these types of investments, that you may have a foot in the door. 

 

The amended definition of accredited investor provides access to those who previously couldn’t qualify simply because of their lifestyle and for those who are knowledgeable and experienced with these types of investments, regardless of their income or net worth. If you are in either of these buckets, we welcome you with open arms! 

How Non-Accredited Investors Can Still Participate

It’s no secret that real estate syndication investments exclude a large segment of people, and even though you may quite meet the accredited criteria, you’re a high-net-worth individual determined to build wealth! So, how can you get in?

 

You might be what’s referred to as a “sophisticated investor”. The SEC provides a broad definition of a sophisticated investor as someone with sufficient capital or net worth and experience to weigh the risks and merits. Industry-wide best practices classify a sophisticated investor as someone with $100K+ individual income ($200K+ joint) or $350K+ in assets outside the primary residence in combination with sufficient experience. 

 

The key here is “sufficient experience”, which is why we want to (and have to) have a conversation with you! We invite you to not only leverage your capital in a way that works as hard as possible toward building wealth, but to also leverage your relationships, namely, the one between you and Deaton Equity Partners. And even if you do meet the income or net worth requirements, we legally cannot share investment opportunities with you (or even mention certain deals) without establishing a relationship with you first. 

 

The bottom line is, even if the thought of talking about finances on a call is something you’d rather avoid (we aren’t scary, I promise!), it’s never too early to begin developing a relationship if it means you gain access to otherwise-exclusive investment opportunities with great returns and epic tax benefits. Plus, since very few deals are available to a limited number of sophisticated investors, you don’t want to miss your chance!

 

How The Updated Accredited Investor Definition Affects You

 

The amended definition of an accredited investor expands the criteria to include non-traditional couples, experienced investors, and licensed investment professionals who, according to the original guidelines, would have been excluded before August of 2020. If that’s you, this is your invitation to the party! We’re so excited to welcome you, and those you know, who are newly-qualified (according to this amendment), high-net-worth individuals to the exclusive world of wealth-building real estate syndication investments. 

 

Whether you think you’re accredited, sophisticated, or unsure, the important takeaway is that we create a relationship, beginning with a call, in which we get to know you, discuss your investing experience and your investing goals so that we can share deals with you and provide you access. 

 

No Relationship = No Access = No Opportunity 😥


You deserve to know about opportunities for which you qualify. It’s time to reach out and seize your chance.  Join our Passive Income Investor’s Group and take steps to build the life and the passive income you deserve. It’s what we call

Passive Income…for life!

Investing In A Real Estate Syndication: All The Details

Investing In Real Estate Syndication: All The Details

After you’ve become interested in but before you’re fully committed to a real estate syndication, you should know several details about actually investing in these deals. 

 

The process of investing in a real estate syndication is very different from picking a stock or a mutual fund online. Furthermore, unlike typical investment properties, there are hold times, barriers to entry, and a whole set of expectations that you need to know about prior to committing to a deal. 

 

As a smart investor, you’ve got to know exactly why you’re choosing a particular investment in addition to the required credentials, the process, what’s involved, and how long you should expect to wait until payout. Guess what? You’re in luck! 

 

That’s precisely what you’re about to read!

How long does a real estate syndication last?

Unlike an online stock, ETF, or mutual fund that can be exchanged daily or more (i.e. highly liquid), real estate syndications come with planned, projected hold times. While each real estate syndication is different, we typically see hold times of 5-7 years, but they can be longer depending on the strategy and business plan.

Real estate syndication deals (especially value-add investments) have to allow time for things such as property renovations, management changes, occupancy rate increases, and even market conditions to adjust. This means that you should plan to invest your capital for 5-7 years (or the timeline stated on the investment summary & memorandum), because it is highly unlikely that you will be able to take your money out until the asset is sold.

Who can invest in real estate syndications?

Now you might be wondering if there’s any red tape. 

Is just anyone allowed to invest in this sort of thing? It seems pretty unconventional.  

Well, you’re somewhat correct. A large majority of real estate syndications are open to accredited investors only, though there are some that are also open to non-accredited, sophisticated investors (i.e., investors who can demonstrate that they understand real estate syndications and their risks). We’ll drill in deeper to this accreditation topic in a later blog post.

In order to be considered an accredited investor, you must meet at least one of two requirements. 

  1. You must have at least $1 million in net worth, not counting your primary home.

  2. You must make $200,000 per year as an individual, or $300,000 jointly with your spouse, have made this amount or more for each of the last two years, and intend to make this amount or more this year.

If you meet either one or both of these requirements, then you are an accredited investor. (**disclaimer: these are the Securities Exchange Commission requirements as of this writing, but they are subject to change. You can verify the latest at their website.)

If you’re not yet an accredited investor, there are still some real estate syndication opportunities out there for you. However, you may need to look a little harder for them. This is because the opportunities for non-accredited investors cannot be publicly advertised, hence the feeling of secrecy you’re getting.

What’s the process for investing in a real estate syndication?

So maybe you’re accredited, or maybe you’re not, but you’re really wondering HOW someone invests in these elusive real estate syndication deals you’re reading so much about. 

Here are the basic steps for investing in a real estate syndication:

  1. The sponsor announces that the deal is open for funding, usually via email.

  2. You review the investment summary deck and decide to invest.

  3. You submit your soft reserve, telling the sponsor how much you’d like to invest.*

  4. The sponsor holds an investor webinar, where you can get more information and ask questions.

  5. The sponsor confirms your spot in the deal and sends you the PPM (private placement memorandum).

  6. After signing the PPM, you wire in your funds or send in a check.

  7. The sponsor confirms that your funds have been received.

  8. The sponsor notifies you once the deal closes and lets you know what to expect next.

*Real estate syndications are almost always filled on a first-come, first-served basis. Thus, sponsors use a soft reserve to help them determine who’s interested in investing.

By submitting a soft reserve, you are telling the sponsor you’re interested in the deal and want to invest X amount. The soft reserve does not guarantee you a spot in the deal, nor does it lock you in. You can always back out or change your mind later.

Pro tip: If you’re thinking about investing in a deal but aren’t sure whether you want to invest $50,000 or $100,000, go ahead and put in a soft reserve for $100,000. This holds your spot in the deal.

If you decide later that you only want to invest $50,000, you can easily decrease your investment amount. However, if you had put in a soft reserve for $50,000 and later wanted to increase it to $100,000, you might not be able to increase your soft reserve amount if the syndication is already over-subscribed.

What happens after I invest in a real estate syndication?

Once you’re sure you want to invest in a real estate syndication, you do your research, and you lock in a deal. Now what? 

After you’ve sent in your funds for a real estate syndication deal, your “active” participation is done. Now you can sit back and wait for the cash flow distributions to start rolling in.

Depending on the particular deal, you may receive either monthly or quarterly cash flow distributions, and they may start immediately, or after a few months and once the property is “stabilized”.

Regardless, you should start receiving monthly updates as soon as the deal closes. These monthly updates will include information on the latest occupancy and progress on the renovations.

Every quarter, you should receive a detailed financial report on the property, and every spring during tax season, you will receive a Schedule K-1 Form to file with your taxes, which will report your share of the income and losses from depreciation for the property.

As your projected hold date approaches, the monthly information you receive may include information about a sale. Once the asset sells, you can expect your original investment capital to be returned, plus any percentage of profit due to you. Time to start looking for another syndication to multiply those returns!

Now You’re In The Know…

At this point, you’ve gone from curious, to interested, to knowledgable about passively investing in real estate syndication deals. All that’s left to do from here is to actually find a deal and get involved! You’re fully informed about who can invest, the hold time, the process, and what to expect. Plus, we’re here for any questions or guidance along the way. 

 

There’s certainly much more to drill into in the world of syndications. So if you’re up for further exploration and would like to gain access to actual deal materials, webinars and potential investment opportunities, be sure to sign up for our Passive Income Investor’s Group. It’s free and there are no obligations. It’s just one of the ways we share our passion for creating Passive Income…for life!

 

Happy investing!

The Importance of Focusing on Capital Preservation

The Importance of Focusing On Capital Preservation

Let me ask you a question. What first interested you in real estate syndications? 

Most likely, it was the potential to put your hard-earned money to work for you to create solid returns with minimal risk or participation and therefore grow your wealth over time.

And in fact, that’s the number one question that the majority of our investors ask when they first consider investing in a real estate syndication with us. They want to know, if they were to invest $100,000, how much money they could stand to make.

And believe me, we love amazing returns on investments! And those returns are a big part of why we do what we do. However, while returns are certainly important, there’s an even more important aspect that we focus on when we evaluate potential deals.

Can you guess what it is? I’ll give you a hint. It’s not nearly as exciting as passive income and double-digit returns. In fact, it’s even more boring than taxes and K-1’s.

The most important thing we focus on in a real estate syndication is capital preservation. In other words, we focus on how NOT to LOSE money. That’s our number one priority, as boring as that might sound.

Why It’s Important to Talk About Capital Preservation

Sure, while capital preservation isn’t the most exciting part of investing in real estate syndications, it IS one of the most critical elements. 

 

It’s easy to just focus on cash flow returns, potential earnings, and brightly colored marketing packages, but when an unexpected situation arises, you’ll be thankful (for this article and) for a sponsor team that gives capital preservation the attention it deserves. 

 

Capital preservation is all about mitigating risk, and as Warren Buffett puts it, there are two rules to investing: 

 

Rule #1: Never lose money

Rule #2: Never forget Rule #1

 

No matter what you invest in or WHO you invest in (because you are investing in a sponsorship team), you should know what to ask and what to look for so you can invest confidently with a team that holds your best interest. 

 

Our 5 Pillars of Capital Preservation

At the core of every investment in which we participate, capital preservation is our number one priority. There are 5 building blocks that make up our capital preservation strategy.

 

#1 – Raise money to cover capital expenditures upfront

Businesses and multifamily properties, especially value-add assets, require capital to run effectively. Imagine the avalanche of problems that can accumulate when capital expenditures (like property and unit renovations) must be funded purely by cash flow. In this situation, operational income (which varies based on occupancy, collections, maintenance, etc.) and should be used to fund cash-on-cash returns, would have to be reallocated to fund sudden HVAC repairs instead of unit those essential renovations according to the business plan. In this case, the business plan falls behind schedule, units aren’t upgraded as planned, vacancy persists and property revenue is not growing as needed. 

 

Instead, when we make an acquisition, we ensure the funds for capital expenditures are taken care of upfront. As an example, if we need $2 million for the down payment and $1 million for renovations, we will raise that $3 million upfront. This means we have $1 million cash for renovations and won’t have to rely on monthly cash-on-cash returns. It’s a conscious action taken with the aim of capital preservation.

 

#2 – Purchase cash-flowing properties

One great option to preserve capital is to purchase properties that produce cash flow immediately, even before improvements. If units don’t fill as planned or the business plan isn’t going smoothly, just holding the property would still allow positive cash flow. 

 

#3 – Stress test every investment

Performing a sensitivity analysis on the business plan prior to investing allows us to see if the investment can weather the worst conditions. What if vacancy rose to 15%? What would happen if the exit cap rate was higher than expected? What level does occupancy need to be at to still produce cash flow?

 

Properties look wonderful when they’re featured in fancy marketing brochures with best case business plans and attractive proformas (i.e., projected budgets), but stress testing those numbers helps us take a look at how the performance of the investment may adjust based on potentially unpredictable variables. 

 

#4 – Have multiple exit strategies in place

In any disaster or emergency, you want to have several ways out. In case of a fire, you want a door and window. The same goes for real estate syndications. 

 

Even if the plan is to hold the property for 5 years, no one really knows what the market conditions will be upon that 5-year mark. So, it’s important to account for contingency plans, in case you need to hold the property longer, and the possibility of preparing the property for different types of end buyers (private investors, institutional buyers, etc.).

 

#5 – Put together an experienced team that values capital preservation

Possibly the most critical pillar of all is to have a team that values capital preservation. This includes both the sponsor and operator team(s) and the property management team. All of these people should be passionate about their role and display a strong track record of success. 

The more experience they have in successfully navigating tough situations, the better and more likely they will be able to protect investor capital. This extends throughout the General Partnership team with co-GP team members, strategic partners and the extended team working on lenders, legal framework, accounting and renovations. All working together to maximize upside and protect any downside.

 

Conclusion

While capital preservation may not be very exciting, it certainly is one of the most critical building blocks of a solid deal. Every decision and initiative by the sponsor team should be rooted in preserving investor capital. Because while several solid investments earning 20% average annual returns can win you bragging rights and build wealth, it just takes one underperforming investment to put a big dent in those returns.

And this is why we rely on the five capital preservation pillars for our real estate syndication deals:

  • Raise money to cover capital expenditures upfront
  • Purchase cash-flowing properties
  • Stress test every investment
  • Have multiple exit strategies in place
  • Put together an experienced team that values capital preservation

When browsing for your next real estate syndication investment, go ahead and soak in the pretty pictures, daydream about the projected returns, and imagine how smoothly that business plan might go. 

Then, take a second look, read between the lines, and read back through the investment deck with an investigative eye. Look for hints that capital preservation is as important to the sponsor team as it is to you.

5 Reasons You’ll Love Investing in Real Estate Syndications

5 Reasons You'll Love Investing in
Real Estate Syndications

If you’ve ever experienced owning single-family or multifamily homes, you know that these investments require time and energy. 

Investing in residential real estate can be challenging because, typically, you as the solo investor wear so many hats throughout the seemingly never-ending process. Responsibilities include finding the property, funding the deal, renovating the property, interviewing tenants, and even performing maintenance. 

The trouble is, it doesn’t stop there. You have to repeat most of the process over again when your tenant’s lease is up.

Why Investing in Multifamily Rentals Can Be a Lot of Work

Small multifamily rentals have some advantages over single-family homes. For example, if one tenant moves out, the tenants in the other units are still there to help cover the mortgage. Plus, it’s much easier to manage one property with multiple tenants than to manage multiple properties with one tenant each. 

But, even with a property manager on board to help with your rentals, bookkeeping, strategic decisions, and maintenance/repair costs are still in your court. You’re basically running a small business, which can be challenging, especially if you’re working a full-time job.

The Case for Passive Real Estate Investments

On the flip side, there are fully passive investments in commercial real estate. These are professionally managed and operated investments so you don’t have to deal with any of the three scary T’s  – Tenants, Toilets, and Termites. Oh my!

According to a Forbes article, once investors begin to understand passive commercial real estate investments, it’s common for them to move toward syndications. Here’s why:

  1. Minimal Time Required

Have you heard the phrase “set it and forget it”? Well, in a syndication deal, you put your money in, collect cash flow throughout the hold period, and receive additional profits upon the sale of the property.

You won’t be fixing toilets, screening tenants, or handling maintenance. The sponsor team and the property management team expertly attend to those things so you can sit back, enjoy the returns, and focus on living life.

  1. Opportunity for Diversification

It would be unreasonable for anyone to attempt to become an expert in every phase of the property investment process, and even more so when it comes to different markets. 

By investing with experienced deal sponsors, you can easily diversify into various markets and asset classes while resting assured that the professionals are taking care of business. This allows you to quickly and easily scale your portfolio while also mitigating risk.

  1. Did You Say Tax Benefits?

Similar to personally owned rentals, you get pass-through tax benefits when investing in real estate syndications. You’ll be able to write off most of the quarterly payouts, which means you basically get tax-free passive income throughout the holding period. Cha-ching!

You will, however, likely owe taxes on the appreciation income you earn upon the sale of the property. (Always check with your own CPA on your personal situation)

  1. Limited Liability

When you invest passively through real estate syndications, your liability is limited to the amount of your investment. If you were to invest $50,000, your biggest risk would be losing that $50,000. You wouldn’t be on the hook for the entire value of the property, and none of your other assets would be at risk.

  1. Positive Impact

With personal investments, you make a difference in one, two or maybe four families’ lives, which is wonderful. But with real estate syndications, you have the chance to change the lives of hundreds of families and whole communities with just one deal.

Each syndication creates a cleaner, safer, and nicer place for people to live and impacts the community and the environment positively. And that’s something you just can’t gain from stocks and mutual funds.

Conclusion

If you’re on the fence between active and passive real estate investments, the experience you gain from owning small rentals is irreplaceable. However, personally owning rental properties is not a prerequisite to commercial real estate syndications. And with commercial properties you get the advantage of scaling growth, leveraging a team of experts and regaining time to live your life the way you want.

Either way, investing in real estate is a wonderful way to diversify your portfolio and mitigate risk. It gives you an opportunity to have a positive impact on the families who will live in your units, as well as a positive impact on the environment and community. It’s a terrific choice!

Investing in Real Estate vs. Relying on a 401k: Two Drastically Different Retirement Outcomes

Investing in Real Estate vs. Relying on a 401k:
Two Drastically Different Retirement Outcomes

The American Dream. I remember each of my grandparents working for a time while I was a kid and then each retiring from companies after decades of employment with a retirement party, a gold watch and a healthy pension. General Dynamics. Braniff Airlines. F&M State Bank. My how work has changed since then!

 

That ‘normal’ path of going to college, landing a good job, keeping that for most of your working life, and retiring with a pension are artifacts in just a few remaining institutions. Today’s expectation is more like job-hopping to boost your salary and/or working in a gig economy where we’re 100% individually responsible for putting away savings SO THAT we can hopefully retire one day. 

 

As a result, many of us have old, partially funded, half-forgotten retirement accounts scattered throughout our trail of previous employers. 

 

If this sounds familiar and you haven’t already, I recommend decluttering the number of your retirement accounts ASAP by rolling each one over into a single, consolidated account.  And in doing so, there are some clever options I’ll reveal in a bit to give you more control, more flexibility and some juicy advantages in managing your money.

Red Rover, Red Rover, Please Roll Those Accounts Over!

You don’t want to be on the verge of retirement attempting to remember all the way back to your 20s and 30s as to who you worked for and what financial company managed that 401K, 403b, or IRA. Sifting through old email archives or trying to find quarterly statements…let alone passwords. What a disaster!

Trust me, while some of that is moderately fresh in your mind, you’re going to want to consolidate and rollover all your prior retirement accounts into a single, manageable account you can easily keep track of. 

It’s a beating, but if you do what it takes now – find all the accounts, see all the notaries, file all the paperwork – your future self (and your family) will thank you SO much. So suck it up and take action sooner rather than later!

Investing in Real Estate with Retirement Funds

Here’s where you get to the good stuff. Once you can see the value of your combined retirement accounts, their lackluster performance and all of those management fees, you will become interested in investment opportunities that have the potential to help you accelerate your earnings. 

Well, did you know you can use your retirement funds to invest in and enjoy the incredible wealth-building returns of real estate? 

Yup! You sure can!

There are certainly rules you need to follow in order to do this, but before we get to that, let’s walk through a couple of hypothetical scenarios to demonstrate why you might be interested in investing in real estate with your retirement savings. 

Hypothetical Scenario #1: Keep My Money Where It Is

First, assume you have $100,000 in your consolidated retirement account. And let’s say that over the next few decades, you earn an average of 7% in returns annually. You are able to add $10,000 per year to the account with compounding growth. In 30 years, when you reach retirement age, how much will you have…? 

$1.8 million

Not a bad deal. So, you’re thinking, I can handle that, right?

Well, let’s add inflation into the mix. Inflation is about 3.2% per year, which means the cost of living doubles every 22 years. 

So the $1.8 mil that sounds like big bank right now, equates to less than $900,000 in today’s money. Living out retirement on only $900,000 would be downright scary. 


Enter: The Self-Directed IRA

With a self-directed IRA, you have infinitely more control over the types of investments you’re allowed to make with your retirement money. No more being limited to just certain mutual funds, stocks, and bonds – although you can certainly invest in those if you want. 

Of course, there are limits – you can’t invest in a vacation home for yourself, for example. But you CAN invest in commercial real estate syndications. These are passive investments where you direct the custodian of your self-directed IRA account (which could be you) to invest the funds in a certain investment deal on your behalf. Any interest or profit earned from the syndication go right back into your retirement account and amplify your retirement savings. 


Hypothetical Scenario #2: Invest My Money In Real Estate Syndications

Now, let’s pretend that the same $100,000 was in a self-directed IRA account and invested in real estate syndications. Assume you invest in deals with a 5-year hold time and a 2x equity multiple, which means over the course of 5 years, your initial investment doubles (roughly 20% annual returns).

To be clear, that means in 5 years, your $100,000 investment yields $200,000 and over 30 years of similar returns, your self-directed IRA could value about $6.4 million. 

Additionally, don’t forget about the $10,000 in contributions each year, like in hypothetical scenario #1. Add those in and you’d have over $9.5 million at retirement. SHOW ME THE MONEY!!

*Side note: Being able to contribute $10,000 per year assumes that your employer’s 401k allows in-service rollovers. If that is not allowed, you may be limited to contributing $5,500 per year which makes the total in your account in 30 years around $7.4 million. Still not a bad deal at all. 

**Side note 2: There are many, many other ways to more fully utilize self-directed accounts. From catch-up contributions, to having an account for a business or side business, to other movements. So make sure you connect with a great advisor and/or provider that can maximize your exact situation.

In Summary

Comparing $9.4 million (or $7.4 million if your contributions were limited) to $1.8 million is a no-brainer. 

The impact on your future life and your kids’ future is nearly unimaginable, but add that to the impact your 30 years of real estate investments made on thousands of families whose apartments and communities you helped improve. That’s a truly exponential return on investment.

I’d choose real estate every time. (and I do!!!)

The thing is, for this math to work you can’t make this choice when you’re 65. This is a choice you have to make now. Even if you procrastinate another 5 years, you’re missing out on hundreds of thousands of dollars…potentially millions.

Do it for your future self, for your family, for your children. The short-term paperwork is worth the effort  to prevent your 70-year-old self and your loved ones from experiencing financial stress and strained relationships because of money, or a lack thereof. Learn the lingo, and do what it takes today so you can live life on your own terms when it matters most. 

If you’re interested in continued education, please visit our Resources page. I also encourage you to sign up for our Passive Income Investors Group to get more great content, actual deal results, live webinars, plus access to incredible deals (like the examples we just walked through) that you can invest in right alongside us.

We’re on a mission to return over $1 billion to investors while investing and improving communities of families. We’d love to help you build Passive Income, for life!

What Happens When You Invest $50,000 Each Year In Real Estate Syndications

What Happens When You Invest $50,000 Each Year In Real Estate Syndications

Fifty thousand dollars is a LOT of money for most of us. Nevermind fifty thousand dollars per year. I get it, but hear me out. Once you see the potential results, I strongly believe you’ll be more willing to put in the effort required to get there. 

 

I’ve seen regular people with regular salaries (even teachers!) do this and change their life trajectories forever. So, as with most things in life, it’s about resourcefulness, not so much the resources. You can do anything you put your mind to, and seeing the progression of investing in syndications year after year might help you put your mind to it. 

 

Here’s what could happen when you invest $50,000 a year into real estate syndications:

Year 1

While the first year may not be life-changing, it’s definitely an accomplishment to invest your first $50,000. It’s also pretty cool to pick out that first property. Let’s pretend you select a 350-unit value-add multi-family unit in Dallas, Texas. 

 

Soon afterward, you begin to receive $1,250 every three months in distribution checks, which is about 10%, pretty common in our standard deals. 

A nice, modest start at this point. 

Year 2

In the early spring, you receive your first Schedule K-1, which is the tax document that shows your income and losses from your first investment. We’ll call that Dallas apartment complex from year 1 property A. 

Through the magic of our tax system, accelerated depreciation, and cost segregation, your K-1 form for property A shows hefty paper losses, even though you enjoyed around $400/month average since the distributions started. Those paper losses allow you to offset both your investment income and some of your regular income as well!

 

This same year you invest another $50,000 into syndication B, which bumps your cash flow from real estate syndication investments to $2,500/quarter ($1,250 from each property, A and B). Now we’re talking!

Year 3

This year, in the early spring, you receive two K-1 tax forms. This marks a turning point in your finances because from here forward, you’ll begin to look forward to tax season! 

 

Soon you invest another $50K into your third deal, real estate syndication deal C. Afterward you begin to receive 3 distribution checks each quarter, totaling about $3,750. You’ve boosted your yearly income at this point by $15,000 annually. Not too shabby!

Year 4

Partially through the year, Real Estate Syndication A sends word that renovations are complete on the property, and the sponsors are seeking to sell the asset early. Because this property is in a hot submarket in a growing metro area, the listing gets a lot of attention and is soon purchased by another syndication group.

Your original $50,000 investment from Real Estate Syndication A, plus an additional $25,000 in profits from the sale is received. Cha-ching!

You play it smart and invest all your returns from Real Estate Syndication A ($75,000), plus the $50,000 you’ve saved in year 4, into Real Estate Syndication D.

You now have a total of $225,000 invested, across three syndications, each with a preferred return of 8% and an average annual cash flow of 10%. This should yield about $22,500 annually in cash flow distributions (~$5,600 per quarter). Now things are really getting interesting!

Year 5

By this time, Real Estate Syndication B (your investment from year 2) has completed its renovations and is also sold. You receive your original $50,000, plus an additional $25,000 in profits.

Last year’s deals worked out great and you love the way the general partnership team has been working, so you decide again to roll that $75,000 from investment B along with this year’s $50,000 all into Real Estate Syndication E, bringing your total invested capital to $300,000.

Now your cash flow checks start really looking good, totaling about $7,500! At about $2,500/mo it’s better than some people’s net monthly salary. 

Years 6 – 7

Now that you’re getting the hang of it, let’s start moving a little more quickly.

In years 6 and 7, Real Estate Syndications C and D are sold, respectively. Each year, you invest additional capital of $50,000 to the returns you receive from those exited deals. In each year 6 & 7, you invest $125,000 into Real Estate Syndication F & G, respectively.

Now, you have a total of $487,500 invested. Every quarter, you’re getting multiple cash flow distribution checks totaling around $12,000, or about $48,000 per year.

You’re now nearing a decent career path’s GROSS salary value. It’s like you’ve got an invisible earner in your home generating income but not adding to any of your expenses. And because of all the depreciation benefits, you’re continuing to show paper losses (remember your favorite K-1 forms), so all this cash flow isn’t being taxed! 

Years 8 – 10

Another three years pass.  The kids grow, you’ve checked a few life experience must-haves off the list, and you’re maturing into the life of a savvy real estate investor.

You’ve now been investing $50,000 every year for 10 years. The first six deals have exited, each time leaving you with a healthy return to reinvest.

Over these 10 years, you’ve saved up $500,000 in cash, which is no small feat. You’re smart and money-savvy, which is why you put that into syndications instead of McMansions and Ferraris. So let’s do the final round of math, shall we?

In each of years 8, 9, and 10, syndication deals sold and left you with healthy returns to roll into the next investment. By the end of year 10, you have over $880,000 invested in multiple real estate syndications across multiple markets and asset classes, producing almost $90,000 in diversified passive income per year. That’s more than the median household income in the US!

So, if you were to invest $50,000 a year into real estate syndications, THAT’s what happens.

What Life Looks Like in Year 10 and Beyond

At this point, you earn passive income of over $90K per year, and that figure grows every year. You love your chosen career, so rather than quitting, you opt for a freelance lifestyle, giving you more flexibility to take longer trips with your family.

You enjoy fun once-in-a-lifetime experiences, travel, hike the Inca Trail to Machu Picchu, enjoy yoga retreats, and stay in a glass igloo so you can dream beneath the Northern Lights. Good thing for those regular distribution checks!

You have the ability to donate often to charities and non-profit organizations that you love and be an active volunteer at your kids’ school and in your community.

Perhaps the passive income enables a great education for the kids, or a personal chef, or helps fund an early retirement for your parents.

Most of all, you rest easy with the confidence  that you’ve created a lasting legacy for your family. Someday, they’ll continue to invest and build their own passive income. You won’t have to worry about being a burden on them in your old age.

Disclaimers

You probably already know most of what I’m going to say here, but it’s important to reiterate.

Real-life investing is not clean and easy like it seems from this post. You can’t predict exactly when a deal is going to exit, cash flow returns might not be exactly 10%, and you may not be able to find a great deal to invest in right when you’re ready. Life is complicated. 

The scenario we walked through together in this post is based on an average hold time of 3 years before the deal exits. While most of our syndications project a 5-year hold, most of them exit quite a bit sooner than that, often soon after the renovations are complete and the property is stabilized.

You should also notice that the example didn’t include reinvesting the cash flow, an option that would further accelerate the growth. But life’s meant to be enjoyed too, right? Rough calculations for capital gains taxes and depreciation recapture at the sale of each property have been incorporated, though the operative word here is “rough.”

In the end, it’s very unlikely that you would see these exact numbers. It’s possible that the numbers could be slower to grow, but it’s also possible that you’ll see much faster growth. This post is not meant to be a prescription. Rather, to demonstrate to an order of magnitude how diligence and patience, together with compounding returns, can dramatically change the course of your financial future – and that of your family. 

In Conclusion

Investing passively in real estate syndications is NOT a get-rich-quick scheme (usually!). Quite the opposite, in fact. Investing in real estate syndications is a long-term strategy that should result in building wealth slowly but steadily over time.

It’s almost like farming. You have to plant the seeds, then wait a season or more before the harvest.

Dabbling in house hacking, private lending, and out of state rentals might be your entry point. And if so, that’s great because you’re on to something. Hopefully, this 10-year plan opens your eyes to something bigger and better. 

There’s rarely a well-trodden path, and it’s even less often laid out this clearly. Real Estate is worthwhile, but some investments are wins and others aren’t. This method of $50,000 at a time is a predictable, operable, seemingly magical process anyone can implement to begin their syndication journey. 

And that’s why we’re investing in these syndications right alongside you, one $50K investment (or more) at a time. And, like you, we look forward to the next ten years using this stable, intentional, and low-hassle path toward growing our passive income and wealth.

Investing In A Real Estate Syndication: All The Details

Investing In A Real Estate Syndication: All The Details

Before you’re fully committed to, and after you’ve become interested in a real estate syndication, you need to know several details about actually investing in these deals.

The process of investing in a real estate syndication is very different from picking a stock or a mutual fund online. Furthermore, unlike typical investment properties, there are hold times, barriers to entry, and a whole set of expectations that you need to know about prior to committing to a deal.

As a smart investor, you’ve got to know exactly why you’re choosing a particular investment in addition to the required credentials, the process, what’s involved, and how long you should expect to wait until payout.

Guess what? You’re in luck! That’s precisely what you’re about to read!

How long does a real estate syndication last?

Unlike an online stock, ETF, or mutual fund that can be exchanged daily or more, real estate syndications come with required, projected hold times. While each real estate syndication is different, we typically see hold times of 5-7 years, sometimes longer.

Real estate syndication deals have to allow time for property renovations, management changes, occupancy rate increases, and even market conditions to adjust. This means that you should plan to invest your capital for 5-7 years (or the timeline stated on the investment summary & memorandum), because you will not be able to take your money out until the asset is sold.

Who can invest in real estate syndications?

Now you might be wondering if there’s any red tape. 

Is just anyone allowed to invest in this sort of thing? It seems pretty exclusive.  

Well, you’re kind of correct. A large majority of real estate syndications are open to accredited investors only, though some are also open to non-accredited, sophisticated investors (i.e., investors who can demonstrate that they understand real estate syndications and their risks).

In order to be considered an accredited investor, you must meet at least one of two requirements. 

  1. You must have at least $1 million in net worth, not counting your primary home.

  2. You must make $200,000 per year as an individual, or $300,000 jointly with your spouse, have made this amount or more for each of the last two years, and intend to make this amount or more this year.

If you meet either one or both of these requirements, then you are an accredited investor.

If you’re not yet an accredited investor, there are still some real estate syndication opportunities out there for you. However, you may need to look a little harder for them. This is because the opportunities for non-accredited investors cannot be publicly advertised, hence the feeling of secrecy you’re getting.

What’s the process for investing in a real estate syndication?

So maybe you’re accredited, or maybe you’re not, but you’re really wondering HOW someone invests in these elusive real estate syndication deals you’re reading so much about. 

Here are the basic steps for investing in a real estate syndication:

  1. The sponsor announces that the deal is open for funding, usually via email.

  2. You review the investment summary deck and decide to invest.

  3. You submit your soft reserve, telling the sponsor how much you’d like to invest.*

  4. The sponsor holds an investor webinar, where you can get more information and ask questions.

  5. The sponsor confirms your spot in the deal and sends you the PPM (private placement memorandum).

  6. After signing the PPM, you wire in your funds or send in a check.

  7. The sponsor confirms that your funds have been received.

  8. The sponsor notifies you once the deal closes and lets you know what to expect next.

*Real estate syndications are almost always filled on a first-come, first-served basis. Thus, sponsors use a soft reserve to help them determine who’s interested in investing.

By submitting a soft reserve, you are telling the sponsor you’re interested in the deal and want to invest X amount. The soft reserve does not guarantee you a spot in the deal, nor does it lock you in. You can always back out or change your mind later.

Pro tip: If you’re thinking about investing in a deal but aren’t sure whether you want to invest $50,000 or $100,000, go ahead and put in a soft reserve for $100,000. This holds your spot in the deal.

If you decide later that you only want to invest $50,000, you can easily decrease your investment amount. However, if you had put in a soft reserve for $50,000 and later wanted to increase it to $100,000, you might not be able to increase your soft reserve amount if the syndication is already over-subscribed.

What happens after I invest in a real estate syndication?

So, you’re sure you want to invest in a real estate syndication, you do your research, and you lock in a deal. Now what? 

After you’ve sent in your funds for a real estate syndication deal, your active participation is done. Now you can sit back and wait for the cash flow to start rolling in.

Depending on the particular deal, you may receive either monthly or quarterly cash flow distributions, and they may start immediately, or not for a few months.

Regardless, you should start receiving monthly updates as soon as the deal closes. These monthly updates will include information on the latest occupancy and progress on the renovations.

Every quarter, you will receive a detailed financial report on the property, and every spring during tax season, you will receive a Schedule K-1 for your taxes, which will report your share of the income and losses for the property.

As your projected hold date approaches, the monthly information you receive may include information about a sale. Once the asset sells, you can expect your original investment capital to be returned, plus any percentage of profit due to you. 

Now You’re In The Know…

At this point, you’ve gone from curious, to interested, to knowledgable about passively investing in real estate syndication deals. All that’s left to do from here is to actually find a deal and get involved! You’re fully informed about who can invest, the hold time, the process, and what to expect. Plus, we’re here for any questions or guidance along the way. 

 

Happy investing!