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Real Estate Syndications – How To Tell If They Are Right For You

Real Estate Syndications -
How To Tell If They Are Right For You

So you’ve been devouring all the information possible and have become enamored with the power of passively investing in real estate syndications. How could you not?! 

The ability to invest in real, physical assets without the hassle of being a landlord, getting a share of the majority returns, and reaping amazing tax benefits is pretty irresistible. Plus, the diversification opportunities with minimal legwork while making an impact on local communities just about seals the deal. 

Even though these traits seem impossible to pass up, real estate syndications aren’t for everyone. Each investor is in a different stage of life, has a different level of risk tolerance, and maintains different goals. 

Before investing in a real estate syndication, see if one or more of the below describes you and your current situation.

#1 You Have More Than $50K of “Play” Money

While there are some real estate investment platforms that will accept smaller investment amounts, most private real estate syndications begin at a minimum investment of $50,000.

You want to make sure you have the minimum investment of $50,000, plus your standard emergency fund, plus any other savings for your life’s aspirations. Think about it – a new car, fluffy retirement savings, this year’s vacation to Cabo, and college education funds, to list a few.

 

Of course, there are lots of contingencies in place in syndications, but they are an investment and as such, come with risks.  And just as with any investment, if you aren’t prepared to lose your investment in its entirety and be okay financially, then syndications may not be your jam…yet. You may want to head back to the drawing board with some serious savings plans and re-visit real estate syndications down the road once you have any key needs covered.. 

 

On the other hand, if you have your potential cash-needing scenarios covered with savings, by all means, invest with confidence! 

#2 You’re Okay Having Someone Else Take the Reins

If you’re short on time, but heavy on cash, and want someone else (a professional team) to manage the property while you reap the rewards, you’ve found the right investment. 

 

Passive investing in real estate syndications is much less hands-on than your typical residential real estate rental property, in fact, you’ll probably never see the property in person and won’t be involved in any day-to-day decisions. 

 

You don’t have to be in contact with the broker, monitor the property manager’s performance, or receive and decipher between contractors’ bids. Instead, you get a few emails, sign a legal doc or two, and carry on with your life while the checks show up. As a passive investor, you’re a passenger on a plane ride. So, sit back and have a cocktail.

#3 You’re Looking for a Long-Term Investment

Maybe you’ve done your research and know not to look for some get-rich-quick scheme, but rather, are interested in a steady longer-term approach to wealth. Unlike stocks or something you can flip in the two-year range, real estate syndications typically have a hold period for five or more years. 

 

If you’re more of a “set it and forget it” type investor, and can plan for your investment capital to go earn you cash flow and appreciation for set periods of time, then passively investing in real estate syndications may be your new obsession.

#4 Sharing Returns In Exchange for Less Work is Attractive to You

Fix-and-flips and standard rental property approaches to investing allow 100% of the profits in your pocket. Mostly because they are smaller deals, require plenty of sweat-equity, and often have only one party (you) financing and managing the deal. But that also means you are liable for 100% of the expenses – be they in the form of time and/or money!

 

Multifamily real estate syndications are completely different as there could be tens or even hundreds of individuals involved – thus some profit sharing. Usually, the passive investors get the larger portion of a 70/30 or 80/20 split, with the general partners getting the smaller percentage and also enjoy what’s called a “preferred return”, meaning some amount of the initial returns go to the passive investors before the general partners’ returns kick in. 

 

Group investments like this take a “team” or collaboration mentality versus a competitive mindset. The general partners have done the upfront work to find and secure a deal; are actively managing the property; making any decisions and management toward renovations; and handling marketing and financial reporting. So, it only makes sense that they are compensated for their efforts. If profit sharing and the concept of “a rising tide lifts all boats” makes sense to you, you’re in the right place.

#5 You Don’t Need the Money for a While

It’s possible you’re in a season of life where your kids’ vehicle purchases or college decisions are either several years in front of or behind you, that you’re in a home that doesn’t need a massive kitchen renovation, or just that you have spent some time planning well, establishing some financial surplus, and minding your expenses. 

 

If this is the case, you also likely met the criteria in #1, and you are going to be okay having your money “locked-up” for a bit. You’ve worked hard to save, budget, and build a little nest egg, and you’re just looking for somewhere to park it for a few years with the possibility of earning some interest. 

 

Having expenses covered for the foreseeable future is a fantastic feeling, and if this describes you…well, investing passively in a real estate syndication hopefully captures your interest even more after realizing how well-positioned you are for this type of investment opportunity. 

 

Recap

You’ll absolutely love being able to invest your money in real estate without the hassles of being a landlord, all while having the chance to invest with different sponsors in different markets and different asset classes. And bonus – the tax benefits and returns from passive investing can surpass those from personal rental properties.

But, being a passive investor isn’t for everyone. So, if you…

  • Have more than $50k of “play” money

  • Are okay earning returns while NOT having an active role

  • Are good with a longer-term investment

  • Find collaboration and sharing big returns attractive

  • Are comfortable putting your cash to work for 5+ years

 

…then investing passively in real estate syndications likely could be the best fit for you. 

 

The beauty of real estate investing is that it’s so incredibly diverse. Perhaps some of the above doesn’t describe you and you’d rather roll up your sleeves and do the work yourself. Or perhaps you’re looking for a more liquid or a shorter-term investment. That’s totally okay. Life is not “one size fits all”.

 

There are so many opportunities out there to invest in great projects and impact local communities. Commercial real estate syndications are just one avenue, but if you meet a few of the criteria above, you might have found your match. 

 

And if that’s the case or you’d like to explore more, then make sure you’ve signed up for our Deaton Equity Partners Passive Income Investor’s Group and check out our Resources section as well as YouTube and social channels.  We’re committed to bringing as much great passive income investing content to our community and give them the tools to fuel life’s adventures!


Until next time, we’ll see you on the path to Passive Income…for life!

7 Steps to Investing in Your First Real Estate Syndication

7 Steps to Investing in Your First
Real Estate Syndication

For many of us, the process of buying a house is fairly familiar.

  • decide you want to buy a house
  • think about the neighborhood you want to be in
  • list out the features in your must-have versus nice-to-have columns
  • check with a lender to see how big a loan they’re willing to give you
  • consequently, move some things from your must-have to your nice-to-have column after you get your lender’s pre-approval letter
  • find an agent to tour properties until you find the home of your dreams
  • finally…put in that offer package that the seller would be crazy to turn down

[Insert your own variations and “fun” experiences here] 😊

While the timeline varies from deal to deal, the overall steps of investing in a real estate syndication are essentially the same

Similarly, other traditional types of real estate investing that involve buying a house and making some sort of profit on it, are also pretty easy to understand.

Fix-and-flip: buy a house, renovate it, sell it for a profit.
Buy and hold: buy a house, rent it out, get monthly rent checks.

Beyond that, the edges can start to become a little fuzzy, especially when you start talking about things like group investments (aka, syndications), in which you invest passively alongside several, sometimes hundreds of, other investors to purchase a large asset, like an apartment building.

In this post, I will walk you through that process at a very high level, from start to finish, so you have a clear understanding of all the steps involved in investing passively in your first real estate syndication.

While the timeline varies from deal to deal, the overall steps of investing in a real estate syndication are essentially the same:

  1. Decide that you want to invest in real estate
  2. Understand your investing goals
  3. Find an investment opportunity that aligns with your goals
  4. Reserve your spot in the deal
  5. Review & sign the PPM document (private placement memorandum)
  6. Send in your funds
  7. Celebrate & look forward to receiving your passive income deposits!

The process behaves much like a funnel, with each step bringing more clarity on your goals, potential deals, and ultimately, that perfect deal.

Step #1 – Decide That You Want to Invest in Real Estate

This is your most important step in which you set your intention.  After all, there are many other things you could invest in, from gold to coffee plantations to stocks and bonds.

This is a decision that I won’t be able to make for you. You’ll have to look at your overall portfolio, reflect on your goals, and decide whether investing in real estate can help you reach those goals.

What I can tell you, is a bit about how we got into real estate investing.

We began investing in residential real estate in 2016.  We started with buying and selling rural, vacant land and upon selling it to others, we would owner finance the sale, thus building up a “passive” income stream. 

Then a few years later, while we loved the idea of passive income, we didn’t want to take the time and effort to build a rental property portfolio; manage the properties; or go through the hassles of finding and buying the properties.  We also really wanted to apply the lessons of other great real estate investors and leverage the huge tax savings that come with larger real estate assets.

Enter real estate syndications.

These investments presented the potential for greater returns than other investment types; could be totally passive; and brought us incredible tax savings.  Since then, we’ve invested in over 1,000 multifamily units and have continued to build our cash flow, net worth and network while virtually eliminating our tax bill.  Not too shabby!

Has every investment been a homerun? Absolutely not. But am I glad we made each and every investment that we did? Yes. 100% yes. Real estate has taught us about people, relationships & teams; leverage; tax benefits; passive income; and the power of giving back to the community. For us, real estate is a critical part of our lives and the cornerstone of our long-term strategy of building wealth for our family.

All that is to say, every person and every family is different, so you’ll need to do some research, thinking, and reflecting to decide if real estate investing is for you.

Step #2 – Understand Your Investing Goals

Once you decide that you want to invest in real estate, think about what you’re hoping to get out of it. Are you looking for a long-term or short-term investment? Are you hoping for a quick lump sum or a steady stream of passive income over time?  How much do you have to invest, both in terms of money and in terms of time?

If you’re not afraid to roll up your sleeves and put in some sweat equity, or you want to control the process to choose your own tenants or cabinets or flooring, you might consider trying a fix-and-flip, or buying and holding a small rental property.

If, on the other hand, you want more of a set-it-and-forget-it type of investment, one that you can scale very quickly and that delivers nice, big tax benefits, then a real estate syndication might be a better fit. You can invest your money alongside other investors, then have an asset manager execute the strategy, manage the asset, and carry out the business plan to update the units and maximize impact and returns while you focus on other things and deposit your distribution checks.

Step #3 – Find an Investment Opportunity That Aligns with Your Goals

If, at this point, you’ve decided that a real estate syndication is the best fit for you, the next step is to find a syndication opportunity that works for you.  Just as there are a variety of different real estate assets you can invest in personally, there are a variety of real estate syndication projects available as well, from ground-up construction to value-add assets, and even turnkey syndications.

To help investors learn about investment opportunities, deal sponsors typically provide some variation on the following materials:

  • Executive summary
  • Full investment summary
  • Investor webinar

These are the core materials that will give you a full 360-degree view of the asset, market, deal sponsor team, business plan, and the projected financials.

Personally, when I review these materials, I’m looking first and foremost at the team who’s running the project.  I want to make sure they have a solid track record and that they’re good people.  As you know, you can give a great project to a terrible team, and they’ll drive it into the ground.  On the flip side, you can give a struggling project into a terrific team, and they’ll turn the whole thing around, delivering on the returns promised to investors.

Beyond the team, I look to see if the business plan makes sense, given the asset class, submarket, and where we are in the economic cycle.  I do my own research on the market, looking at job growth, population growth, and other trends.  I look at the minimum investment amount, projected hold time, and projected returns.  I look to make sure that the team has multiple exit strategies in place in case their Plan A doesn’t pan out.  I look for conservative underwriting.  I prepare for, attend and/or review the investor webinar and ask tough questions.

Basically, I look for any reason NOT to invest in the deal.

If, after all my research and analysis the investment still looks good, I consider investing in the deal.

But again, this is my personal philosophy and methodology.  As you review different investment summaries, you’ll come up with your own criteria of what you’re looking for.  And the more you review, the better you’ll start to understand exactly what you’re looking for.

Step #4 – Reserve Your Spot in the Deal

One thing to note about real estate syndications is that the opportunity to invest in the deal is on a first-come, first-served basis.

This can be especially important for deals in hot markets with strong deal sponsors.

I’ve seen multi-million-dollar investment opportunities fill up in a number of hours.

That’s why it’s important to do your research ahead of time, to know how much money you want to invest, and what you’re looking for in an investment opportunity.

That way, when the opportunity opens up, you can jump on it with confidence.

Often, there will be an opportunity to put in what’s known as a “soft reserve” amount.  This is a reservation that holds a spot for you in the deal while you take some time to review the investment materials. If you decide to back out or reduce your investment amount later, you can do so with no penalty.

The flip side is, if you don’t hold a place, but then later decide you want to invest, there may no longer be room for you in the deal, and you’ll have to join the backup list.

Not every deal offers a soft reserve, but when there is one, and I think I might be interested, I always put in a soft reserve to buy myself some more time to think about the deal, review the materials, and do my own research.

For deals with a soft reserve, this step and the previous step #3 might be flipped or more fluid, so I tend to review the executive summary, reserve my spot in the deal, then review the rest of the materials.

Step #5 – Review the PPM

Once you’ve decided to invest in a deal, the first “official” (aka, legal) step is the signing of the PPM (private placement memorandum).

This is a legal document (often quite lengthy) that goes into detail about the investment opportunity, the risks involved, and your role as an investor in the project.

The PPM is certainly not the most fun document to review, but it’s very important that you read through it so you fully understand all aspects of the investment opportunity – including the risks, subscription agreement, return structure, and operating agreement.

Step #6 – Send in Your Funds

Once you’ve completed the PPM, the next step will be to send in your funds (aka, the amount you’re investing into the deal).

Typically, you will have the option to either wire in your funds or to send in a check.  I’ve used both methods before and have had no issues with either method.

Pro tip: Before wiring in your funds, be sure to double check the wiring information, and let the deal sponsor know to expect your funds so they can be on the lookout.

Step #7 – Celebrate & Get Ready to Receive Your Distributions!

You did it!  By this point in the process, you’ve done your due diligence on the investment, reserved your spot in the deal, reviewed all the legal documents, and sent in your funds.

That means you’re done with all the “active” parts of your role as an investor. If we’re using the syndication-as-an-airplane-ride analogy, that means you’ve picked your destination, bought your ticket, checked your bags, reviewed the safety information, buckled your seat belt, and now you’re ready for a cocktail and a movie.

The next piece of communication you’ll likely receive is a note once the property has closed. Deal sponsors typically like to put lots of smiley emojis and exclamation points in these emails.

After that, expect monthly updates on the project, more detailed quarterly reports on the financials, quarterly cashflow distributions, and an annual K-1 Form for your tax returns.

Conclusion

So, there you have it. Hopefully, the process of investing in a real estate syndication is a bit clearer now, and…a little less intimidating.

Real estate syndications are more of a set-it-and-forget-it type of investment, so most of your active participation is up front. After you decide to invest in a syndication, you review the investor materials (executive summary, full investment summary, and investor webinar), reserve your spot in the deal, review and sign the PPM, and send in your funds.

The first time you do it, it might seem a bit confusing as to what to expect and what questions to ask.  However, as you review and invest in more deals, the process will become very familiar.  And after that?  Well, we’re pretty darn confident you’ll be hooked on generating more Passive Income…for life!

And in addition to the ideas just presented, you can amplify your journey with the following resources: 

  • EXPLORE more about the power of passive real estate investments in our section of other blogs and videos.
  • SIGN UP for our newsletter for passive income-related content delivered right to your inbox
  • JOIN our Passive Income Investors Group to gain access to multifamily investment opportunities and more behind the scenes content