The benefits of real estate, without the headaches
Passive investing means you get to invest and then step back and collect your returns. This is commonly done through a syndication.
What is a real estate syndication?
A real estate syndication allows a group of investors to pool their resources together in order to purchase an investment property.
When you invest in a real estate syndication, the managing team takes care of everything, from acquisition to day-to-day management to financial governance, and the passive investors reap the benefits of that work.
Benefits of investing in a real estate syndication
Investors are able to diversify and build wealth through cashflow, appreciation and equity paydown when investing in a real estate syndication. Tax benefits of the investment also flow through to passive investors, all which can accelerate your path toward financial freedom.
Syndications can also serve as a great hedge against inflation. The last two years alone we’ve seen double digit rent growth and appreciation in apartments. The growth of rents typically outpaces inflation, and because the value of the asset is based on the income it produces, this leads to higher valuations that far outpace the inflation rate. With a shortage of housing units in most U.S. markets, real estate will remain a valuable investment for years to come.
Furthermore, investing in real estate can positively impact a community. Many real estate syndicators work to provide quality and affordable housing that is a great benefit to the community at large.
Types of partners in a syndication
A real estate syndication requires two types of partners:
Deal Sponsors are responsible for a lot of the heavy lifting in the deal. They’re responsible for:
- Finding and analyzing the opportunities
- Developing a business plan
- Raising capital and securing financing
- Profitably managing the asset
- Providing updates to investors
Passive Investors (this could be you!) are equity partners. These investors prefer a less hands-on approach to their investment:
- Analyze new opportunity to ensure it is the right fit
- Evaluate the deal sponsors before investing
- Bring equity to fund the deal
- Receive updates and enjoy the benefits of the investment
Types of real estate syndications
There are two types of real estate syndications, each with its own qualifications.
When presented with an opportunity to invest, make sure you know what kind of syndication is offered.
Participants in 506 (C) syndications must qualify as Accredited Investors.
Accredited Investors meet one of the following criteria:
- Individual with >$200k in annual income for >2 years;
- Married with >$300,000 in joint annual income;
- Household with >$1 million in assets (bank, savings, loan association);
- Investment firm or trust with >$5 million in assets.
Both Accredited Investors and Sophisticated Investors can participate in 506(B) syndications.
Sophisticated Investors meet the following criteria:
- Individual with sufficient knowledge and expertise to weigh the value and risks of an investment;
- Must have a pre-existing relationship with a Deal Sponsor.
Key financial terms
Financial jargon can be confusing, and while we try to make things simple, it’s important to understand how to analyze a deal and to follow the regular updates and communications that your Deal Sponsors provide.
Choosing a Deal Sponsor
When reviewing possible investments, it is crucial to evaluate the Deal Sponsor as well as the deal itself. Consider the Sponsors’ experience, track record and values. Most Sponsors are happy to tell you about previous projects and to take time to answer your questions.
Investor Presentations are another great way to learn about a Deal Sponsor and their offerings. Details about a property such as location, age of buildings, and unit mix, as well as the holding period of the investment, and overall business goals, should help you make a decision about whether the investment aligns with your own goals.
It is also important to verify your interests are aligned. Ask the Deal Sponsor if they will be investing as well. You want to ensure the Deal Sponsor treats your money like their own.