Pros & Cons to Real Estate Syndications

In this article we will go over the pros and cons to investing in Real Estate Syndications. If you don’t know what a Real Estate syndication is, it is basically a form of investment strategy where a group of investors pool their money together to purchase a property, usually in Multifamily, Self Storage, Hotels, etc. You can read more about it here. 

It’s important to highlight not just the benefits of real estate syndications, but also the downsides, so you can see both ends of the spectrum. Having said that, this will be a high level overview, we highly recommend you go through the official investment documents of any investment opportunity you’re looking at in detail to understand all the risks associated.

Now that’s out of the way, let’s get right into it!

Pros:

  • Passive Investment:
      • This is easily the biggest benefit to investing in syndications/funds. It allows you the ability to invest in Real Estate without dealing with the hassle of dealing with tenants, managing the property yourself, maintenance, etc. You can continue to focus on your main business or job while using this as a way to invest your earnings.
  • Cash Flow: 
      • You can build a steady stream of cash flow that you don’t have to think about or manage yourself
  • Appreciation:
      • If you invest in the right deals with the right sponsors, you can greatly benefit from Real Estate appreciation, as well as “forced appreciation” which happens when the property is improved and increases it’s income to higher levels, causing forced appreciation. 
  • Tax Deductions:
      • One of the main reasons I started investing in syndications was to get “on paper” depreciation and legally save on taxes. Depending on your income bracket and passive gains, this could be a big benefit. We recommend speaking with a CPA to understand how this may or may not benefit you as we are not licensed CPAs. 
  • Top Market Exposure:
      • Some Real Estate markets outperform others due to many factors, mainly population growth and migration patterns. With Real Estate Syndications, you can pick and choose those top performing markets at will. You can read about our top 10 markets here. 
  • Diversification:
      • Instead of being invested in one unit (single family house), you get to diversify as you have multiple units, which usually brings in more stability to the property. If one tenant leaves a single family house, you lose all your revenue. If one tenant leaves a 100 unit property, that’s only 1%, and business carries on as usual. 

 

Cons:

  • Long Term (3-5 Years, generally)
      • Generally speaking, most Real Estate syndications are put together with the projection of a 3-5 year holding period. It’s not uncommon to be in and out of a deal in less than 3 years, but that’s not usually the expectation set up front.
  • Illiquid:
      • When you invest in a Real Estate Syndication, you’re basically investing in an entity that’s buying a property. Usually, you wouldn’t have your money back out until either the property gets refinanced or sold. If the holding period is 3-5 years, you have to be ok with not having access to your investment capital for that term. If you plan on investing the money, this may not necessarily be a concern.

 

Accredited vs. Non-Accredited:

Some syndications require you to be accredited to invest, and some are open to both accredited and non-accredited. 

There are several ways to qualify as an Accredited investor by the SEC:

  • $1 million or higher in Net Worth, excluding the equity in your primary residence

OR

  • Make $200,000 ($300,000 combined if married) for the past 2 years with the expectation of continuing to make that amount this year
  • If you do not meet that criteria as set by the SEC, you may be Non-Accredited, which limits which type of investment opportunities you’re allowed to invest in

 

Is there a risk of losing money in a Real Estate Syndication?

As with any other investments, there is a possibility that you may not make the projected returns, or possibly even lose your complete investment. I have personally not lost money in any of my investments, but there is always a chance. You have to vet the deal and make a decision based on the info you gather whether it’s a sound investment or not. You can read about some of our criteria to see the process we go through to source deals on our website.

If you are interested in looking at future Real Estate investment opportunities to invest passively in deals, click the link here to schedule a call to be added to our Model Equity Investor Club where you will get private access to limited investment opportunities as they become available! We have nothing to sell you on the call, it will be completely free with the intent of answering any questions you may have.



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