Invest in a Real Estate Syndication as a way to pool resources with others. What Is/Isn’t A Real Estate Syndication?
When you hear the word syndicate, your mind may first go to a movie where evil criminals plotted to defeat the super hero, and maybe you remember watching Batman where the Joker met with his syndicate to do this. Yes, people work together in what is called a Real Estate Syndication to make money. And while you may have some characters in the group, in this case, it is legal.What Is/Isn’t A Real Estate Syndication?There are several reasons why you should consider investing in a RE Syndication. One reason may be time. You like real estate but don’t have the time to search and underwrite deals. You not only need connections to source these deals but the ability to look at many deals to find the one that works for you. Even if you find one, getting it under contract and closed in a hot market is a very tough task. A second reason is economies of scale. The bigger the project the more favorable deals you can arrange with vendors. If your property is large enough, say 80 units or bigger, you can afford an onsite full-time property manager and maintenance person instead of paying for a part-time person that may not be as motivated. A third reason to invest in a RE Syndication is you are hopefully working with experts, people that have done countless deals and made a lot of money which you hope to make on your deal.Where Do You Find Real Estate Syndications?
There are a few ways to access real estate syndications. Of course, you can always go online and use a crowdfunding site. If you are already an Accredited Investor, try Realty Shares or Peer Street to find your next deal. An Accredited Investor is someone who made a minimum of $200k in annual income the last two years or $300k if you are a joint investor, AND you expect to make at least the same in the upcoming year. You may also qualify as an Accredited Investor if you have a net worth of $1 million or more, not including your primary residence. This designation is used by the SEC to ensure that investors of unregistered securities have the means to lose their investment. Certainly, losing your money is not part of any investor’s plan but the reality is, that it can happen.
If you are an non-accredited investor then you can use Realty Mogul, Fundrise or Crowdstreet. These sites let you start investing with as little as $500. Additionally, you still may be able to invest in a RE Syndication 506(b) offering since a sponsor can have up to 35 non-accredited investors. However, you must be sophisticated, meaning you have sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment.
You won’t see advertisements for 506(b) offerings as that is illegal. You must have a pre-existing relationship with a sponsor before you can invest. According to WealthForge, “In general, under this rule an issuer of securities has a “safe harbor” exemption from registration. That means the issuer doesn’t have to obtain SEC pre-approval of the offering or need a license to sell its own securities, as long as it follows the rules for the exemption.” Whereas a 506(c) offering allows sponsors to raise capital via advertising, but all investors must be accredited.
You may also find deals through local real estate meetups. I attend a few meetings with REIA since they are a great way to network, learn and partner with other like-minded individuals. Search for events on BiggerPockets or Meetup. Attending these meetups may increase your sophistication as an investor by allowing you to develop relationships with syndicators and other experts.
How Do Investors Make Money?
When you invest in a RE Syndication, you may receive rental profits and money when the property sells (assuming the property appreciated and/or the debt was paid down by the rents). Typically, payments from rental profits are made on a quarterly basis, although a few do pay out monthly. Some deals can be as short as a year or less while others can last 10 or more years. Investors typically earn a preferred return, meaning before any profits are split, the investor gets for example 7%. Then profits are split say 70% investors and 30% sponsor although this varies based on experience of the sponsor and how the deal is structured. Sometimes, this split can adjust down for an investor when the sponsor hits certain benchmarks rewarding the sponsor for a strong return.
Conversely, the sponsor is the one who finds the deal, raises the money, executes the business plan and eventually helps manage the sale. In return, they usually take an acquisition fee upfront from 1-3%, an asset management fee of no more than 2% from ongoing revenues, a disposition fee at the time of the sale up to 3%, and a share of the profits.
My Experience Investing In Real Estate Syndications
I have personally invested in three real estate syndications through a Self-Directed IRA. My first investment involved a student housing opportunity in Tucson, and then eventually, two separate apartment complexes in the Dallas area. These give me passive income in my retirement account without having to do much continued work. The work I needed to do was all upfront: I had to find sponsors I trusted, evaluate the opportunities, and check their history. Once invested, I only need to periodically make sure they are still on track with the stated business plan. I realize I’m simplifying things here, and it can be scary to trust someone with your hard-earned money, but I have worked hard to build my knowledge base so I could take that leap. I’ve reaped the rewards of my effort. I suggest you do the same.
Getting involved in a real estate syndication is a great way to get involved in a bigger real estate deal than you could on your own and let someone else do the heavy lifting while you earn a passive income. My goal is to grow my passive income substantially, so I have much greater financial freedom. If you’d like to read more about my real estate goal, click here. What’s your goal?