Real Estate Investing Best Practices

If you’re interested in investing in real estate but aren’t sure how to get started, you’re not alone. Often, would-be investors know that real estate is a reliable, relatively low-risk way to build wealth but aren’t sure how to initiate the process. 

A typical path new investors take is starting small and building capital, then investing in more significant, more passive investment deals down the road. 

Here at Noblivest, we know many investors who started real estate by investing in short-term or vacation rental properties. By starting with a vacation rental or Airbnb in a desirable area, you can enjoy the property with your friends and family while building your capital and gaining valuable real estate experience.

If freedom is one of your top priorities, you’ll, at some point, likely move from active investment projects to more passive investments. For example, vacation rentals often lead to small multifamily properties and ultimately to completely passive commercial real estate syndications.

This is a great strategy, but there are a few things to do before getting started in real estate investing. Keep reading for a quick guide on how to take your first steps toward real estate investing success. 

Identify Your Strengths

The first step is to identify your strengths. While this might sound cliché, understanding your strengths and weaknesses is crucial to your success. Everyone has areas where they don’t perform well, areas where they’re average, and areas where they truly excel. 

As we all know, when we’re able to focus our efforts on our strongest areas, we perform better and are ultimately more fulfilled. The same holds true for real estate investing.

As an investor, it’s essential to identify your strengths. For instance, if you’re exceptional at seeing potential in properties and creating a renovation plan that brings a diamond in the rough asset to life but aren’t great at executing the plan, you need to focus your efforts where you’re the strongest. In this example, you should stick with finding rundown properties and creating an overall strategy for what needs to happen to bring them to their full potential. Since you’ve identified you’re not the best at executing a plan; you need to have someone on your team who does excel in that area. 

Identifying your own strengths is essential, but it’s just as critical to identify the strengths of others as well. As you build a team, everyone will bring their own unique talents and expertise to the table. When everyone is operating from their own personal zone of genius, everyone is more productive and creative, creating a deal that’s ultimately more successful. 

Design A Plan

Now that everyone’s strengths and passions have been identified, it’s time to design a plan to bring your real estate investment dreams to reality. 

Let’s face it, most of us want to design a life around our personal goals and desires. Real estate investing is a great way to get there.

When designing a viable plan, you must first do your due diligence. A real estate investment plan is not to be taken lightly. You, as the investor, must research what options are available to you, research markets, determine what type of investment best fits your lifestyle and personal investment goals. 

Here’s a pro tip, get a pulse on what other real estate investors are doing. By following other investors, you’ll quickly understand what’s working and what’s not. Also, be sure to stay up to speed on the current real estate market. 

While your plan may involve some trial and error down the road, do your part to establish a viable plan early on before you even need one. 

Take Action

Once you’ve put in the work to create a vision for your life and real estate investment journey, it’s time to get your hands dirty and start taking action. 

While this step seems obvious, it can also be the most difficult one to take. It’s not uncommon to get so wrapped up in the research and the due diligence of real estate investing that you suddenly find yourself stuck. You’re doing all the right things but not actually taking any action steps. 

A smart way to combat this counterproductive behavior is to set yourself up on a timeline. Starting with research, map out each phase that needs to be completed. Once you have all the stages mapped out, include specific action steps that need to take place. Then, most importantly, add dates to your action steps. When deciding how much time to allow for each task, a good rule of thumb is to create a time frame that’s realistic and doable but also challenges you. You don’t want to make your action plan so comfortable that it doesn’t get accomplished within a reasonable amount of time. 

Action, after all, is intended to get you from point A to point B, point A being where you are now, and point B is the lifestyle you’re dreaming of. The quicker you take action, the sooner you start progressing toward your real estate investing goals. 

Propel Yourself Forward

Investing in real estate can feel overwhelming, even intimidating, especially if you’re new to the process. However, it’s important to remember that progress doesn’t have to equal perfection. 

To make forward progress, you have to trust yourself. You have to trust your strengths and your instincts. As time goes on, you’ll start feeling more comfortable in your new role as a real estate investor, but until then, it’s up to you to continue to propel yourself forward.  

Remember, your first few real estate investments will likely be a work in progress. You’ll quickly figure out what works and what doesn’t. Then, as your expertise grows, you’ll know how to adjust your deals and your overall vision accordingly. 

By creating a vision, starting small, and taking action, you can develop a cycle of investments that you can enjoy, while living a meaningful, intentional life as you build your wealth.

5 Things Every New Investor Should Do Before Investing In Their First Real Estate Syndication

It is but natural to feel uncertain about some things, especially if we are going to entrust our precious money to an investment that you haven’t seen personally. 

Despite the promise of good passive income a real estate investing can give, there’s still a side of you who felt blindfolded, and was in doubt and fear when you first began to consider real estate syndication as an investment option.

So to help you to feel at ease with your  first real estate syndication investment, here are the 5 must things to do before investing. 

 

Do Your Research

The best way to build your real estate investing confidence is through self-education and research. Listen to podcasts, read books, and find websites on real estate.

Books:

Rich Dad, Poor Dad by Robert Kiyosaki

It’s a Whole New Business by Gene Trowbridge 

Principles of Real Estate Syndication by Samuel Freshman  

Podcasts:

BiggerPockets Podcast 

Best Real Estate Investing Advice Ever with Joe Fairless

The Real Wealth Show with Kathy Fettke

Ask Questions

Relevant Facebook groups and forums like BiggerPockets can help you learn what questions you should be asking.

It’s likely that other real estate investors have asked about your same concerns and, just by reading through the forum’s questions and answers, you’ll gain clarity.

Remember there are no dumb questions and that you have the right to be diligent about gathering answers to your concerns. 

Connect with Other Real Estate Investors

A successful real estate investor needs a supportive community, and considering that syndication is a group real estate investment, you’ll want to get networking.

Any new investors will share similar anxieties, questions, confusion, and excitement. Experienced real estate investors can provide invaluable firsthand accounts of their experience with various projects, including apartment complex investments, and sponsors.

Find other investors through online forums like BiggerPockets, local networking events, or by asking sponsors if they’ll connect you to their current real estate investors.

Review Previous Real Estate Deals

Finding comfort with financial projections, summary data, and real estate investment lingo may feel overwhelming.

As you review more investment summaries, you’ll start to understand the flow of the deal packages, how each sponsor communicates, and exactly which real estate investments interest you.

Take Your Time

Each new real estate investment opportunity fills up quickly. This can make new real estate investors panic and start to believe they are missing the best deals.  

Remember, there will always be another high-return investment opportunity. 

Allow yourself time to complete the steps laid out here, so that when you make your real estate syndication choice, you are confident about every step.

Considering Everything

If you take nothing else from this article, remember it’s completely normal to feel skeptical, anxious, and even timid when making your first real estate syndication commitment.

The ability to take action is what separates the successful from those who give up. 

Your first real estate syndication deal is a huge milestone in your investing journey, and, even though your head might be spinning now, this is a time to savor.

How To Review A New Investment Opportunity In Under 5 Minutes

Time is our most limited resource! Most people would actually agree with this saying that “Wasting time is worse than wasting money.” So if you are into passive real estate investing, how would you actually tell at first glance that this deal is actually the one you are looking for? 

If you’re the kind of investor who wants to efficiently vet deals,  then keep reading, because that’s exactly what we’ll walk through in this article.

The First Glance

New deal alert emails are like a surprise gift. You had no idea it was coming, but you can’t wait to rip it open and see what’s inside.

You receive a deal alert and pull these details:

  • Asset Type: B-class multifamily
  • Market: Dallas, TX
  • Hold time: 3 – 5 years
  • Minimum investment: $50,000
  • Fund Deadline: 3 weeks from today

With this simple, at-a-glance information, you’re able to immediately see that although this is the perfect asset class and market you wanted, you are aiming for a longer hold or an emerging market. Or perhaps you already know you need more than 3 weeks to access your capital. PASS.

Another deal will pop up shortly and you’ll get opportunity after opportunity to practice this little exercise. At some point, the details will all be exactly what you’ve been waiting for and you’ll get to dig deeper.

The Numbers

Once you’ve decided a deal’s initial look aligns with your goals, it’s time to dig further into the investment summary and explore.

As an example, you might learn that this particular deal is offering:

  • 8% preferred return
  • 9% average cash-on-cash return
  • 17% IRR
  • 20% average annual return including sale 
  • 2.0x equity multiple

But what does all that mean for you and your $50,000? 

In time, you’ll get lightning-quick at this and know right away what all of that means, but right now, let’s pretend this is your first go. 

Preferred Return & Cash-on-Cash Return

Preferred return, a common structure for deals, means that the first percentage (in this case, 8%) of returns go 100% to the limited partner passive investors. Sponsors don’t receive any returns until the property earns more than that. 

This means that if you invested 50K and everything went according to plan, you should see 8% of $50,000 or $4,000 this year, which breaks down to $333 per month. 

Since cash-on-cash returns are projected at 9%, that tells you that this deal is projected to pay out above the 8% preferred return at some point. 

Equity Multiple

The next fun number on the list is the equity multiple. This number quickly tells you how much your investment is expected to grow during the project. 

Continuing on the example above, your $50,000 investment with a 2x equity multiple should work out to $100,000 once the asset is sold. This accounts for the cash flow distributions plus the profits from the sale.

We typically aim for a 1.75x – 2x equity multiple on deals, so you can use that as your benchmark. 

Average Annual Return & IRR

My last two concerns when initially examining a new deal alert are the average annual return and the IRR. 

The average annual return tells you what the average earnings are, averaged over the hold time. 

In the example above, we discovered that your $50,000 is expected to double to $100,000 over the next 5 years. That total return is 100% of your original investment, and when divided over the 5 year hold period, we see that your average annual return is 20%.

The IRR (internal rate of return) is the average annual return (in this example 20%) and adjusts for the time delay. Since the majority of your earnings are expected later, at the sale, and time has cost associated with it, the IRR takes that into account. An IRR of 14% or more is a great target. 

The Decision

After this 5 minute analysis of these data points, you should be able to tell if this deal is a potential yes or no for you. This isn’t a final decision and it doesn’t mean you’re putting in a wire transfer this afternoon, but it does mean you can decide to spend more time reading into the investment summary or not, and you can make that decision with confidence. 

If these numbers align with your investing goals, you can go ahead and let the sponsor know you’re interested by requesting the full investment summary or submitting a soft reserve. 

Conclusion

New investment deal opportunities can be exciting, but if you get lost in the weeds too quickly, they can become overwhelming too. 

Whether you’ve had funds ready for weeks or are still in limbo getting them rolled over into a self-directed IRA, it’s imperative to know exactly what you’re looking for so you can jump on the perfect deal and minimize wasted time. 

With the data points, you learned to look at in this post, you’ll be able to identify if a deal is even worth your time and energy right off the bat. 

The Technical Side to Investing in Real Estate Syndications – Your Questions Answered

As an investor, it is reasonable to wonder about the returns, minimum investment requirements, taxes and more when it comes to real estate syndications. There are a lot of variables to consider! However, having a background or experience in real estate investing, commercial or residential, is not always required, especially as a Limited Partner. The best part is that there are experts that focus solely on managing and overseeing these factors that do it all for you!

𝙃𝙤𝙬𝙚𝙫𝙚𝙧 𝙖𝙨 𝙖 𝙥𝙖𝙨𝙨𝙞𝙫𝙚 𝙞𝙣𝙫𝙚𝙨𝙩𝙤𝙧, 𝙩𝙝𝙚𝙧𝙚 𝙖𝙧𝙚 𝙟𝙪𝙨𝙩 𝙖 𝙛𝙚𝙬 𝙩𝙝𝙞𝙣𝙜𝙨 𝙮𝙤𝙪 𝙣𝙚𝙚𝙙 𝙩𝙤 𝙠𝙣𝙤𝙬 𝙖𝙗𝙤𝙪𝙩 𝙨𝙮𝙣𝙙𝙞𝙘𝙖𝙩𝙞𝙤𝙣𝙨 𝙩𝙝𝙖𝙩 𝙖𝙧𝙚 𝙙𝙞𝙛𝙛𝙚𝙧𝙚𝙣𝙩 𝙛𝙧𝙤𝙢 𝙖𝙣𝙮 𝙤𝙩𝙝𝙚𝙧 𝙩𝙮𝙥𝙚 𝙤𝙛 𝙙𝙚𝙖𝙡 𝙮𝙤𝙪’𝙫𝙚 𝙡𝙞𝙠𝙚𝙡𝙮 𝙗𝙚𝙚𝙣 𝙞𝙣𝙫𝙤𝙡𝙫𝙚𝙙 𝙞𝙣 𝙤𝙧 𝙝𝙖𝙙 𝙚𝙭𝙥𝙤𝙨𝙪𝙧𝙚 𝙩𝙤.

Today we’re going to address these 4 technical details: 

  • What are the returns like in a real estate syndication?
  • What’s the minimum amount I can invest?
  • Can retirement funds be used to invest in syndications?
  • What about taxes?

We love details too and commend you for digging into the not-so-surface elements of this type of investment. 

#1 – Returns

As with most investment vehicles, people are attracted by and curious about the possible returns. By investing passively in a real estate syndication, you can earn two types of returns: cash flow and profit split.

Cash flow returns are checks or direct deposits (typically on a monthly basis) from the time the deal closes until the asset is sold. Profit split returns are where the investors literally split the profit from the sale of the asset according to the structure outlined in the contract.

Here’s a great example, using round numbers for ease. Let’s pretend you invest $100K. You can look forward to a possible 8-10% in cash flow returns, meaning about $8K per year, which is about $667 per month.  

Additionally, when the asset is sold (5 years later-ish), you could expect up to 40-60% returns on your initial capital investment. This means you’ll receive your $100K back (initial investment), plus maybe $50K in profit. 

Adding it up in your head yet? Seeing $$$$$? Yep. 

$8K cash flow returns per year + $50K in profit at the sale means you would have turned $100k into $200K in about 5 years. 

Now, of course this all comes with the caveat that these are estimated returns that can vary based on market conditions, location, the deal structure, and many more variables. In no way is it guaranteed that you’d double your money. We’re saying it’s seriously possible though.

#2 – Minimum Investment Amount

The typical minimum threshold for investing passively in a real estate syndication is $50K. 

Anyone interested in investing at this level should have liquid funds beyond this investment value, should be aware of potential losses,  and be “okay” with the possibility of losing these invested funds. 

Your money will be illiquid during the hold time (you can’t withdraw your investment capital until the asset is sold). Thus, you should intentionally set up financial arrangements so that you will not need to access this money for quite some time. 

#3 – Retirement Funds (Yay or Nay)

Retirement funds CAN be used to invest passively in real estate syndications. Yay! In fact, this is how many investors “get their feet wet” with syndications. 

To invest in a real estate syndication with retirement funds, you must first roll your existing account (401K, IRA, etc.) into a self-directed IRA account. 

There are many self-directed IRA companies out there, who would be happy to help with this. Once your funds are in the self-directed IRA account, you may choose what you want to invest in. 

You’ll need to coordinate with your self-directed IRA custodian, provide them with copies of the legal documents for the syndication, and they will send the funds on your behalf. 

The one requirement for this situation is that all returns MUST go directly back into the self-directed IRA account, and never into your personal accounts. 

#4 – Tax Benefits

You don’t get to do anything with your money these days without some sort of tax implications. Investing in real estate syndications is no different. 

As a passive investor, you are a part-owner in the underlying asset, which means you get a share of the tax benefits. One of the largest ones is accelerated depreciation through cost segregation. 

Owning rental property comes with the ability to depreciate the value over time. With commercial real estate syndications, the sponsors often order a cost segregation study where an expert will provide a report delegating assets eligible for accelerated depreciation. 

All big words aside, this means that you get the benefit of front-loading depreciation into the first few years of ownership instead of over a 30 year period – perfect for a 5-year deal!

Confidence in the Technical Details

Now that some of your specific questions about the technical side of passively investing in a real estate syndication have been answered, you can approach your search for a deal confidently. 

You now know retirement funds can be used, that the minimum investment is only $50K, and that there’s potential for serious tax benefits AND returns. Sure there are risks, as with anything, but now you have a clearer picture of what your next steps are. 

If you were considering investing with retirement funds, you know to begin seeking help in rolling your funds into a self-directed IRA. If you weren’t sure if you had enough liquid cash to invest, now you know what the minimums are. If you didn’t understand why people said you could double your money in just a few years, your eyes have been opened.

With less technical questions floating around in your mind, you’re that much closer to becoming a confident passive real estate syndication investor. 

Reasons Why You Should Not Invest In Real Estate Syndications

In life, sometimes we decide impulsively because of the good things and promises that we hear from different people, especially from the people we trust, right? 

But, if we are going to enter the world of real estate syndications, we must be very certain in our decision making. Remember, real estate investments are a big investment and are not the perfect choice for everyone. 

So, ask yourself first, is real estate syndication your cup of tea? 

If you’re still unsure about it, here are the top four reasons why someone should NOT invest in real estate syndications. 

  1. You Can’t Take Your Money Out At Will

Entering into a real estate syndication deal means you agree to the terms and projected hold time. Your investment capital (cash invested) is illiquid for the duration of the deal until the asset is sold. 

If you’re passively investing in a real estate syndication deal and the hold time is 5 years, then you should plan to leave your money invested for the full 5 years, if not longer. 

Other investments like stocks and mutual funds are much more flexible, and often times you can decide to sell and have your money back within minutes. In contrast, real estate syndications do not allow you to make withdraws at will. 

Upon initiating or entering a real estate syndication deal, you must sign the Private Placement Memorandum (PPM). This document spells out the hold time, liquidity, and other details of the investment.  If there’s anything about the idea of investing at least $50,000 and not having access to it for 5 years that makes you uneasy, turn around now.

  1. You Have To Invest A LOT of Money

The minimum investment on our real estate syndication deals is $50,000, which is a LOT of money for anyone. 

You could buy a car, pay for private school, or make major headway on a mortgage. There are many options on how such a large value of cash could be used. 

Our advice? Don’t put $50,000 into a real estate syndication until you’re absolutely sure that THIS is how you want to use this cash. 

Want more of our advice? If you have $51,000 in your savings account, don’t you dare invest $50,000 of it into a real estate syndication.  

Since your cash investment won’t be available for several years, you’ll need to ensure you have enough saved in a separate emergency fund, created other accessible savings for additional short term goals, and have yet more cash to, well, cover life in general. Go with your gut on this one. 

  1. You Have to Learn A New Process

Standard rental properties work much the same way as they do in the game of Monopoly. You check out a property, buy it, rent it out, and collect rent each month. 

Investing passively in real estate syndications requires you to throw all of that out the window. Passive investors almost never set foot on the property, they don’t have a relationship with the lender or the management team, and they’ll never come into contact with tenants. 

You will enter into the investment when the asset is already on it’s way to closing. Passive investing is called such for a reason – because you’re not involved day-to-day and because you retain time freedom throughout the process. 

  1. You Have to Give Up Control

One more major fundamental difference between passive investing and everything else is the level of control you have over the daily decisions made in regards to the property, renovations, and tenants. 

In regular real estate investments, you retain creative control over improvements, screening tenants, and whether you’re planning to sell within a certain period of time. 

Investing in real estate syndications passively removes all of these daily hassles and puts you in the passenger seat. This can be frustrating if you’ve previously enjoyed controlling aspects of the property. However, developing a level of trust in the sponsor team, in this case, is imperative. 

If you don’t think you can handle allowing a team of professionals to make decisions for you, you might as well cross real estate syndications off your list now.

Conclusion

Every syndicator and sponsorship team will shout from the rooftops about how great syndications are, and sure, they can be fabulous tools to grow wealth. But no investment vehicle is perfect and, certainly, no single investment style is perfect for everyone. 

If any of the above top four reasons not to invest in a real estate syndication triggered you, maybe investing passively in real estate syndications isn’t your cup of tea. And that’s okay. 

You have the power to choose what’s right for your situation, your family, and your financial goals, and you should absolutely exert that power to it’s fullest. Be honest with yourself and listen to your gut. 

Are Real Estate Syndications Too Good To Be True?

“What’s the catch?” This may probably be your first response after hearing how wonderful real estate syndications are and how passive investing works.

Receiving a check in the mail for doing, seemingly, nothing sounds too good to be true, and probably for some, if it’s too good to be true, it may be a fraud. 

No judgment for this kind of thought, because this is actually a good thought process! 

It simply means you’re not blindly jumping in. Instead, you’re thinking critically and doing your own due diligence. Kudos to you.
Do you want to know the  hidden risks of investing and behind the scenes of real estate syndications? Are real estate syndications really too good to be true? That’s exactly what we’ll cover in this article. Ready? Let’s do it.

What Are The Pros & Cons of Real Estate Syndications?

Just like for every purchase, investment, or decision, there are pros and cons to real estate syndications as well. Each one may matter to you … or not. It completely depends upon your investing goals, timeframe, and financial position.

Pros: 

  • No active responsibilities – You don’t have to worry about or deal with tenants, renovations, or midnight emergencies. 
  • Set it and forget it – Most syndication deals are several years in length. Once invested, you don’t have to make other decisions for that cash for 3-10 years.
  • Checks just show up – As a passive investor, your monthly or quarterly cash flow checks get automatically direct deposited.

Cons:

  • No control – As a passive investor, you’re hands-off. The sponsor team is 100% in charge of the day-to-day decisions and you don’t get a vote. 
  • Locked in long-term – Since most real estate syndications are 5 years or longer, you can’t just withdraw your capital willy-nilly.
  • The profit is split – As one of many investors, you’ll commonly receive a 70/30 split where 70% of the profits are divided between the passive investors (there could be hundreds just like you), and 30% is split between the sponsor team. 

You’ll learn more pros and cons as you dig into the details of investing in real estate syndications. We suggest keeping a running list and making notes around points that either excite or bother you.

Why Aren’t Real Estate Syndications for EVERYONE?

Not everyone has $50,000 or more in readily investable cash. Even if they do, is the timing right? Have they ever heard of real estate syndications? Are they well informed? Do they trust a deal with so many moving parts?

Life Events

Among other things, consider the challenges life events bring into the picture. What if an adoption, wedding, graduation, or college is on the horizon for your family? 

Those may be reasons someone might hesitate to invest $50,000 or more in an investment for 5  (or more) long years. Any major life change comes with an impact to your financial situation. 

Dependent upon your cash situation and life event timing, it may or may not be the best time to invest in a real estate syndication, regardless of what the market is doing.

Accreditation

As it stands, becoming an accredited investor is a pretty hefty barrier to entry. 

An accredited investor can invest in nearly anything they want. To qualify as an accredited investor, you must have either over $1mil net worth (excluding your primary home) or make $200,000 per year ($300,000 joint income), have done so for the past two years, and intend to make the same this year. 

Even if you haven’t reached accredited status yet, you can still invest in real estate syndications, although these deals may be much harder to find since they cannot be publicly advertised. 

How Trusting Are You?

Investing passively requires you to have mountains of trust in your sponsor team, the decisions they make, the people they hire, and the renovations they choose. If you’ve got a control freak gene deep down inside, this may not be the best investment for you. 

On the other hand, if you just want to chill while reading your monthly update while the checks roll in, stay with me here. 

How Could You LOSE Money Investing in a Real Estate Syndication?

So, let’s address the elephant in the room. Yes, you could lose money investing in a real estate syndication. 

Real estate syndications are just like stocks, or mutual funds or any other investment vehicle and none of them come with a guarantee. If things go South, you could lose some or all of your original investment capital. 

Yep, there it is. The honest truth. 

If you invest right, that shouldn’t happen. The less experienced the operator and the less savory the submarket then the greater likelihood of losing money. But if you’re smart about the deals you invest in, that shouldn’t happen. Which brings us to my last point.

Why Smart Investing Isn’t Truly Passive

If you want to be a true passive investor, who’s able to relax as the sponsor team works on your behalf, then it’s imperative you learn to invest smartly. 

In order to maintain a level of trust in the investment and the sponsor team and truly enjoy the passive income without lifting a finger, you have to practice due diligence and critical thinking at the front-end of the deal. 

Pushing through the overwhelm of markets, metrics, interest, splits, accreditation, and everything you have to learn and understand before making an informed decision is imperative. There’s a TON of work you have to do upfront in order to attain the comfort level a true passive investor has. 

You wouldn’t just throw around $50,000 of your hard-earned cash without educating yourself about where it’s going first, right? Only after you put in the work, connect with the right people, and do your own research to attain a level of comfort toward your investment deal, will you be able to sleep soundly at night while your passive investment earnings get deposited. 

Conclusion

While real estate syndications are awesome (duh!), they aren’t perfect, and they are not for everyone. 

Real estate syndications have pros and cons, risks and rewards, and require lots of research and time invested upfront. 

If you’re willing to invest your time and do your research in order to facilitate wise investments on your part, I think you’ll find real estate syndication to be a fabulous experience. 

The Importance of Focusing on Capital Preservation

As an Investor, we all love good returns! And the main reason why we’re all fascinated in investing in real estate syndications is because of its magic in giving back our hard earned money with great passive income returns. 

While most of us are concentrated on this wonderful benefit, there is one most important thing that we need to focus on in real estate syndications, and that is CAPITAL PRESERVATION. 

This might be boring as it may sound, but we need to learn this on how we will NOT LOSE OUR MONEY. 

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

Here are the five capital preservation pillars that are at the core of every real estate syndication deal: 

#1 – Raise money to cover capital expenditures upfront

Imagine the avalanche of problems that can accumulate when capital expenditures (like renovations) must be funded purely by cash flow. In this case, cash-on-cash returns, which vary based on occupancy and maintenance costs, would have to fund sudden HVAC repairs instead of unit renovations according to the business plan. In this case, the business plan falls behind schedule, units aren’t ready as planned, and vacancy persists. 

Instead, we ensure the funds for capital expenditures are set aside upfront. As an example, if we need $2 million for the down payment and $1 million for renovations, we will raise $3 million upfront. This means we have $1 million cash for renovations and won’t have to rely on monthly cash-on-cash returns. 

#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% and what would happen if the exit cap rate was higher than expected? 

Properties look wonderful when they’re featured in fancy marketing brochures with 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.

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.

The five capital preservation pillars used in real estate syndication deals we do include:

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

7 Biggest Differences Between REITs And Real Estate Syndications

It is a reality that many investors want to put their money in real estate but don’t want the life of being a Landlord. Well, who would want to fix a toilet emergency at 3 am, right? 

That’s why the next logical step that many investors take is toward a real estate investment trust (REIT), which is easy to access, just like stocks. 

But what is a REIT, anyway?

When investing in a REIT, you’re buying stock in a company that invests in commercial real estate. So, if you invest in an apartment REIT, it’s like you’re investing directly in an apartment building, right?

Not really. 

Let’s explore the 7 Biggest Differences Between REITs and Real Estate Syndications:

Difference #1: Number of Assets

A REIT is a company that holds a portfolio of properties across multiple markets in an asset class, which could mean great diversification for investors. Separate REITs are available for apartment buildings, shopping malls, office buildings, elderly care, etc.

On the flip side, with real estate syndications, you invest in a single property in a single market. You know the exact location, the number of units, the financials specific to that property, and the business plan for your investment. 

Difference #2: Ownership

When investing in a REIT, you purchase shares in the company that owns the real estate assets.

When you invest in a real estate syndication, you and others contribute directly to the purchase of a specific property through the entity (usually an LLC) that holds the asset. 

Difference #3: Access to Invest

Most REITs are listed on major stock exchanges, and you may invest in them directly, through mutual funds, or via exchange-traded funds, quickly and easily online.

Real estate syndications, on the other hand, are often under an SEC regulation that disallows public advertising, which makes them difficult to find without knowing the sponsor or other passive investors. An additional existing hurdle is that many syndications are only open to accredited investors.

Even once you have obtained a connection, become accredited, and found a deal, you should allow several weeks to review the investment opportunity, sign the legal documents, and send in your funds. 

Difference #4: Investment Minimums

When you invest in a REIT, you are purchasing shares on the public exchange, some of which can be just a few bucks. Thus, the monetary barrier to entry is low.

Alternatively, syndications have higher minimum investments, often $50,000 or more. Though they can range from $10,000 up to $100,000 or more, real estate syndication investments require significantly higher capital than REITs.

Difference #5: Liquidity

At any time, you can buy or sell shares of your REIT and your money is liquid.

Real estate syndications, however, are accompanied by a business plan that often defines holding the asset for a certain amount of time (often 5 years or more), during which your money is locked in.

Difference #6: Tax Benefits

One of the biggest benefits of investing in REITs versus real estate syndications is tax savings. When you invest directly in a property (real estate syndications included), you receive a variety of tax deductions, the main benefit being depreciation (i.e., writing off the value of an asset over time).

Oftentimes, the depreciation benefits surpass the cash flow. So, you may show a loss on paper but have positive cash flow. Those paper losses can offset your other income, like that from an employer.

When you invest in a REIT, because you’re investing in the company and not directly in the real estate, you do get depreciation benefits, but those are factored in prior to dividend payouts. There are no tax breaks on top of that, and you can’t use that depreciation to offset any of your other income.

Unfortunately, dividends are taxed as ordinary income, which can contribute to a bigger, rather than smaller, tax bill.

Difference #7: Returns

While returns for any real estate investment can vary wildly, the historical data over the last forty years reflects an average of 12.87 percent per year total returns for exchange-traded U.S. equity REITs. By comparison, stocks averaged 11.64 percent per year over that same period.

This means, on average, if you invested $100,000 in a REIT, you could expect somewhere around $12,870 per year in dividends, which is great ROI.

Real estate syndications, however, between cash flow and profits from the sale of the asset, can offer around 20 percent average annual returns.

As an example, a $100,000 syndication deal with a 5-year hold period and a 20 percent average annual return may make $20,000 per year for 5 years, or $100,000 (this takes into account both cash flow and profits from the sale), which means your money doubles over the course of those five years.

Conclusion

So, which one should you invest in?

All in all, there’s no one best investment for everyone (but you knew that, right?).

If you have $1,000 to invest and want to access that money freely, you may look into REITs. If you have a bit more available and want direct ownership and more tax benefits, a real estate syndication may be a better fit.

And remember, it doesn’t have to be one or the other. You might begin with REITs and then migrate toward real estate syndications later. Or you might dabble in both to diversify. Either way, investing in real estate, whether directly or indirectly, is forward progress.

Stocks vs Real Estate: A comparison of risks

Everyone knows there is no such thing as a risk-free investment so the key is to understand the risks thoroughly, determine your personal threshold for risk, and do everything you can to mitigate it.

Let’s take a close look at investing in stocks versus real estate and the four basic risks of investing.

Risk #1 – Market Correction

Stock Market

Sudden market corrections can result in wild swing in stock prices and during a downturn, investors may exit quickly which only solidifies their losses.  Others try to ride it out but a bear market during a recession can last for months, or even years.  

Multifamily Real Estate Investments

Recessions can actually be good for commercial multifamily real estate investments, especially for workforce housing. During a recession, many people forego buying a home and choose to rent instead.  This increases the demand for apartments, thereby decreasing the risk.

Risk #2 – Competition

Stock Market

Consumers don’t have insight into technology development or companies’ operations. At any point, a new competitor can disrupt the market with a new approach or new technology and have a significant impact on investment returns.

Multifamily Real Estate Investments

Multifamily competitors don’t just spring up out of nowhere, because space, zoning, and permits are limited. In addition, the demand for multi-family housing continues to outpace supply so apartment vacancies are at record lows.

Risk #3 – Consumer Behavior 

Many stocks are consumable products that may be affected when consumers cut down on their spending.  In addition, changes in technology and consumer behavior can drastic impact stock prices 

Multifamily Real Estate Investments

Real estate is a basic human need that will never go away. Everyone needs a place to live and that need has only strengthened over time, especially with rising population trends.

Risk #4 – Lack of Control and Transparency

Stock Market

Investing in stocks is like buying a train ticket. There are hills and valleys but the conductor (CEO) is unreachable so you’d better buckle up and hang on!

Multifamily Real Estate Investments

In a real estate syndication, you know exactly who the deal sponsor is, and you can reach out directly to ask questions.  In addition, there are multiple buffers in place to protect investor capital, such as reserves and insurance, and experienced professionals to handle the unexpected.

Conclusion

Whatever investment you choose, understand the risks going in, and just do it. Because that money you see sitting in your savings account? It’s losing value (because of inflation) with every passing second.

There’s certainly no one “right” way to invest. The key is to invest. Period.

The Process Of Investing In Your First Real Estate Syndication

Are you an active landlord that dreams of getting away from the grind of dealing with “tenants, trash, and termites?” But still want to earn passive income? 

Maybe it’s time for you to join a real estate syndication! 

But before jumping into this exciting new adventure, let’s review the basic steps you need to take, in order to invest in a syndication successfully.

1. Determine your investing goals

2. Find an investment opportunity that fits

3. Reserve your spot in the deal

4. Review the PPM (private placement memorandum)

5. Send in your funds

Step #1 – Determine Your Investing Goals

Once you decide you want to invest in a real estate syndication, consider both your short-term and long-term investing goals so you can be sure to find investment opportunities that best fit your personal goals.

Think about the amount of capital you have to invest, the length of time you want that capital invested, tax advantages you’re looking for, and whether you are investing primarily for ongoing cash flow to help offset your income, long-term appreciation, or a hybrid of both.

Step #2 – Find a Fitting Investment Opportunity

Once you’ve determined your investing goals, aim to find a deal in alignment with your goals. There are real estate syndication projects available ranging from ground-up construction to value-add assets, and even turnkey syndications.

Deal sponsors typically provide an executive summary, full investment summary, and an investor webinar for investors, which provides a full 360-degree view of the asset, market, deal sponsor team, business plan, and the projected financials.

Take time to properly vet the sponsor team, ask them your questions, and read between the lines of any investment materials they provide. Take a look at things like whether the business plan has multiple exit strategies, whether there are signs of conservative underwriting, and double-check whether the proposed business plan makes sense given the asset class, submarket, and current economic cycle. 

Research market trends in job and population growth. Review minimum investment requirements, projected hold time, and projected returns. Finally, attend the investor webinar and ask tough questions.

Basically, at this stage, look for any reason NOT to invest in the deal.

Step #3 – Reserve Your Spot in the Deal

Once you’ve found a team and an opportunity you want to invest in, it’s time to reserve your spot in the deal. Usually, deals are filled on a first-come, first-served basis, so you’ll want to take the time to ask questions and do your research BEFORE a live deal opens up.

Often, investment opportunities can fill up within mere hours, which is why it’s important to have completed research, solidified your investment value, and have clear goals. That way, when the opportunity opens up, you can jump on it.

The option for a soft reserve may be available, which holds your spot while you take time to review the investment materials. So, you might combine Steps #2 and #3 by reviewing the executive summary, reserving your spot in the deal, then reviewing the rest of the materials. This allows you the opportunity to back out or reduce your investment penalty-free.

If you are late in putting in your soft reserve, the deal may be full by the time you decide you want in, at which point your only option is to join the backup list or wait for the next deal. 

Step #4 – Review the PPM

Once you’ve decided to invest in a deal, the first official step is to review and sign the PPM (private placement memorandum).

This legal document provides in-depth details about the investment opportunity, the risks involved, and your role as an investor. Although reading legal jargon may be no fun, it’s very important you gain a full understanding of the risks, subscription agreement, and operating agreement pertaining to the investment.

As part of signing the PPM, you’ll also decide how you’ll hold your shares of the entity holding the asset and whether you want your distributions sent via check or direct deposit.

Step #5 – Send in Your Funds

Once you’ve completed the PPM, the final step is to send in your funds. Typically, you’ll find wiring instructions in the PPM document.

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

Conclusion

By now, the process of investing in a real estate syndication should be more clear, and perhaps, a little less intimidating.

Real estate syndications are more of a set-it-and-forget-it type of investment, so your active participation is upfront, during the time you’re choosing a deal, reviewing the investor materials, reserving your spot, reading and signing the PPM, and wiring in your funds.

Don’t worry though, if this process still seems a bit daunting. That’s what we’re here for, and we’ll be with you every step of the way as you invest in your first real estate syndication. As you review and invest in more deals, the process will become second-nature.