#investinginrealestate – Noblivest Blog

Why Scale From Single-Family Investing to Multifamily Investing?

Investing in real estate can be a lucrative way to build wealth, but deciding where to invest can be a challenge. Many investors began investing in real estate using single-family homes. As they accrued more properties, they also likely implemented a property manager to take over management tasks.

However, even with property management, many single-family home investors find themselves wanting to scale up, or do more investing, but are tied to the work it takes to add these properties to their portfolios.

They inevitably look toward multifamily properties.

While both options have their advantages, there are several compelling reasons to scale up from single-family investing to multifamily investing. In this blog post, we’ll explore those reasons and help you make an informed decision about your investment strategy.

Reason #1: Higher Potential Returns

One of the primary reasons to invest in multifamily properties is the potential for higher returns. Multifamily properties typically generate more rental income than single-family properties because they have multiple units. This means that even if one unit is vacant, there are still other units generating income.

Expenses are also spread out across many units. Costs associated with landscaping or management are less per unit compared to single family properties, which can mean a higher NOI, or Net Operating Income.

Reason #2: Less Risk

Investing in multifamily properties can also be less risky than investing in single-family properties. With single-family properties, if the tenant moves out, the property is vacant, and the investor is responsible for covering all expenses until a new tenant is found.

With multifamily properties, however, the risk is spread across multiple units. If one tenant moves out, the investor is still generating income from the other units.

Additionally, multifamily properties can be less susceptible to fluctuations in the housing market. While single-family properties may be affected by changes in the local housing market, multifamily properties are influenced more by the local rental market, which tends to be more stable.

Your risk as a passive investor is also less. You enter the team as a limited partner, which means you have limited liability if anything were to happen at the property. Be sure to read your legal documents carefully and speak with your attorney to fully understand your liability risks.

Reason #3: Greater Control

Investing in multifamily properties can also provide greater control over the investment. With single-family properties, the investor is at the mercy of the local housing market. If property values decline, there’s not much the investor can do other than wait for the market to improve. This is because the value of a single-family home is based on comparables, or the value of similar properties in the same vicinity.

With multifamily properties, however, the investor has more control over the value of the property. By implementing value-add strategies such as renovations, upgrades, and property management improvements, investors can increase the value of the property and generate higher returns. The value of a multifamily property is based on the NOI, or Net Operating Income. If the NOI increases, so does the value of the property – no matter what is happening in the neighborhood.

Reason #4: Easier Financing

Financing a multifamily property can also be easier than financing a single-family property. Multifamily properties are typically viewed as commercial properties, which means they can be financed with commercial loans. Commercial loans often have lower interest rates and longer repayment terms than residential loans, making them more affordable and easier to manage.

Even better, as a passive investor in a real estate syndication, you don’t have to personally deal with any lenders or qualification processes. In single-family investing, you have to qualify for a new loan with every subsequent property, and are eventually limited in the total number of loans you can have at all. This process is also not known for being smooth and easy, to say the least!

Reason #5: Economies of Scale

Additionally, multifamily properties benefit from economies of scale. For example, expenses such as landscaping, maintenance, and property management can be spread across multiple units, resulting in lower costs per unit. This can lead to higher net operating income (NOI) and cash flow, which can translate into higher returns for investors.

Conclusion

While investing in single-family properties can be a great way to get started in real estate investing, scaling up to multifamily properties can provide even greater potential returns, less risk, greater control, and easier financing. If you’re ready to take your real estate investing to the next level, consider exploring the multifamily market and taking advantage of the benefits it offers.

As a passive investor in a real estate syndication, you can take advantage of all the benefits of multifamily investing with none of the headaches associated with being a landlord.

To learn more about how you can invest passively in real estate, check out our website at https://noblivest.com and apply for our Noblivest Investor Club by completing the form in the top right button “Invest With Us”. Our Noblivest Investor Club members receive educational content about real estate syndications and access the opportunities in our pipeline.

10 Steps to Invest in a Real Estate Syndication (Step 10: Repeat and Grow Your Capital)

Franklin Roosevelt was once quoted as saying:

“Do something. If it works, do more of it”

Step 10 is perhaps the easiest step of all as it simply involves repeating steps 1-9 and continuing to increase your wealth through various investments in real estate syndications.

So, let’s recap:

Step 1: Define your goals – Start by identifying what it is you really want – life goals and financial goals. It will help you draw your roadmap and dictate your investing decisions.

Step 2: Research investment options – Do you research, get educated and meet as many syndicators as you can to see who might be the best fit for you.

Step 3: Evaluate potential opportunities – Sign up for syndicator’s mailing lists so you receive new deal alerts.

Step 4: Review the project specs – Attend the webinar and ask questions. Get to know the team, market and deal a little better.

Step 5: Sign up for the investor portal – Use this as your home base to subscribe to the deal and keep track of your documents and investments.

Step 6: Review and Sign the PPM – Read through the subscription docs carefully or get an attorney to review them for you.

Step 7: Wire the funds – print the instructions and bring them to the bank with you and verify your account numbers before submitting!

Step 8: Let your money work for you – sit back and enjoy your distributions while the sponsorship team works the business plan!

Step 9: Reinvest funds via a 1031 – Defer capital gains taxes by investing directly into another like-kind investment.

Step 10: Repeat and grow your capital – Enjoy the benefits of compounding as you continue to grow your wealth through real estate.

It’s that simple! Now, of course, you can make small adjustments along the way by investing in different asset classes, in various parts of the country (or world), etc. But one fact has consistently remained true: 90% of the world’s millionaires become so through owning real estate.

So get started on your journey to financial freedom!

10 Steps to Invest in a Real Estate Syndication (Step 9: Reinvest Funds)

A typical real estate syndication may last 3-5 years or longer but once the return hurdles have been met and/or the property increases significantly in value, the sponsor team may opt to sell the property.

This is an important step because commercial property values are based on the amount of income generated. Improvements made to the property along with more efficient operations, and market appreciation, lead to an increase in the net operating income (NOI). And the greater the NOI, the greater the value of the asset, thus leading to sizable profits upon the sale.

When the property goes full cycle, it’s an exciting time! The investors are returned their original capital plus equity from the sale and everyone is happy.

However, once the asset is sold, capital gains taxes (and often depreciation recapture) are owed. At this point, investors may opt to defer their taxes through the use of a 1031 Exchange.

A 1031 Exchange refers to a section in the Internal Revenue Code that allows you to sell one investment property, and, within a set amount of time, swap that asset for another like-kind investment property.

Doing so means that, instead of having the profits paid out directly to you, you roll them into the next investment. As such, you don’t owe any capital gains when the first property is sold.

Here are three important things to know about 1031 Exchanges:

Both assets in an exchange, the one sold and the new property to be acquired, must be like-kind investment properties of similar value
Investors cannot receive the funds directly. A qualified intermediary is needed to facilitate the exchange
Investors have 45 days after the sale of the asset to identify potential replacement properties

Note that the properties — both the one you relinquish and the one you receive — must be business or investment properties. So you couldn’t take your the returns from an investment property and use it to purchase a personal residence

Only some real estate syndications offer a 1031 exchange as an option. Every sponsor is different and approaches 1031 exchanges differently so if this is something that you are interested in, be sure to ask the sponsor about it directly.

10 Steps to Invest in a Real Estate Syndication (Step 8: Let Your Money Work For You)

The hard part is over! Now that you have signed the PPM and wired your funds, this is where the magic begins and your money begins to work for you.

Here is what you can expect as a limited partner (LP):

1. Regular updates and newsletters

Depending on the team, you will receive monthly or quarterly communications. The sponsorship team may share financials, occupancy updates, photos of renovations and details about how they are adding value to the property. Sometimes you’ll receive updates about on-site events, such as food trucks, ice cream socials or pool parties which are a great way to show appreciation to the tenants.

2. Distributions will start

Depending on the deal, you will typically start to receive your first distributions within a few months or up to a year. Be sure to ask prior to investing when you might expect distribution payments. If it’s a deeper value-add business plan, payment may not start until much later due to the property having higher economic vacancies for renovations. Returns for the first year are often lower than subsequent years; however, if your deal has a cumulative preferred return, you will see those returns made up once the property is stabilized.

3. Refinance Returns

Sometimes, you may experience a refinance on the around years 2-3 once the asset is fully stabilized. When this happens, some or all of your original investment is returned back to you; The coolest part is for some deals, you may retain equity in perpetuity and continue to cash flow even when your money isn’t in the property anymore. And once the property sells, you still get a share of the upside from the profits. Not all deals are like this, and some are structured differently so be sure to read the PPM and ask questions. This should all be spelled out in advance.

10 Steps to Invest in a Real Estate Syndication (Step 7: Wire The Funds)

Once you have committed to the deal and signed the PPM, the last step is to wire the funds. Typically, the syndication team will provide a document with the wiring instructions as part of the subscription docs and they may also upload it as a separate sheet into the investor portal.

Be sure to fill this form out carefully! Make sure you have supplied the correct and accurate information to ensure that the operator receives it in a timely manner. It’s a good idea to print the instruction sheet and take it with you to the bank so you have it handy for the wire transfer.

Once the wire is completed, check in with the sponsor team directly to make sure it has been received. Some banks will wire the funds immediately while others may batch their wires and send them all out at the end of the day. You should see the investment reflected into your portal dashboard within a few hours or by the next day. If your wire has not been received within 24 hours, you should definitely contact your bank to get the status and ensure that the wire has not been delayed somewhere in their system.

This step is admittedly the most nerve-wracking and also, very exciting! Once the money has successfully made it to its destination, be sure to savor this moment and celebrate.

You have made a huge step towards growing your wealth! Congratulations!

10 Steps to Invest in a Real Estate Syndication (Step 4: Review Project Specs)

Once you have identified a project in which you are interested in investing, it’s time to do a deep dive on the deal specs.

Most syndicators/operators will hold a webinar shortly after a deal is issued. This could be live or pre-recorded. During live calls, they will usually have a Q&A where you can ask direct questions and listen to questions from other investors as well. If the webinar is recorded, you can draft your own list of questions and then follow up with the sponsorship team after the presentation.

If you are new to syndications, you should definitely watch these investor webinars for educational purposes, even if you don’t plan on investing.

During the webinar, you will receive a lot of information about the project including:

The Team – You will get a chance to meet the general partners (GPs) and the sponsorship team, learn about their backgrounds and track record and listen to the details of the deal directly from them.

The Market – The general partners (GPs) will detail their market analysis, and explain what they love about the area including demographics, major employers etc and why they want to invest there.

The Business Plan – The GPs will outline the business strategy for the property and how they plan to monetize the asset so their investors will make money.

Some common strategies include:

Value-add: Renovating existing units and improving operational inefficiencies
Loss to lease: Bringing under-market rents up to current market prices
Additional income streams: Adding services and amenities such as covered parking, valet trash and storage rentals to increase revenue
Buy and hold: Purchasing the property with the intent to own for an indefinite period of time for ongoing cash flow

The Financials – The team will provide an overview of the information outlined in the Private Placement Memorandum (PPM) including the pro forma financials, market comps, debt structure and cash flow assumptions along with the project timeline.

Once you’ve had a chance to review the deal specs with the operating team and ask any questions, you will have a clearer understanding if this particular project will be a good fit for your personal investing goals.

Be sure to check out the additional blogs in this series to see all 10 Steps to Invest in a Real Estate Syndication.

10 Steps to Invest in a Real Estate Syndication (Step 1: Define Your Goals)

Step 1: Define Your Goals

Investing in a real estate syndication can be both exciting and daunting. Syndication is a great way to build your passive income by partnering with an experienced team

Of course, as with any investment, it’s important to research and gather information to help guide your investing decision.

So, to help you in your journey, we are sharing 10 Steps to Invest in a Real Estate Syndication. We will unveil each step over the next two weeks along with some suggestions on how to get started.

10 Steps to Invest in a Real Estate Syndication

Step 1: Define Your Goals

1. Cash Flow or Equity Upside?

Before you invest in anything, it’s important to clearly define your long term goals. Your life stage is a good starting point. Are you in your 20-30s and plan on working for a while? Or, are you in your 50-60s and closer to retirement? Do you want a higher cash flow for a consistent stream of income? Or would you prefer a higher upside that will potentially multiply 2-3x over 5 years? Sit down with your spouse or partner and think about what you want and the best fit for your current situation

2. Assess your Finances

Take a look at your finances and investment portfolios. Do you have a lot of cash sitting around in a checking or savings account? Are you too heavily invested in one investment vehicle? Would you like to diversify? Do you have a freedom number to achieve your goals? How much income do you need to make to cover your basic living costs? Think about how much you want to invest to start.

3.Are you an accredited or sophisticated investor?

Accredited investors meet one or more of the following criteria: an individual with gross income exceeding $200,000 in each of the two most recent years or joint income with a spouse or partner exceeding $300,000 for those years OR someone with a net worth of $1,000,000 or more, excluding their primary residence.

4. Do your homework

Start researching different syndication or investment groups. Start by meeting people. Join a Facebook group or investment club for passive investors. Start by looking up at their website and signing up for their lists. Book a call to get to know these individuals.

Ask questions about them and their experience or track record and pay close attention for clues on how they treat their investors.

𝙂𝙤𝙤𝙙 𝙨𝙞𝙜𝙣𝙨:

– They are taking an interest in you, and genuinely trying to help you with your financial goals

– They are open to build a relationship with you

– They are truthful and honest about themselves and their group

– They are not pressuring you to invest in anything

𝙒𝙖𝙧𝙣𝙞𝙣𝙜 𝙨𝙞𝙜𝙣𝙨:

– They don’t have time for you

– They rush the call

– They don’t seem interested in you and your goals

– Their only objective is for you to invest with them

Are Real Estate Syndications Too Good To Be True?

“Sounds great. So, what’s the catch?” This may be your first response after hearing how wonderful real estate syndications are and how passive investing works.

Receiving money for doing, (seemingly) nothing may seem too good to be true, and sometimes we worry that if something sounds too good to be true, it’s not legit.

It’s ok if this thought crossed your mind; in fact, that’s actually a good thing!

It simply means you’re not blindly jumping in. Instead, you’re thinking critically, asking questions and gathering more information. You’re doing your due diligence and that’s a smart strategy before you invest in anything!

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 deposited directly into your bank account..

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, 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.

How Real Estate Syndications Hedge Against Inflation

Inflation has been rampant over the past couple of years with rapidly increasing costs for everything from groceries to appliances to travel.

Those rising prices lead to a decline in purchasing because your dollar simply doesn’t stretch as far as it used to.

We’re all feeling this same pinch at home as we face rising energy costs for the winter, and see the cost of food and clothing shoot upward for our families.

We all want to make sure our families are well-provided for, especially in challenging times.

Real estate investors, along with the rest of the world, are experiencing this inflationary environment as well. Even investors with a diversified portfolio are looking for more ways to create an inflation hedge.

So how can you protect your money in an environment like this?

One of the best ways to hedge against inflation is investing in “sticky assets” such as real estate syndications.

Let’s take a quick look at our economic environment, the definition of “sticky” real estate, and then how specific types of real estate can hedge against inflation.

Rising Consumer Price Index and Interest Rates

The combination of the Covid pandemic, the war between Russia and Ukraine, and supply chain shortages across the globe have the world reeling under rising inflation.

In response to inflation, the Federal Reserve has raised interest rates with the hope of curbing high inflation without stunting economic growth.

As consumers see their monthly payment go up in almost every area, investors are looking for an investment strategy that will work as an inflation hedge, provide real estate income, and create long-term cash flow if inflation hits even harder.

This is where the “sticky” asset classes of real estate come into play. Real estate prices continue to rise, but not all commercial real estate provides the same long-term value and rental income that you want from real estate investing.

Because you entered real estate to avoid the fluctuations of the stock market, maintain your level of purchasing power, and gain inflation protection, let’s define the term “sticky” and how such investments can work for you.

Defining “Sticky” Assets in Real Estate

“Sticky” real estate is the idea that the revenue stream of the property is consistent over the long term. Commercial real estate is valued by tenants and whether or not it is a piece of income-producing real estate.

Property values in private real estate like houses are often evaluated based on the location of the house. The improvements the neighbors do (or don’t) affect your home value too!

However, commercial properties are valued based on their revenue streams and the consistency of those revenue streams.

For example, an office space might have a 95% tenancy rate, but that rate alone doesn’t make it a sticky asset class. You also need to look at how likely the tenants are to stay in that building long-term.

Many office buildings do not fall under the umbrella of “sticky” real estate because of various factors such as remote work and ease of movement from one building to another. These office buildings find it difficult to raise rents because the demand is low. This keeps investors from having a higher rental income.

However, doctors’ offices and other medical buildings are often considered sticky because of the amount of money that goes into building the infrastructure for the building. The medical corporation, rather than the landlord, is usually investing millions in a specialized infrastructure that will keep them in the building for the long term.

These tenants will usually remain even if property prices go up because they would need even more money to invest in a new building. Such office buildings are considered “sticky.”

An investment strategy that focuses on “sticky” real estate investments has the potential to stay strong in the face of high interest rates, a steep inflation rate, and a fluctuating stock market.

So how does a real estate investment hedge against inflation?

Real estate investing in sticky asset classes can hedge against inflation and bolster your portfolio against a future that may see interest rates rise again.

Multifamily units are often in great demand during a period of high inflation and high interest rates. If families have to downsize their lifestyle as inflation rises, they often move into an apartment or condominium. This property sector often sees consistent income even during an economic downturn.

Storage units can be a good hedge against inflation. People who can’t find housing due to high demand or those who are moving into multifamily units due to housing prices often turn to storage units. They’ll put the majority of their belongings in storage while they live with the bare minimum belongings in a minimally sized apartment or with another family. These storage units often provide positive cash flow and passive income for a real estate investor.

Because real estate rental properties that fall under the “sticky” asset class are often in high demand no matter the economic situation, they are usually a strong source of passive income and a great hedge against inflation.

Real Estate Investment Trusts or Real Estate Syndications?

Real estate investment trusts work more like the stock market and may see fluctuations similar to stock prices. Real estate syndications, on the other hand, usually require more up-front investments but often provide a more stable source of passive income. Alternative investments like real estate syndications can offer you access to “sticky” assets that can hedge against inflation, even if you don’t have millions of dollars to buy commercial real estate on your own.

Face the Future with Confidence through Strong Investments

You can’t control the Federal Reserve or overall consumer prices. What you can do is pursue an investment portfolio that contains a commercial property with solid infrastructure, long-term tenants, and the potential for raising rents.

Even as inflation rises, your confidence can rise too knowing you are seeking sound investment advice by understanding how “sticky” assets can help you reach your financial potential during shaky economic times.

Your peace of mind will allow you to focus on your family and not on your worries about inflation, recessions, or any number of problems on the horizon. Allow investments in “sticky” assets to provide for your family and create a sense of security in an insecure world.

Five Strategies for Capital Preservation

2022 has been a roller coaster of a year.

Between rising interest rates, inflation hitting a 40-year high and a war in Ukraine, leading economists have been forecasting a recession all year.

As investors, we all love good returns. In fact, passive income is a key reason why many of us invest in real estate.

But the most important thing that we need to focus on in real estate syndications – regardless of what the economy is doing – is CAPITAL PRESERVATION.

Put simply, how do we NOT LOSE OUR MONEY?

It’s still a great time to invest and capital preservation is all about mitigating risk. 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 strategies for capital preservation that will minimize risk in a 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 strategy 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 seem very exciting, it is a key building block of a solid deal. Every decision and initiative by the sponsor team should be rooted in preserving investor capital.

The five strategies for capital preservation we use in our real estate syndication deals 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

So, when you are browsing for your next real estate syndication investment, go ahead and admire 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.

Taking the time to dig into the business plan will enable you to make an educated decision as to whether or not this particular project is right for you.