As a real estate investor, taxes aren’t the most exciting aspect of real estate investing, but they’re important to understand nonetheless.
As a real estate investor, it’s much more fun to focus on great returns and upgrading your lifestyle, but you must be sure to not overlook taxes completely.
As a passive investor in a real estate syndication, your sponsor team will guide you through tax season and help you ensure you’re getting the tax benefits you deserve. The beauty of investing in real estate is that your investments lower your tax obligation rather than increase it, unlike some other investment vehicles, such as mutual funds and stocks.
Any time you’re investing your hard-earned money, you should do your due diligence to gain a working knowledge about how you may be taxed as a result of your investment and explore the best strategies to decrease your tax bill.
There are different kinds of tax strategies, and knowing the best one will give you a great advantage and savings as a real estate syndication investor.
How does Depreciation and Cost Segregation work?
Wear and tear on a property over time is expected and you’re allowed to write off the depreciated value of an asset over time. You’re allowed to write off the value of residential rental assets over 27.5 years and commercial properties can be written off for 39 years.
Depreciation affects you, as the investor, because when you earn cash-on-cash returns, the tax on the amount you receive is deferred. This means you aren’t required to pay taxes on the earnings from the asset until it’s sold. You also have the option to elect bonus depreciation, if you choose, which can even further maximize your tax benefit.
Cost segregation amps up the tax advantages even further. In typical real estate syndications, the property is held for around five years. With straight-line depreciation, properties held for many years receive the most benefit. By utilizing cost segregation, you’re able to take into account the various aspects of the property that will depreciate at a quicker rate. For instance, the signage of an apartment complex is expected to deteriorate quicker than the roof. Cost segregation can speed up depreciation benefits, so investors can have further tax advantages even within five years’ time.
Tax Benefits Of Investing In Real Estate
By investing in real estate, either actively or passively, you can qualify for significant tax advantages. You can use the deductions earned from real estate investments to offset your other income and ultimately greatly decrease your tax bill each year.
In order to build wealth, it’s not enough to earn income, you also have to know what strategies can best help you maximize the tax benefits available to you. Investing in real estate syndications gives regular people the chance to build wealth quickly and sustainably, while also mitigating risk.
As always, be sure to consult your CPA or tax advisor to assess your personal situation and determine what strategies best fit your needs and financial goals.
When you first begin to consider real estate syndication as an investment option, it can feel lonely, intimidating, or even like you’re going in blindfolded.
I personally experienced fears around investing in a property I’d never seen, concern about how I’d get my money back, and doubt around the inability to log into an account and see my money.
These fears were addressed head-on through research. Every article I read and every conversation I had built my certainty until I began to feel confident toward taking the plunge.
If you’re considering your first syndication and feeling hesitant, I recommend doing your research, connecting with other investors, reading through previous deals, and taking your time.
Do Your Research
The best way to build your investing confidence is through self-education and research. Listen to podcasts, read books, and find websites on real estate.
Rich Dad, Poor Dad by Robert Kiyosaki
It’s a Whole New Business by Gene Trowbridge
Principles of Real Estate Syndication by Samuel Freshman
Best Real Estate Investing Advice Ever with Joe Fairless
The Real Wealth Show with Kathy Fettke
Relevant Facebook groups and forums like BiggerPockets can help you learn what questions you should be asking.
It’s likely that other people 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 Investors
A successful investor needs a supportive community, and considering that syndication is a group investment, you’ll want to get networking.
Any new investors will share similar anxieties, questions, confusion, and excitement. Experienced investors can provide invaluable firsthand accounts of their experience with various projects 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 investors.
Review Previous Deals
Finding comfort with financial projections, summary data, and 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 investments interest you.
Take Your Time
Each new investment opportunity fills up quickly. This can make new investors panic and start to believe they are missing the best deals.
Remember, there will always be another opportunity.
Allow yourself time to complete the steps laid out here, so that when you make your syndication choice, you are confident about every step.
If you take nothing else from this article, remember it’s completely normal to feel skeptical, anxious, and even timid when making your first 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.
For most people, the process of buying a house is fairly familiar.
You decide you want to buy a house, think about the neighborhoods and features in your must-have versus nice-to-have columns, talk with a lender to see how big a loan they’re willing to give you, consequently move some things from your must-have to your nice-to-have column after you get your lender’s pre-approval letter, then get together with a broker to tour properties until you find the home of your dreams and put in that offer package that the seller would be crazy to turn down. [Insert your own variations and horror stories here.]
By extension, the traditional types of real estate investing that involve buying a house and making some sort of profit on it, are also fairly easy to grasp. Fix-and-flip: buy a house, renovate it, sell it for a profit. Buy and hold: buy a house, rent it out, get monthly rent checks.
Beyond that, the edges can get a little fuzzy, especially when you start talking about things like group investments (aka, syndications), in which you invest passively alongside several, sometimes hundreds of, other investors to purchase a large asset, like an apartment building.
In this post, I’d like to take you through that process from start to finish, so you have a clear understanding of all the steps involved in investing passively in your first real estate syndication.
While the timeline can vary with different deals, the overall steps of investing in a real estate syndication are largely the same:
1. Decide whether to invest in real estate, period
2. Determine your investing goals
3. Find an investment opportunity that fits
4. Reserve your spot in the deal
5. Review the PPM (private placement memorandum)
6. Send in your funds
I tend to think of this process as a funnel, each step of which helps you gain a little more clarity on what you want and helps you get a little closer to your goals of finding and investing in a specific deal.
Step #1 – Decide Whether to Invest in Real Estate, Period
This is perhaps the most important step of all, the decision of whether you want to invest in real estate, period. After all, there are many other things you could invest in, from gold to coffee plantations to stocks and bonds.
This is a decision that I won’t be able to make for you. You’ll have to look at your overall portfolio, reflect on your goals, and decide whether investing in real estate can help you reach those goals.
What I can tell you, is a bit about how I got into real estate investing.
For me, I more or less fell into real estate investing. The first house my husband and I bought was a duplex, so right out of college, we became landlords. We quickly glommed onto this idea of passive rental income, and we had fun doing the renovations ourselves and finding tenants (some of whom are still good friends to this day).
Over the years, as we acquired more rental properties, we really started to grasp the power of passive income. Today, we have a number of rental properties in a number of different markets. Some we purchased ourselves, and others we invested in through group syndications.
Has every investment been a homerun? Absolutely not. But am I glad we made each and every investment that we did? Yes. 100% yes. Real estate has taught us about people and relationships, leverage, tax benefits, passive income, and the power of community. For us, real estate is a critical part of our personal portfolio and of our long-term strategy of building wealth for our family.
Once you decide that you want to invest in real estate, think about what you’re hoping to get out of it. Are you looking for a long-term or short-term investment? Are you hoping for a lump sum fairly quickly, or a steady stream of passive income over time? How much do you have to invest, both in terms of money and in terms of time?
If you’re not afraid to roll up your sleeves and put in some sweat equity, or you want to choose your own tenants or cabinets or flooring, you might consider trying a fix-and-flip, or buying and holding a small rental property.
If, on the other hand, you want more of a set-it-and-forget-it type of investment, a real estate syndication might be a better fit. You can invest your money alongside other investors, then have an asset manager take the helm, manage the asset, and carry out the business plan to update the units and maximize impact and returns.
Step #3 – Find an Investment Opportunity That Fits
If, at this point, you’ve decided that a real estate syndication is the best fit for you, the next step is to find a syndication opportunity that works for you. Just as there are a variety of different real estate assets you can invest in personally, there are a variety of real estate syndication projects available as well, from ground-up construction to value-add assets, and even turnkey syndications.
To help investors learn about investment opportunities, deal sponsors typically provide some variation on the following materials:
Full investment summary
These are the core materials that will give you a full 360-degree view of the asset, market, deal sponsor team, business plan, and the projected financials.
Personally, when I review these materials, I’m looking first and foremost at the team who’s running the project. I want to make sure they have a solid track record and that they’re good people. As you know, you can give a great project to a terrible team, and they’ll drive it into the ground. On the flip side, you can give a struggling project into a terrific team, and they’ll turn the whole thing around.
Beyond the team, I look to see if the business plan makes sense, given the asset class, submarket, and where we are in the economic cycle. I do my own research on the market, looking at job growth, population growth, and other trends. I look at the minimum investment amount, projected hold time, and projected returns. I look to make sure that the team has multiple exit strategies in place, in case their Plan A doesn’t pan out. I look for conservative underwriting. I attend or review the investor webinar and ask tough questions.
If, after all my research and analysis pans out, I consider investing in the deal.
But again, this is my personal philosophy and methodology. As you review different investment summaries, you’ll come up with your own criteria of what you’re looking for. The more you review, the better you’ll know exactly what you’re looking for.
Step #4 – Reserve Your Spot in the Deal
One thing to note about real estate syndications is that the opportunity to invest in the deal is on a first-come, first-served basis.
This can be especially important for deals in hot markets with strong deal sponsors.
That’s why it’s important to do your research ahead of time, to know how much money you want to invest, and what you’re looking for in an investment opportunity.
That way, when the opportunity opens up, you can jump on it.
Often, there will be an opportunity to put in a soft reserve amount. This is to hold a spot for you in the deal while you take some time to review the investment materials. If you decide to back out or reduce your investment amount later, you can do so with no penalty.
The flip side is, if you don’t hold a place, but then later decide you want to invest, there may no longer be room for you in the deal, and you’ll have to join the backup list.
Not every deal offers a soft reserve, but when there is one, and I think I might be interested, I always put in a soft reserve to buy myself some more time to think about the deal, review the materials, and do my own research.
For deals with a soft reserve, this step and the previous step #3 might be flipped or more fluid, so I tend to review the executive summary, reserve my spot in the deal, then review the rest of the materials.
Step #5 – Review the PPM
Once you’ve decided to invest in a deal, the first “official” (aka, legal) step is the signing of the PPM (private placement memorandum).
This is a legal document, often quite lengthy, that goes into detail about the investment opportunity, the risks involved, and your role as an investor in the project.
The PPM is certainly not the most fun document to review, but it’s very important that you read through it, so you fully understand all aspects of the investment opportunity, including the risks, subscription agreement, and operating agreement.
As part of signing the PPM, you’ll also need to decide how you want to hold your shares of the entity that’s holding the asset. Often, you can also specify whether you want your cashflow distributions sent via check or direct deposit.
Step #6 – Send in Your Funds
Once you’ve completed the PPM, the next step will be to send in your funds (aka, the amount you’re investing into the deal).
Typically, you will have the option to either wire in your funds or to send in a check. I’ve used both methods before and have had no issues with either method.
Pro tip: Before wiring in your funds, be sure to double check the wiring information, and let the deal sponsor know to expect your funds so they can be on the lookout.
Step #7 – Celebrate
You did it! By this point in the process, you’ve done your due diligence on the investment, reserved your spot in the deal, reviewed all the legal documents, and sent in your funds.
That means you’re done with all the active parts of your role as an investor. If we’re using the syndication-as-an-airplane-ride analogy, that means you’ve picked your destination, bought your ticket, checked your bags, reviewed the safety information, buckled your seat belt, and now you’re ready for a cocktail and a movie.
The next piece of communication you’ll likely receive is a note once the property has closed. Deal sponsors typically like to put lots of smiley emojis and exclamation points in these emails.
After that, expect monthly updates on the project, more detailed quarterly reports on the financials, quarterly cashflow distributions, and an annual K-1 for your tax returns.
So, there you have it. Hopefully, the process of investing in a real estate syndication is a bit clearer now, and perhaps, a little less intimidating.
Real estate syndications are more of a set-it-and-forget-it type of investment, so most of your active participation is up front. After you decide to invest in a syndication, you review the investor materials (executive summary, full investment summary, and investor webinar), reserve your spot in the deal, review and sign the PPM, and send in your funds.
The first time you do it, it might seem a bit confusing as to what to expect and what questions to ask. However, as you review and invest in more deals, the process will become second-nature.
I’m headed out to a fun girls day out wine-hopping with my friends around the Hamptons. Out of the blue during my drive there, I got a call from my property manager.
“Hey, we’ve got some bad news. There is a car wedged into your property.”
I had to pull over… “Wait, what??”
She responds, “A car crashed into your property.”
These kinds of calls are the best, aren’t they?
At that moment, I wanted to just quit… sell the property, leave it as a loss and RUN! I really didn’t want to deal with the mess that came with something like this. While I couldn’t just do that in the moment, it definitely ruined my supposed day off and instead I spent all day on the phone with countless contractors, tow truck services, insurance, the police, etc in an area that had bad service.
It was months of calls and arrangements with insurance adjusters, contractors, tenants, the property manager, L&I inspectors from the city and on and on it went. It felt like a neverending nightmare! Honestly, to this day as I’m writing this post it’s still a battle I’m working through.
How I got here
After around 13 years in the corporate world, I finally acted on what I always knew. I just wasn’t a good fit for what was expected out of me at work. I was hired to do a job the way I was told and that was it. Any creativity or suggestions for efficiencies were completely nixed, nipped in the bud! Whether it were managers, directors or a lot of times even colleagues, I felt a lot of animosity towards different approaches and ways of thinking. I always considered myself a little different, and this environment made me feel exhausted and low all the time. There was no fulfillment or impact in what I did. I was trading time for a paycheck, but I knew my time was worth so much more than this!
By 2019, I had a family and two very young boys who needed me. It wasn’t just a time thing, they needed their mom in her best and most ideal state to raise and support them. Every parent knows how demanding children are under age 3. I felt depressed and full of anxiety all the time. My confidence was at an all time low. I wasn’t where I needed to be in order to be the best mom for them. I knew something had to change! It was a scary move, but it was necessary!
I started learning more about real estate at the end of 2019 and into 2020. WOW! What a big world it was! I knew I was committed to investing in this particular asset class, but I didn’t know what exactly I wanted to do. I first landed on the BRRRR strategy on properties in Philadelphia. It stands for Buy Rehab Rent Refinance Repeat. It’s a little like a Fix & Flip, however instead of flipping (which means selling) I am holding it as a rental property. The biggest advantages in this strategy are the Refinance step, where I get to draw out all of the money I invested in both purchase and renovations using a Cash Out Refinance and long term appreciation by holding the asset. These properties would multiply our net worth thanks to the tried and true appreciation of real estate over time. The goal was to own the property with none of my own money in, and have tenants pay down the mortgage while I still made a nice cash flow on top. I did this once, and it was great! Then I scaled up to 4 properties, and that’s when the problems started coming all at once. It ended up taking far more time that I would have liked, especially with my priorities focused more at home with my kids. I didn’t want to be tied to my phone keeping tabs on property managers and contractors, let alone getting calls like the one above during times I least expected.
So that’s what brought me to real estate syndications. As you read in the first blog post, Margaret was one of my first exposures to real estate investing. She was already in the multifamily syndications space and had told me all about it. I figured because I couldn’t scale as quickly as I hoped using the BRRRR strategy in SFH rentals due to time limitations, I could supplement by investing passively in multifamily syndications alongside my active investing ventures. The results were far beyond what I ever imagined! I thought my rentals helped increase my net worth, but the syndications supercharged it and I didn’t have to worry about tenants, showers leaking or cars crashing into my properties! I just saw a nice direct deposit every month coming into my bank account and reports of how the property appreciated whether it was through value-add renovations or just plain market appreciation in hot population and job growth areas. The best icing on the cake was finally seeing a refund from the IRS after almost a decade of paying nearly 6-figures annually to Uncle Sam in taxes. WOW!
What is a real estate syndication?
In the simplest sense, a syndication is a group investment. A group of investors pools their money to invest in something together. In the case of a real estate syndication, investors come together to invest in commercial real estate assets, like apartment complexes, self-storage buildings, and mobile home parks.
The beauty of a real estate syndication is that you can leverage other people’s time, energy, and expertise.
As a busy mom, I can use all the leverage I can get.
In a syndication, the sponsors are the active investors, the ones who know the ins and outs of that particular market, who spend time getting to know the real estate brokers, who visit the properties and walk the units, who pore over the due diligence documents, who work with the property managers day-to-day.
As a passive investor in a real estate syndication, I get to partner with a stellar team with a strong track record, invest my money in a great piece of real estate, and get great returns, all while doing next to no work.
Let me say that again, because I think it bears repeating. I get to invest in real estate without having to do any work.
Renovations running behind schedule? Not my problem.
Noise complaints from the tenants in apartment 2B? Not my problem.
Shower leaked into the first floor? Not my problem.
The sponsor takes care of all of that, and I get a neat little monthly report on the progress and updates.
As a passive investor, I can spend more time with my family and less time dealing with the headaches of being a landlord. #winwin
What’s the catch?
Okay, you’re thinking, this all sounds pretty good. But what’s the catch?
I hate to disappoint you, but there is no catch.
In a real estate syndication, everyone works together, and everyone wins.
Think of a real estate syndication like an airplane ride. The sponsors are the pilots. They do the active work of flying the plane. If a warning light goes off, the pilots deal with it.
The passive investors, on the other hand, are the passengers. They get to enjoy the ride, while reading, watching a movie, or dozing off. They don’t have any responsibilities in making sure the plane gets to the right place safely. They’re just along for the ride.
For their work, the sponsors get a cut of the deal, just as a pilot gets paid for their work in flying the plane. The lion’s share of the returns, though, go to investors, even though they’re doing the mouse’s share of the work (okay, I’m not exactly sure what the opposite of lion’s share is, but you get my point).
In a syndication, just as in an airplane ride, everyone works together and is going to the same place.
Interests are aligned, and everyone wins.
What do returns look like?
Just like when you invest in a rental home, the returns in a real estate syndication can vary, based on the asset, market, and business plan.
What I can tell you though, is that, on average, the deals that I invest in (which are the same deals that we offer to our investors) have a cash-on-cash return of 8 to 10 percent per year and are held for a projected 5 years.
When factoring in the profits from the sale of the asset at the end of the 5 years, the average returns are around 20 percent per year. Not bad, right?
In other words, if you were to invest $100,000 in one of these real estate syndications with us, you could expect around $8,000 per year in cashflow distributions. On top of that, when the asset is sold in year 5, you could expect another, say, $60,000.
In 5 years, you would likely turn your initial $100,000 investment into $200,000. All without lifting a finger or dealing with a single broken toilet.
How to Invest in a Real Estate Syndication
The process to invest in a real estate syndication is a bit different than buying a rental property. For one, you can’t just go up to a broker and ask about a syndication. It doesn’t quite work that way.
Rather, to find real estate syndication opportunities, you need to find sponsors who have deals currently under contract. Often, because of SEC regulations, sponsors cannot publicly advertise their deals, so they can be hard to find unless you know someone who knows someone.
Luckily, now you know someone who knows someone. (Hint: It’s us.)
At Noblivest, we specialize in connecting passive investors to experienced sponsors in growing markets. We do the heavy lifting of finding and vetting sponsors and deals. We cherry-pick the best deals in the best markets, and we make them available to our investors.
We’re investors first and foremost. So we’re always looking for deals that we want to invest in ourselves. When a deal meets our strict criteria, we invest our own money into the deal, and we open up the investment opportunity to our investors as well.
What does Noblivest get out of it?
We’re in the business of helping people. We’ve seen firsthand the difference that great sponsors and syndications can make to a community. We’ve had tenants thank us profusely for the work we’re doing in turning their communities around.
We’ve also been thanked profusely by investors whom we’re helping to build passive income streams, so they can stop worrying about money and start living the lives they’ve always wanted.
As for how we keep our lights on, that part comes from our partnerships with the sponsors. We work hard to find great sponsors and great deals. When we find them, we partner up with the sponsors and join the general partnership.
As such, we get a cut of the sponsors’ fees and equity in the deal. That means that, as an investor, you invest your money directly into the deal; you don’t pay us any extra fees.
Ready to learn more?
The best way for you to learn more about real estate syndications, as well as our current, previous, and upcoming deals, is to join the Noblivest Investor Club.
Through the Noblivest Investor Club, you’ll get first looks at all the deals we offer. We’ll work with you to figure out your investing goals and to help you find the best deals to meet those goals. We’ll then walk with you every step of the way as you invest in those deals.
So if you’re ready to be done with the headaches of being a landlord, sign up for the Noblivest Investor Club below, and get started on your path toward becoming a passive real estate investor.