The Investor's Guide to Real Estate Syndications

The world of finance is as equally daunting as it is intriguing. However, with the right guidance, real estate investing can be one of the most profitable endeavors you can partake in.

Despite its potential perks, real estate investing isn’t for the faint of heart. It takes a great deal of self-discipline, a willingness to keep pace with current market trends and an appetite for calculated risk taking. But for the aspiring entrepreneur looking to diversify their business profits into more than just a savings account, real estate definitely has its appeal. The benefits include:

  • Tax advantages: Taxes are typically one of the chief expenses for any industry, let alone a real estate investment company. However, rental homes, apartment complexes, vacant property, commercial buildings, shopping centers and warehouses all have their own unique tax incentives.

  • Cash flow: Everyone’s benefit of choice, cash flow essentially means regularly occurring profit.

  • Hedge against inflation: Inflation is defined as a continued increase in the general level of prices for goods and services. Unlike almost every other kind of investment opportunity, real estate reacts proportionately to inflation.

  • Leverage funds: Leveraging money also allows you to initiate more than one real estate deal at a time because all of your funds aren’t confined to one project.

  • Equity: If you were to borrow money to complete a real estate deal, you will be expected to pay it back with interest. But, each payment also moves you closer towards paying off your principal payments.

Not only can real estate investing yield big rewards for your portfolio, but it grants you the independence to earn a steady flow of income that can secure your financial freedom for the long haul.

Real Estate Investing vs. Alternative Investments

Building on the success of real estate investments, the growth and popularity of alternative investments has continued to grow and develop since the 1990s. From hedge fund managers to high net worth individuals, the investment community has necessitated a variety of new alternatives designed to challenge traditional investment processes from brokers, banks, and investment dealers. In response, the market produced an increased supply and more complex investment options.

Currently, real estate investing only makes up roughly 10-15 percent of all long term investments, yet confidence in their potential is highest amongst investments types at 27 percent. Ultimately, real estate investments generally offer greater variation and thereby reduce risk.

What are Real Estate Syndicates?

But, what if there was an option that mitigated even more risk than the conventional real estate investment model? That’s where real estate syndicates come in.

Have you ever marveled at all of the large office buildings and outdoor plazas in your city, assuming all of those properties were being managed by a rich billionaire? The reality is that many of them are actually owned by regular people like you and me. Investors who participate in this kind of investment opportunity tend to hold a large percentage ownership interest and do not always contribute in the day-to-day operations of the property. After all, not every investor has the time to search and underwrite hundreds of properties to find the perfect place to acquire.

Real estate syndication involves pooling capital with other individuals for a common purpose, which is usually to generate passive income. For example, instead of purchasing one property for $80,000, you invest that $80,000 into a group fund made up of ten investors. Instead of owning 100 percent of one property, you will own 10 percent of the fund’s profits from cash flow and appreciation.

Syndicates are created and managed by partners who offer various services including researching, negotiating, and handling the property investment in exchange for a stipend and a percentage of the returns. Returns are based on the type of investment (debt vs. equity), the size of the investment, as well as the number of investors involved in the investment.

Syndicates differ widely from Real Estate Investment Trusts (REITs), which behave like stocks for the overall investments made by realtors, in that syndicates offer the opportunity to invest in a single property’s flip-value or long term returns.

Advantages vs. Disadvantages of Syndicates

  • Advantages
    • Syndicates decrease the initial investment needed to purchase expensive properties.
    • Offer on average eight percent return on investment (ROI), exceeding than the standard seven percent benchmark in the stock market.
    • Deliver various tax incentives which can greatly benefit high-income investors.

  • Disadvantages
    • They split the margins made on solid investments.
    • Return is dependent on the experience, credibility, and performance of the general partner who is putting fiscal decisions into actions.
    • Exit strategies for real estate syndications can be complex depending on how much you invest.

It goes without saying that there are many benefits of investing in real estate as the opportunities come in various shapes and sizes. As the industry continues to progress, making sure a deal is well-structured and is beneficial to all parties is key.

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Topics: real estate syndication