When you first learn what real estate syndications are and how passive investing works, your first question might be, “What’s the catch?”
Receiving a check in the mail for doing, seemingly, nothing sounds too good to be true. What are the hidden risks of investing in real estate syndications? What goes on behind the scenes of a real estate syndication?
This is a good thought process because it means you’re not blindly jumping in. Instead, you’re thinking critically and doing your own due diligence. Kudos to you.
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.
