06 Dec How to Invest Passively In a Real Estate Syndication
Real Estate Syndication Investing 101
A great way the majority of real estate investors “get their feet wet” is by making their initial investment in some form of residential real estate. Whether those initial real estate projects are fix and flips through sweat equity or buy and hold rental homes and duplexes for rental income – these initial investments in residential investment opportunities are some of the best ways to start in real estate investing. The lessons learned in these initial real estate acquisitions help potential investors understand the vast benefits of property ownership early on.
Diversifying Your Portfolio
But you certainly don’t have to start with investing in residential real estate investing to reap the many rewards of passively investing in real estate syndications. In this article, we’ll cover the basics of real estate syndication and why a real estate syndicate is an amazing investment vehicle for individual investors to expand and diversify their investment portfolio.
Real estate investors who include these commercial properties (such as apartment complexes) can see dramatic returns and incredible tax advantages if they are investing with the right real estate sponsors and operators who have a proven track record of success.
Until somewhat recently, it was difficult to invest in real estate syndication investment opportunities because the Securities and Exchange Commission (SEC) regulations did not allow for real estate syndication opportunities to be publicly advertised. This made it so that you had to be part of an inner circle of sorts (i.e., you had to know someone who was doing a commercial syndication deal) in order to invest in one. That has all changed, and the new rules benefit YOU!
But maybe you’ve never heard of a commercial real estate syndication and are wondering things like:
- What the heck is a real estate syndication?
- How does a syndication work and how do I get paid?
- Why should I invest in a commercial real estate syndication deal?
- What’s an example of a real estate syndication?
A Real Estate Syndication – What’s That?
Let’s start with the basics of the term – real estate syndication, which essentially is the pooling of resources (knowledge, experience and funds) within a group of investors to purchase a particular investment such as a piece of real estate. The advantage of a syndication is that it enables this group of investors to purchase a much larger asset to potentially capitalize on high returns. This is not to be confused with real estate crowdfunding.
Let’s say you have $50,000 to invest. You could invest those funds in purchasing your own residential rental property, but that would require you to have to view multiple real estate deals, run the analysis on the dozens and dozens of deals you find, locate that one “good deal”, compete with other buyers who may be bidding up the price, then if you are granted the contract you must negotiate well to stay in contract, conduct the inspections and obtain the financing.
Then likely you will need to hire contractors to do some work on the property, so you’ll need to fund that as well. Then once that is finished and the property is ready to be rented out, then you’ll need to find a good tenant through background checks, credit checks, interviews and references and then you will need to become or oversee a property manager for your new real estate acquisition. Being an active real estate investor is ALOT of work, which is why we love passive investing in real estate.
Phew…you tired yet? So, unless you have a lot of time and energy, this real estate investment strategy in acquiring rental properties one at a time can be a great deal of work and at times frustrating. This is the point where most people find real estate investing to be too difficult and too time-consuming to continue pursuing. Additionally, it can take quite a long time to build up a significant enough portfolio buying one rental property at a time that will produce enough passive income that would enable you to leave your job, and that’s the ultimate end goal with accumulating steady passive income streams, isn’t it?
Syndications vs Residential Real Estate Investments
Commercial real estate syndications can be a great alternative to investing in residential real estate such as a single family home because a real estate syndication can allow you to still invest in real estate, without having to do any of the day-to-day work. Instead, you can invest the $50,000, which is a typical minimum investment, into a real estate syndication as a passive investor. If you contribute your $50,000 and another investor contributes their $50,000 and someone else has $100,000 to contribute, and so on, then you’re able to pool these real estate funds to acquire a much larger asset such as an apartment community.
But here’s the real kicker as to why commercial real estate syndications are such a great deal for the passive investors – passive investors don’t have to do any of the work that we talked about earlier: finding the properties, analyzing the properties, submitting contracts, managing the property, etc, etc, etc.
The lead sponsor or general partnership team does all work in procuring that one great deal for the investors, negotiating the contract, conducting all of the due diligence, obtaining the financing, bringing all of the passive investors together for the equity portion AND the general partnership (GPs) takes care of and oversees all of the day-to-day operations of the property on your behalf. You then get regular cash flow distributions, plus you get a portion of the profits when the asset sells and you can obtain extraordinary tax benefits.
Real estate syndications can be an amazing real estate investment vehicle to grow your wealth passively for all of those reasons.
How Does A Syndication Deal Work & How Do I Get Paid?
A real estate syndication has both a team of general partners (GPs) or otherwise known as the deal sponsor or sponsor team and a group of limited partners (LP’s) or otherwise known as passive investors. As mentioned earlier the general partners or deal sponsors are the individuals responsible for doing all of the heavy lifting. These two groups of people form a real estate syndication.
The limited partners (LPs) are the passive investors (others like you), who invest their money into the deal. There is a minimum investment into the deal – typically $50,000 – $100,000. There often is a preferred return to the limited partners. The limited partners have no active responsibilities in managing the asset.
You as the passive investor simply put your capital to work in the investment so that you can receive a steady passive income stream.
What Is the Structure?
Together, the GPs and LP’s join a legal entity (usually a Limited Liability Company – LLC), and that entity holds the real estate asset. The LLC, a pass-through entity, allows you to have direct ownership while also receiving the tax benefits that real estate investing allows for investors.
Once the deal closes, and you are the proud owner of an apartment building, then the sponsor team (GPs) get to work executing the business plan. The team will work with the property management team and construction teams to upgrade the property with the ultimate goal of improving efficiencies where needed and helping to increase the value of the asset. As we mentioned earlier, during this time, the limited partners will receive steady, ongoing cash flow distribution checks (either monthly or quarterly).
Once the successful business plan has been completed, and the exit strategy of selling the asset has concluded, then the LP’s receive their initial investment back, and they receive their share of the profits at sale. What a way to boost your retirement account – all while a team of experts do all of the work for you!
Why Should You Invest In A Real Estate Syndication?
Okay, now that we have covered the logistics of how a real estate syndication works, let’s talk more about what’s in it for you. There are a number of reasons why passive investors decide to invest in a commercial real estate syndication.
Here are a few of the top reasons:
- You want to invest in real estate but don’t have the time or interest in managing properties and being a landlord.
- You want to invest in physical, tangible assets (as opposed to paper assets, like stocks).
- You want to invest in something that’s more stable and avoid the volatility of the stock market.
- You want the tax advantages that come with real estate investing.
- You want to receive regular cash flow distributions each month or each quarter.
- You want to invest with your retirement funds to help diversify your portfolio.
- You want your capital to do good while doing well and help make a difference in local communities.
A real estate syndication is one of the best ways that busy professionals can invest in large-scale, institutional grade, physical real estate assets. It’s an excellent way to have your own money work for you without the commitment of time, energy, or expertise all while positively impacting the community, earning distributions, and reaping tax advantages.
An Example Of A Real Estate Syndication:
Okay, so you may be interested, but you’re still sort of like, “Is this for real?” So, let’s go over what a real estate syndication deal would actually look like.
Let’s say that the team at PCRP Group finds an apartment community in Atlanta, Georgia this after looking at dozens if not hundreds of different deals to find “the one” good deal. Let’s say the asset’s purchase price is $80M. Then we at PCRP Group along with our other general partners would need to raise the equity portion of the acquisition which would also include the capex costs (or construction rehabilitation costs) to improve the quality, efficiencies, and the value of the property.
The equity portion or technically the down payment (usually about 25%-30% of the acquisition price or in this case roughly $24M) would need to largely come from raising the equity from the limited partners (passive investors). We at PCRP Group then create a business plan and an investment summary for the prospective investors. We work with a syndication attorney to structure the deal. Then we, as the real estate syndicators, put together a real estate syndication offering complete with all of the legal documentation including a Confidential Private Placement Memorandum (PPM) for the investors to review and conduct their own due diligence.
How Much Does a Passive Investor Typically Invest?
Each passive investor invests a minimum of $50,000 to $100,000 until we have enough to cover the equity portion of the acquisition (as well as the cost of the renovations – capex).
Once the deal closes, we work closely with the property management team and construction teams to improve the property and get the renovations done on budget and on schedule.
During this time, our team sends out monthly updates, as well as monthly cash flow distribution checks, to our passive investors.
When we sell the property after 3 to 7 years typically, then each passive investor receives their original capital plus their split of the profits according to the terms of the PPM. Our splits are anywhere from 50/50 to 80/20 depending on the deal. The passive investors receive the larger portion of the split with our deals.
So, let’s recap: the passive investors receive monthly cashflow checks during the hold period, plus they have their initial capital returned once the property is sold AND they receive the larger portion of the equity split after the sale AND they can receive extraordinary tax benefits…not a bad deal for the passive investors who do not have much work if any!
Now that you know the basics of a real estate syndication, including what a real estate syndication is, how it works and how little work and expertise is needed on your part to begin receiving passive income checks, don’t you wish you knew about this investment strategy much earlier on?
We always recommend you research every opportunity extensively. No deal sponsor can give you any guarantees about a deal. Do plenty of due diligence on the project and the team, ask a lot of questions, and only invest if you’re 100% comfortable moving forward. Now that you’ve learned quite a bit more about commercial real estate syndications, just know you’re miles ahead of most other investors. Keep at it so that you can begin to Earn Passively & Live Abundantly!
Ready to Learn More?
The best way for you to learn more about passive investment opportunities in commercial real estate syndications is to join the PCRP Passive Investor Club.
Through the PCRP Passive Investor Club, you’ll get a priority review of all the deals we offer. We’ll work with you to determine your investing goals and then present you with the best deals to meet those goals. We’ll then guide you every step of the way as you invest in those deals.
So if you’re ready to start investing passively in institutional-grade, commercial real estate in fast-growing, climate-resilient markets in the U.S., join the PCRP Passive Investor Club – IT’S FREE! – and get started on your path to EARN PASSIVELY and LIVE ABUNDANTLY!
If you would like to know more about what we do and how it may be of value to you, please reach out to us anytime. We’re always happy to help!