Are Real Estate Syndication Investments Too Good to be True?
When you first learn what commercial real estate syndications are and how passive investing in a multifamily syndication works, your first question will likely be, “What’s the catch, this sounds way too good to be true?”
Receiving a regular cash flow distribution check in the mail for what seems like doing nothing sounds a little too good to be true. What are the hidden risks of real estate investing in an apartment complex? What goes on behind the scenes of a real estate syndication deal?
It’s always good to think critically as real estate investors and conduct your own due diligence on these investment opportunities.
What Are The Pros & Cons of Real Estate Syndications?
Just like for every purchase, investment strategy, or various financial matters in general there are pros and cons for real estate syndicators as well. Each one may matter to you … or not. Every individual investor will have their own criteria when it comes to evaluating which type of investment is best for them and their financial goals and time period that they want to reach them.
No active responsibilities – You don’t have to worry about or deal with tenants, renovations, or midnight emergencies.
Set it and forget it – Most private real estate syndications have a hold term of 5-10 years. Once invested, you don’t have to make other decisions for that initial investment for 3-10 years.
Checks just show up – As a passive investor, you receive quarterly cash flow distribution checks directly deposited to you.
No control - As a passive investor, you are part of an investor group of limited partners who are hands-off. The deal sponsor team or general partners are 100% in charge of the day-to-day decisions and you don’t get any voting rights. This is essentially how passive investing works.
Locked in long-term – Since most real estate syndications are 5 years or longer, you can’t just withdraw your capital whenever you would want. It is committed to the multifamily deal for the term of the hold period.
The profit is split - As one of a group of 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 syndication sponsor team.
When investing in real estate syndications you will want to make notes on what you like and what you don’t like about that particular investment.
Why Aren’t Real Estate Syndications for EVERYONE?
Not everyone has a minimum investment of $50,000 or more ready to be deployed into a real estate property. Even if they do, it may not be the best time for them to invest. Do they know about real estate syndications? Have they ever heard of real estate syndications? Are they well informed? Are they comfortable with alternative investments as opposed to stock market investing?
Life has challenges and events such as weddings, graduations, college tuition payments that can cause a delay in the short term for someone to feel comfortable investing in a real estate syndication knowing that the initial investment can be tied up for 5 years or more.
Depending on your cash situation and the timing of the 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.
Becoming an accredited investor can be a barrier to entry for many people.
An accredited investor can invest in nearly anything they would like. To qualify as an accredited investor, you must have either over $1 million net worth (excluding your primary residence) or you would need to make $200,000 per year or ($300,000 per year for married couples) and must have had that income for the last two years and will likely make that same income or more in the coming year.
Even if you are not an accredited investor yet, you can still invest in these opportunities, although they may be harder to locate because they cannot be publicly advertised to non-accredited investors.
How Trusting Are You?
Investing passively in an apartment building with a sponsor team who is handling all of the details and work for you can require you to have a great deal of trust in the property management team they hire, the decisions they make, the depth of market knowledge they have and their ability to manage the asset well. If you’ve got a control-freak streak, then active investing may be more your jam.
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 get real, here. No fluff. This is an investment, and I’m here to tell you that with any investment, you can lose money – even with real estate syndications.
Real estate syndications are just like investing in stocks, or investing in mutual funds or any other investment type – none of these investments have a guarantee. If things do not go according to the business plan and don’t go well, you could lose some or all of your initial investment capital.
Yep, I said it, and I really want you to understand that real estate syndications have risks just like any other investment.
If you’re smart about the deals you invest in, and you invest with a seasoned real estate syndication deal sponsor with a stellar track record, that shouldn’t happen.
Why Smart Investing Isn’t Truly Passive
If you like the idea of truly passively investing, where you can be hands-off to enjoy your life and let the deal sponsor team do all of the work on your behalf, then it’s super important that you learn to invest intelligently, so you have to do your own due diligence before you invest in the deal.
We at PCRP Group are always evaluating areas and finding ways to mitigate our investor’s risk by investing in areas that are more climate-resilient and by investing in properties that incorporate ESG (environmental, social, governance) initiatives as much as possible.
Pushing through what can be overwhelming information when it comes to real estate markets, analyses, metrics, splits, returns, and accreditation requirements, is imperative to help you make the best decisions around your investments. There’s a good deal of work that passive investors should conduct upfront to be able to be comfortable with the investment and make an informed decision.
No one I know would just throw around $50,000 without educating themselves first. Only after you have put in the work, connected with strong partners and deal sponsor teams, and done your own research will you be able to have a level of comfort in your investment deal that will allow you to sleep well at night while your passive income cash flow distributions get deposited into your account each quarter.
While real estate syndications are awesome – in our humble opinion, and we think they are the best investment vehicle around (we’re biased) – they are not for everyone, and we really want people to understand that.
Real estate syndications have pros and cons, risks and rewards, and require lots of due diligence, research, and a time commitment upfront. So, if you’re willing to take control of your financial future by doing all of these things too, then I think you will enjoy the concept of real estate syndication and the great addition it can make to your investment portfolio.
Note: we are not financial advisors and are not offering financial advice of any kind. Please consult with your advisors before making any investment or financial decisions.
Ready to Learn More?
The best way for you to learn more about 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!