How to Invest in Real Estate Syndications & What To Expect When You Do
Before you invest in a real estate syndicate, you will want to know several details that will help you to decide if you actually want to invest in these deals.
The process of investing in a real estate syndication structure is very different from investing in the stock market or choosing mutual funds online. Additionally, unlike typical investment opportunities, there are hold terms, potential barriers to entry, and a variety of expectations that every passive investor should know about before committing to a multifamily syndication.
As a savvy investor, you’ll want to know how to invest in real estate syndications, what to expect and why you want to be investing in a particular property syndication. You’ll want to understand important considerations such as the requirements that potential investors will need as well as the process, how long you can expect to have your money invested before your payout, and generally the basics of real estate syndication. You’re in luck!
That’s precisely what we’ll cover in this article!
How long does a real estate syndication last?
Unlike an online stock, ETF, or mutual fund that can be exchanged daily or more, real estate syndications come with projected hold times. While each investment strategy with a real estate syndication is different, we typically see hold terms of 5-7 years, sometimes longer depending on the business plan of the real estate syndicator.
Real estate syndication deals in commercial real estate projects such as an apartment building have to allow time for property renovations, occupancy rate increases, and increased efficiencies. We look to the expert syndication sponsorship team and the property manager to make the appropriate changes. Sometimes we also have to adjust to the various real estate market conditions.
This means that each individual investor should be comfortable with having their funds invested for approximately 5-7 years (or the timeline presented in the investment summary & private placement memorandum) because you will not be able to withdraw your capital from the project until the asset is sold.
Who can invest in real estate syndications?
Is just anyone allowed to participate in these investment opportunities? It may seem sort of exclusive to some.
Well, somewhat. The majority of real estate syndications are only available to accredited investors, though some are available if you are a sophisticated investor (i.e., investors who can demonstrate that they have an understanding of the risks involved with investing in real estate syndications).
To qualify as an accredited investor, you must meet at least one of two of these requirements.
- You must have at least $1 million in net worth, excluding your primary residence.
- You must make $200,000 per year as an individual, or $300,000 jointly with your spouse, and have earned that amount for the previous 2 years and are expected to continue to make this amount or more going forward.
Meeting either one or both of these requirements, means you are an accredited investor.
However, if you don’t meet the criteria to be an accredited investor, the important thing to remember is that there are still some real estate syndication opportunities available to you. However, you may need to look a bit deeper for them because an investment opportunity for non-accredited investors is prohibited by the Securities and Exchange Commission from being publicly advertised. This is why real estate investors may see the opportunity to invest in these large real estate deals as being exclusive.
What’s the process for investing in a real estate syndication?
You’re probably wondering HOW would someone go about finding and investing in these commercial properties that you keep reading so much about.
Here are the basic steps for investing in a real estate syndication:
- The syndication deal sponsor announces that the investment property is open for funding, This is done via email usually.
- You get to review the investment summary deck and decide to invest.
- You would then submit your soft reserve.* At this point, you would inform the deal sponsor how much you would like to invest.
- The deal sponsors a.k.a. general partners hold an investor webinar, where you are able to get more information and ask questions.
- The deal sponsor confirms that you have a spot in the deal and will send you a PPM (private placement memorandum) for you to review.
- After signing the PPM, you wire in your funds or send in a check.
- The sponsor team will confirm that the funds have been received – usually by a third-party trust company that holds the real estate funds until closing.
- The funding raise will cease and the opportunity to invest will be withdrawn for any other real estate investors once there is enough capital to close.
- The deal sponsor will notify you that the deal has closed and then will let you know what you can expect next.
What is a Soft Reserve?
*A soft reserve is a way for the deal sponsor to get an idea of who is interested in investing in the real estate project. These investment vehicles are offered on a first-come, first-served basis and funding commitments by the group of investors can fill up very fast – in a matter of days or even hours depending on the real estate property itself and/or the location.
By putting in a soft reserve, you are letting the sponsor know that you have an interest in potentially investing and how much you are willing to invest. This neither guarantees you an opportunity in the deal nor does it lock you into the deal. At this preliminary stage, you can always decide to decline to invest.
Pro tip: If you’re thinking about investing in a real estate syndication deal but aren’t sure whether you want to invest $50,000 or you want to invest $100,000, one of the best ways to move forward is to go ahead and put a soft reserve in for $100,000. This will hold your opportunity to invest in the deal, then you can decide which amount you would like to invest.
How this works is that if you were to decide later that you only want to invest $50,000, then there is no problem decreasing your initial investment amount. However, if you put in a soft reserve for $50,000 and want to increase the amount to $100,000, then you may not be able to because the deal will likely be fully subscribed or over-subscribed with a backup waitlist.
What happens after I invest in a real estate syndication?
So, you’ve decided you want to invest in a real estate syndication, you do your own due diligence and conduct your research, the deal closes and you are in. Now what?
Once you have submitted your funds you are now a commercial property equity partner in a limited partnership in the apartment complex, and your active participation in the deal is over. Now you can sit back, relax and receive the passive income and watch your annual income grow.
Now you can expect to receive, either monthly or on a quarterly basis, the cash flow distributions. The distributions may begin immediately or within a few months after the closing based on the renovations and efficiencies that are implemented. This is all pre-determined and presented to you in the PPM so you will know ahead of time when you will be receiving your cash flow distributions.
What else should you expect?
You will then begin receiving monthly updates as soon as we have closed on the deal. These monthly updates provide you with the occupancy reports and the status of the renovations as well as any other streamlined efficiencies implemented or amenities added to improve the lives of the residents.
Additionally, you can expect to receive a detailed financial report on the property each quarter. And you will receive a Schedule K-1 for your taxes early on after the new year which reports your share of the income and the losses for the property.
The good news is that the “losses” are usually paper losses that are obtained through depreciation and cost segregation which means you may have significant tax benefits with these types of investments as well. You don’t get depreciation tax advantages with most paper investments.
As the projected hold term nears, you may receive a monthly update that the deal sponsors have successfully executed their business plan, have increased the property value, and are now going to sell the asset. When the asset sells, you will receive your original investment capital back and you will receive your percentage of the profits that are due to you.
Now You’re In The Know…
You’re now fully informed about the criteria needed to invest in real estate syndications, the expected hold terms and what that means for your capital, the syndication process, and what to expect at every step of the way.
The bottom line is that the main advantages of real estate investing in this asset class are that it can help you diversify your investment portfolio, provide excellent tax advantages, allow for property appreciation and a share of the profits and real estate creates an amazing hedge against inflation. Who couldn’t use that right now?
All that’s left for you to do is invest in a great deal, relax and collect passive income so that you can start living your life by design on your own terms.
We’re always here for any questions or guidance along the way. Happy investing!
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!