Top Reasons Why You Should Not Invest in a Real Estate Syndication
If you’ve spent any time learning about what we do as a multifamily syndication company, then you’re aware of how strongly we feel about investing in climate-resilient commercial real estate syndications.
WE THINK MULTIFAMILY REAL ESTATE SYNDICATIONS ARE AMAZING INVESTMENTS – FOR VIRTUALLY ANYONE, but maybe NOT everyone, which we’ll discuss in this article.
We’re always excited to share how these investments can be life-changing for passive investors. We want more real estate investors to have the opportunity to learn about how to passively invest in commercial properties to propel their net worth and help to create legacy wealth for their families.
However, it’s just as important to help explain to potential investors who may be thinking of investing in a real estate syndicate, just what to expect and how to evaluate the real estate syndication process to best determine if this type of investment will be a good fit for their overall financial goals.
Let’s take a closer look at what to expect.
1.) You Can’t Pull Your Money Out Any Time You Want
When you invest with a real estate syndicator, you should know beforehand that the investment amount that you commit to the real estate project is capital invested into the real estate deal for the entirety of the hold term until the exit strategy of selling the asset has been executed.
Sometimes you may get a portion of your capital returned prior to the asset being sold if the deal sponsor refinances the asset at any time during the hold term, but you don’t want to count on that.
This is where these particular investment opportunities differ from stock market investing because you will need to plan on your capital being illiquid for 5 – 7 years, typically.
Investment vehicles such as stocks and mutual funds are much more flexible compared to real estate investing of any kind. Stock market investing allows you to sell and potentially have your funds liquidated almost immediately.
This is the main distinction that investors need to be aware of when reviewing real estate syndications as an investment strategy.
What Are the Legal Documents Involved in a Syndication?
The Private Placement Memorandum (PPM), a legal document which is the document passive investors sign when investing in a real estate syndication, will outline and specify the logistics of what you can expect from the investment. The investment summary, executive summary, and operating agreement further address the logistics of virtually everything you will want to know before you invest in the deal such as the business plan and what you can expect from the deal sponsorship team during the time your capital is invested in the asset. In our case, most oftentimes the asset will be an apartment building in a climate-resilient market that you will be investing your capital into.
Additionally, the minimum investment is usually $50,000, and the typical hold time is 5 years, so if either of those factors makes you uncomfortable, then this may not be the investment vehicle you would want to pursue.
2.) The Minimum Investment Is A LOT of Money
As mentioned, the minimum investment capital for most of the commercial properties we syndicate to investors is $50,000. We understand that this is A LOT of money, so we are sensitive to investors who may find that to be too much for them at this time.
Our advice? We feel it’s a good idea that you don’t place that kind of capital into any investment unless you are absolutely sure that this is a viable option for you to be investing in.
Want more good advice? If you only have that much capital to invest, don’t invest all of it in a real estate syndication. Build up more of an investment fund before you expend every dime you have on any one investment. Remember, every investment has risk, and although the main objective at the very least is capital preservation, there is still the chance that you could lose your initial investment in any endeavor you pursue. It’s important that you always have funds set aside for emergencies, so expending all of your savings on any one investment is not a wise strategy.
Additionally, it is not uncommon that most real estate syndications are only offered to accredited investors. That is not to say that you cannot invest in a real estate syndication if you are not an accredited investor, it is just a bit more difficult to find the opportunities because of the rules surrounding the advertising of these deals.
3.) There’s A New Investment Strategy To Learn
When individual investors invest in a rental property, there is a standard system of finding and analyzing properties, fixing them up, and either flipping the properties or renting the properties to collect rental income each month. As an active investor working with rental properties, this strategy is entirely different than passively investing in a real estate syndication deal.
When you are investing in real estate syndications you are seeking passive income with a group of investors seeking the same goal – cash flow. What that means is that you are not an active investor, so it does not require you to ever step foot into a property. You will never have to deal with the financing to acquire the property nor will you have to deal with the property manager or the property management team managing the apartment complex nor will you ever have to take care of handling tenant issues.
You, as a passive investor investing in a real estate asset, are able to retain your freedom all while collecting passive income and collecting your share of the profits when the property sells. That’s it. Besides conducting your own due diligence on the front end (before you invest) there isn’t much else a passive investor does throughout the process.
4.) You Have to Give Up Control
Another fundamental difference when you passively invest in real estate syndications is the level of control you have in the day-to-day management decisions.
With a limited partnership, you truly have a passive role in these commercial properties, unlike the extensive responsibilities that active investors have in these properties.
When you are an active investor, you are responsible for all of the acquisition responsibilities, the management responsibilities, and the disposition responsibilities of the property.
Passive investing removes all of these daily responsibilities and hassles and allows you to sit comfortably in the passenger seat. Now, while some like the idea of being completely hands-off. Some investors are uncomfortable not being in the driver’s seat, and that’s okay. If the idea of not having control of the day-to-day operations is unsettling, then this investment approach may not be for you.
While it can be a bit frustrating not being able to control every aspect of the property, developing a healthy level of trust with the deal sponsor and the sponsor team will be important if you are to invest passively in these types of real estate investments.
The bottom line is that virtually every syndicator and sponsorship team will tell you profusely how amazing real estate syndications are, and there is no doubt that this investment strategy has proven to be a fabulous tool to grow your wealth, but no investment vehicle is going to satisfy every investor’s objectives, timelines and comfort level.
The best way to decide if syndications are a good investment strategy for you (or not) is to review the above top reasons NOT to invest in a real estate syndication, and if any (or all) of those reasons resonate with you as to why you wouldn’t want to invest in a syndication, then maybe this type of passive investment isn’t the right approach for you. And that’s okay.
It’s just as important for you to understand what you are not comfortable with as an investment strategy as it is to understand what you are comfortable with as a path forward to meet you and your family’s financial goals.
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!