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If you’re interested in supplementing your primary income, investing in real estate may be the right avenue. Unlike most other sources of income, real estate investing offers flexibility when it comes to involvement. You can be an active investor managing real estate or you can approach it from a minimal effort perspective. If you’re considering the latter, an investment opportunity to consider is real estate syndication. However, before making any decision, you should first understand how they work, including their benefits and potential risks.
What is real estate syndication?
Real estate syndication occurs when investors collectively group resources, capital, and capabilities to purchase real estate such as apartments, self-storage facilities, mobile home parks, and hotels. Income sharing from these investments is typically made in monthly or quarterly installments, with the investment return derived from the ultimate sale of the property.
Syndications include general partners and limited partners. The general partner realizes the transaction. They find buildings and investors, and once the property is closed, they work with the necessary property management companies and contractors to ensure a successful investment. Investors known as limited partners provide the majority of the capital. As the name suggests, their liability (and responsibility) is limited. However, limited partners pay various fees, such as acquisition and management fees, that can affect potential returns compared to retail investors.
If you are interested in real estate syndication, the most important step is getting an education. After all, one of his biggest risks is who to partner with. So do a thorough research on your options for syndication to participate. For example, check public records to see if you have invested in the type of property you are interested in, contact your network to see who has first-hand experience with syndication, and whether your partners have been involved in financial scandals. We’ll meet with each team once we’ve found a few options that might work. Ask about your industry background, previous investment returns, and the structure for paying your returns. Then ask them for references and actually reach out. Once your due diligence is complete, you are ready to find the real estate syndication that best fits your needs.
Syndication Vs.Other real estate investment options
If you’ve considered passive investing in real estate before, you may have considered buying a rental property or joining a real estate investment trust (REIT).
Renting a property allows you to pay your mortgage and, in most cases, collect cash flow each month. This type of investment benefits from long-term real estate value appreciation. REITs typically own income-generating properties across a variety of properties and sectors. Because they’re listed like stocks, they’re incredibly liquid, making them a passive investment vehicle for investors.
Both of these investment vehicles have strong advantages, but it is important to examine the disadvantages to understand what is the right investment vehicle. For example, buying a rental property is not entirely passive, and interacting with, and maintaining, tenants can be a tedious and stressful process. In addition, rental properties have the problem of relying on a single tenant or a small number of tenants for mortgage payments. If you buy a property but can’t find a tenant, or if you’re just unlucky, your investment may fail. REITs, on the other hand, are his 100% passive, but investors don’t get many of the tax benefits of real estate, such as the tax breaks that come with depreciation. Instead, investing in REITs is taxed like owning any other stock.
When comparing real estate syndication to REITs and rental properties, syndication is an opportunity to combine the best of both worlds. This allows you to invest in real estate in a completely passive way, giving you cash flow, valuation and tax advantages. Syndicates also hold multiple tenants, reducing the risk of one vacancy or unplanned maintenance issues. Still, no investment method is risk-free, including syndication. Real estate is a volatile market, properties may underperform, and the conditions we are setting now for selling your ownership may not be ideal in the future.
What are the benefits of real estate syndication?
Many real estate syndicates make money in two ways. First, investors can earn rental income while owning the property. Later, when the property is sold, the investor can receive the original investment along with the valuation the property has suffered.
Depending on the company, syndications typically last at least three years and earn 7% to 10% annual rental income. This is called a cash-on-cash return and is distributed to passive investors as monthly or annual distributions. When it comes time to sell the building, the market value of a large commercial real estate venture is proportional to the amount of rental income it makes. When you buy a property and renovate it to increase your income, the building can be appreciated and sold beyond its original purchase price.
How to decide if a real estate syndicate is right for you
Interested in real estate syndication as your next investment opportunity? Here are five key metrics to try.
• Interested in passive investments rather than active involvement in the day-to-day management of investments.
• Looking for monthly, quarterly or annual passive income from real estate investments.
• Financially meet the typical $25,000 to $75 minimum investment for real estate syndicates.
• You are a sophisticated or accredited investor.
• You don’t need immediate access to investment funds.
As with any form of investment, there are risks associated with being involved in a real estate syndicate. As someone looking for passive investment opportunities, it is important to undertake due diligence and carefully weigh the pros and cons before committing.
The information provided here is not investment, tax, or financial advice. Please consult a qualified professional for advice regarding your specific situation.
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