Passive Real Estate Investment

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The Ultimate Guide To Investing In Real Estate
Syndications
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• I first learned about real estate syndications at
  a local real estate meetup here in Dallas, TX. I
  had been investing in real estate for years at
  that point, mainly through rental properties, and
  I had never heard of the term real estate
  syndication before.
• Can you imagine? Years. And in that time, Id
  never heard of real estate syndications. But in
  fact, thats pretty common.
• In this guide, well go over all the information
  you need to start investing in real estate
  syndications, from what they are, to the returns
  you can expect, to the risks involved, and more.

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Heres an overview of what well cover
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Real Estate Syndications 101 1. What is a
real estate syndication? 2. How does a real
estate syndication work? 3. Can you give me
an example of a real estate syndication?
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Investing in Real Estate Syndications 1.
Why invest in a real estate syndication? 2.
What are the returns like in a real estate
syndication? 3. Whats the minimum amount I
can invest? 4. How long is a real estate
syndication? 5. Who can invest in real estate
syndications? 6. Can I invest in a real
estate syndication with retirement funds? 7.
What are the risks of investing in real estate
syndications? 8. What about taxes? 9.
What happens after I invest in a real estate
syndication?
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Finding Real Estate Syndication Opportunities 1.
Where can I find real estate syndication
opportunities? 2. How do private real estate
syndications compare to real estate crowdfunding
sites?
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Real Estate Syndications 101
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What is a real estate syndication?

• Lets start with the basics. The term syndication
  simply means a pooling of resources. A real
  estate syndication, then, is when a group of
  people come together to invest in a real estate
  asset together. Instead of buying a bunch of
  small properties individually, the group of
  people come together and buy a larger asset
  together.
• Lets say I have 50,000 to invest. I could take
  it and invest it in a rental property myself, but
  I would have to set aside time to find a
  property, put it under contract, do the
  inspections, run the numbers, get the loan, then
  find the tenant and manage the property.
• But, maybe I dont have that kind of time or
  interest. This is where most people stop. They
  figure, real estate investing is too hard and too
  much work, so they stop there.
• But, what few people know is that real estate
  syndications are the alternative that allow you
  to still put your money into real estate, without
  having to do the work of finding or managing the
  property yourself.
• With a real estate syndication, I can invest that
  50,000 into a real estate syndication as a
  passive investor. So I put in my 50,000, maybe
  you have 50,000 to invest, someone else puts in
  100,000, and on and on.
• By pooling our resources, we now have enough to
  buy not just a rental property, but something
  bigger, like an apartment building.
• As passive investors, we dont have to do any of
  the day-to-day work of managing the property. A
  lead syndicator or sponsor team does the
  day-to-day management (i.e., all the active
  work), and in return, they get a share of the
  profits. (More on this in a bit.)
• When done right, real estate syndications are a
  win-win for everyone involved.

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How does a real estate syndication work?

• There are two main groups of people who come
  together to form a real estate syndication the
  general partners and the limited partner passive
  investors.
• The general partners (GPs) are the people who put
  the real estate syndication together. They do all
  the hard work of finding and vetting the property
  and creating the business plan. Essentially, they
  do the work that you would be doing as the owner
  and landlord of a rental property, just on a
  massive scale.
• The limited partners (LPs) are the passive
  investors, who invest their money into the deal.
  The limited partners have no active
  responsibilities in managing the asset.

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• A real estate syndication can only work when
  general partners and limited partners come
  together. The general partners find a great deal
  and put together a great team to execute on the
  intended business plan. The limited partners
  invest their personal capital into the deal,
  which makes it possible to acquire the property
  and fund the renovations.
• Together, the general partners and limited
  partners join an entity (usually an LLC), and
  that entity holds the underlying asset. Because
  the LLC is a pass-through entity, you get the tax
  benefits of direct ownership (more on this in a
  bit).
• Once the deal closes, the general partners work
  closely with the property management team to
  improve the property according to the business
  plan. During this time, the limited partner
  investors receive regular and ongoing cash flow
  distribution checks (usually every 3 months).
• Once all the planned renovations are complete,
  the general partners sell the property, return
  the limited partners capital, and split the
  profits.

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Can you give me an example of a real estate
syndication?

• Lets say that Jane and John are working together
  to find an apartment community in Dallas, Texas.
  Jane lives in Dallas, so she works with real
  estate brokers in the area to find a great
  property that meets their criteria. After looking
  at a bunch of properties, they find one, listed
  at 10 million.
• John takes the lead on the underwriting (i.e.,
  analyzing all the numbers to make sure that the
  deal will be profitable), and they determine that
  this property has a ton of potential.
• Since Jane and John dont have enough money to
  purchase the 10-million property themselves,
  they decide to put together a real estate
  syndication offering. They create the business
  plan and investment summary for prospective
  investors and work with a syndication attorney to
  structure the deal.

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• Then, they start looking for limited partner
  passive investors who want to invest money into
  the deal. Each passive investor invests at least
  50,000 into the deal. They continue raising
  money until they have enough to cover the down
  payment, as well as the cost of the renovations.
• Once they close on the deal, Jane works closely
  with the property management team to improve the
  property and get the renovations done on budget
  and on schedule.
• During this time, Jane and John send out monthly
  updates, as well as quarterly cash flow
  distribution checks, to their passive investors.
• When the renovations are complete, Jane and John
  determine that its a good time to sell. They
  sell the property for 15 million after just 5
  years. They return all of the passive investors
  original capital, and they split the profits from
  the sale with the passive investors at the 70/30
  split that was agreed upon at the outset of the
  syndication (70 to investors, 30 to the Jane
  and John).

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Investing in Real Estate Syndications
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Why invest in a real estate syndication?

• Okay, now that youve got a decent understanding
  of how real estate syndications work, lets talk
  about whats in it for you. There are a number of
  reasons that passive investors decide to invest
  in real estate syndications.
• Here are a few of the top reasons
• You want to invest in real estate but dont have
  the time or interest in being a landlord.
• You want to invest in physical assets (as opposed
  to paper assets, like stocks).
• You want to invest in something thats more
  stable than the stock market.
• You want the tax benefits that come with
  investing in real estate.
• You want to receive regular cash flow
  distribution checks.
• You want to invest with your retirement funds.
• You want your money to make a difference in local
  communities.

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What are the returns like in a real estate
syndication?

• Lets talk about one of the things people are
  most curious about the returns you can expect
  by investing passively in real estate
  syndications.
• There are two types of returns that you can
  expect from investing in a real estate
  syndication.
• The first type of return is a cash flow return,
  which you would receive in the form of a check or
  direct deposit quarterly from the time the deal
  closes through the time the asset is sold.
• The second type of return is a split of the
  profits upon the sale of the asset. The exact
  split depends on each deals specific deal
  structure.
• Typically, for the real estate syndication deals
  that we do, the cash flow returns total 8-10 per
  year. So, if you were to invest 100,000, you
  could expect about 8,000 per year in cash flow
  returns, or about 667 per month.
• Then, at the sale of the property, you could
  expect an additional 40-60 (40-60,000), in
  addition to receiving your original capital back.
• Altogether, when counting the 8,000 per year for
  five years, plus the, say, 60,000 at the sale,
  you would have received a total of 100,000 in
  returns over the course of five years, thus
  doubling your money in that time. When counting
  the profits from the sale, your average annual
  return over the course of those five years would
  have been 20.

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Whats the minimum amount I can invest?

• Typically, we see a minimum of 50,000 for the
  deals that we do.
• Your money will be illiquid during the length of
  the hold time (i.e., you cant withdraw it until
  the asset is sold). Thus, you should only invest
  with funds that you dont need access to for a
  while and can afford to lose.

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How long is a real estate syndication?

• While each real estate syndication is different,
  we typically see projected hold times of 5-7
  years, sometimes longer.
• This means that, for a real estate syndication
  with a 5-year projected hold time, you should
  prepare to have your money in the project for 5
  years. You will not be able to take your money
  out until the asset is sold.

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Who can invest in real estate syndications?

• A large majority of real estate syndications are
  open to accredited investors only, though some
  are also open to non-accredited, sophisticated
  investors (i.e., investors who can demonstrate
  that they understand real estate syndications and
  their risks).
• In order to be considered an accredited investor,
  you must meet at least one of two requirements.
  The first requirement is a net worth requirement.
  You must have at least 1 million in net worth,
  not counting your primary home.
• The second requirement is an income requirement.
  You must make 200,000 per year as an individual,
  or 300,000 jointly with your spouse, have made
  this amount or more for each of the last two
  years, and intend to make this amount or more
  this year.
• If you meet either one or both of these
  requirements, then you are an accredited
  investor.
• If youre not yet an accredited investor, there
  are still some real estate syndication
  opportunities out there for you. However, you may
  need to look a little harder for them. This is
  because the opportunities for non-accredited
  investors cannot be publicly advertised.

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What are the fees involved?

• There are two main types of fees that are paid to
  the general partners when you invest in a real
  estate syndication.
• The first is an acquisition fee (typically 1-3
  of the purchase price), which is paid out upon
  the deal closing. This is for all the work the
  general partners have put into the acquisition of
  the property.
• The second type of fee is an asset management
  fee, which is an ongoing fee (usually 1-3) that
  is deducted from the cash flow each month, for
  the ongoing work of managing the asset.
• As a passive investor, you dont have to write a
  separate check for either of these fees. These
  fees are already part of the underwriting. So if
  a deal deck says projects an 8 annual return,
  thats already accounting for the fees involved.
  You just write your 50,000 check, and thats it.

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Can I invest in a real estate syndication with
retirement funds?

• Yes! In fact, this is one way that many passive
  investors get started with real estate
  syndications.
• To invest in a real estate syndication with
  retirement funds, you need to first roll over
  your existing retirement funds (401ks, IRAs,
  etc.) into a self-directed IRA or 401k account.
  Once your money is in the self-directed account,
  you can choose what you want to invest it in.
• Any returns you make on the investment must go
  directly back into the self-directed account,
  never into your personal accounts.

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What are the risks of investing in real estate
syndications?

• All this sounds great, but what about the risks?
  Great question. After all, a real estate
  syndication is an investment, and no investment
  is a guarantee.
• One of the biggest risks is the risk of
  execution. When you invest in a real estate
  syndication, youll see glossy marketing
  packages, and the sponsors will answer your
  questions with lofty ideals.
• However, when the rubber meets the road, the
  sponsor team needs to be able to execute on the
  business plan in the face of unforeseen
  circumstances. This is why we invest only with
  sponsors who have a proven track record and who
  prioritize capital preservation, so we know that
  they will protect your investments and will do
  what they say theyre going to do.
• Another potential risk is changing market
  conditions. No one can predict what market
  conditions will be like at the end of a projects
  hold time. Maybe the entire country will be in a
  recession. Maybe the local economy will be in a
  lull.
• This is why its so important to ensure that the
  loan provides some buffer time. That is, if the
  projected hold time is 5 years, check to make
  sure that the loan term is for at least that
  long, and ideally longer than 5 years, so theres
  a buffer in case we need to hold the property
  longer than intended.
• At the end of the day, as a limited partner
  passive investor, your liability in the real
  estate syndication is limited. That means that,
  at worst, you could lose your original
  investment, but you could not lose more than that
  (e.g., you cant lose your house).

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What about taxes?

• When you invest in a real estate syndication as a
  passive investor, you are a part-owner in the
  underlying asset. That means that you get your
  share of the tax benefits.
• One of the biggest tax benefits is accelerated
  depreciation through cost segregation.
• When you invest in a rental property, you can
  depreciate the rental property on a schedule of
  27.5 years.
• When you invest in a commercial real estate
  syndication, the sponsors will often order a cost
  segregation study. What this means is that a cost
  segregation expert will come and take stock of
  all the assets on the property light fixtures,
  carpeting, etc. and create a cost segregation
  report. That report shows which assets are
  eligible for accelerated depreciation.
• For example, instead of depreciating the
  carpeting over thirty or so years, you might be
  able to depreciate it over 5 years. This
  accelerated depreciation can front load all the
  depreciation benefits into the first few years of
  ownership, which is perfect for a real estate
  syndication that projects a hold time of just a
  few years.

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What happens after I invest in a real estate
syndication?

• After youve sent in your funds for a real estate
  syndication deal, your active participation is
  done. Now you can sit back and wait for the cash
  flow to start rolling in.
• Depending on the particular deal, you will
  receive quarterly cash flow distributions, and
  they may start immediately, or not for a few
  months to a year.
• Regardless, you should start receiving monthly
  updates as soon as the deal closes. These monthly
  updates will include information on the latest
  occupancy and progress on the renovations.
• Every quarter, you will receive a detailed
  financial report on the property, and every
  spring during tax season, you will receive a
  Schedule K-1 for your taxes, which will report
  your share of the income and losses for the
  property.

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Finding Real Estate Syndication Opportunities
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Where can I find real estate syndication
opportunities?

• As mentioned above, many real estate syndication
  opportunities cannot be publicly advertised. The
  ones that you do see publicly advertised are for
  accredited investors only.
• So, where do you find real estate syndication
  opportunities?
• You can do a Google search, but how do you know
  that the opportunities that pop up are legitimate
  ones, put together by experienced teams with
  strong track records, who will safeguard your
  money over a period of several years?
• The answer is, you dont. Its extremely hard to
  find great real estate syndication opportunities
  just by doing a few Google searches.
• The best way to find real estate syndication
  opportunities is to get out there and talk to
  people in the real estate investing space, and
  particular those in the real estate syndication
  space. This community is actually small, and once
  you get connected, youll easily be able to find
  sponsors and real estate syndication
  opportunities that fit with your investing goals.

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How do private real estate syndications compare
to real estate crowdfunding sites?

• In the past few years, real estate crowdfunding
  sites have become quite popular as a way to
  invest passively in real estate. Sites like
  RealtyMogul, RealtyShares, and Fundrise have
  helped millions of people invest passively in
  real estate.
• Real estate crowdfunding sites can be a good
  place to find real estate syndication offerings.
  However, there are a few things you should keep
  in mind.
• First, most of these platforms require that you
  be an accredited investor in order to invest in
  their real estate syndication offerings.
• Some of these platforms do offer REITs (real
  estate investment trusts) as an alternative for
  non-accredited investors. Typically, you can
  invest in these REITs with a low minimum
  investment (you can invest in Fundrises eREIT
  for just 500).
• If youre investing in a REIT, just be aware that
  you are not investing in a real estate
  syndication. Rather, you are investing in a fund.
• When you invest in a REIT, youre investing in a
  company that buys real estate you dont have
  direct ownership of the underlying asset
  yourself, like in a real estate syndication. You
  would likely still get good returns, you would
  just be investing in a bunch of assets rather
  than a single one, and you wouldnt get the same
  tax benefits as with a real estate syndication.
• Regardless, if youre just starting out, you
  should definitely check out some real estate
  crowdfunding sites, to see what theyre all about.

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