When you first learn what real estate syndications are and how passive investing works, your first question might be, "What's the catch?"
Receiving a check in the mail for doing, seemingly, nothing sounds too good to be true. What are the hidden risks of investing in real estate syndications? What goes on behind the scenes of a real estate syndication?
Your thought process is good because it means you're not jumping in blindly. Instead, you're thinking critically and doing your due diligence. Kudos to you.
What Are The Pros & Cons of Real Estate Syndications?
Just like for every purchase, investment, or decision, there are pros and cons to real estate syndications as well. Each one may matter to you or not. It entirely depends upon your investing goals, timeframe, and financial position.
- No active responsibilities - You don't have to worry about or deal with tenants, renovations, or midnight emergencies.
- Set it and forget it - Most syndication deals are several years in length. Once invested, you don't have to make other decisions for that cash for 3-10 years.
- Checks show up - As a passive investor, your monthly or quarterly cash flow checks get automatically direct deposited.
- No control - As a passive investor, you're hands-off. The sponsor team is 100% in charge of the day-to-day decisions, and you don't get a vote.
- Locked in long-term - Since most real estate syndications are 5 years or longer, you can't just withdraw your capital willy-nilly.
- The profit is split - As one of many investors, you'll commonly receive a 70/30 split. Seventy percent (70%) of the profits are divided between the passive investors (there could be hundreds just like you), and 30% is split between the sponsor team.
You'll learn more pros and cons as you dig into the details of investing in real estate syndications. We suggest keeping a running list and making notes around points that either excite or bother you.
Why Aren't Real Estate Syndications for EVERYONE?
Not everyone has $25,000 $50,000 or more in readily investable cash. Even if one does, is the timing right? Have they ever heard of real estate syndications? Are they well informed? Do they trust a deal with so many moving parts?
Among other things, consider the challenges life events bring into the picture. What if an adoption, wedding, graduation, or college is on the horizon for your family?
Those may be reasons someone might hesitate to invest $25,000 or more in an investment for 5 (or more) long years. Any major life change comes with an impact on your financial situation.
Dependent upon your cash situation and 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.
As it stands, becoming an accredited investor is a pretty significant barrier to entry.
An accredited investor can invest in nearly anything they want. As a qualified accredited investor, you must have either:
over $1mil net worth (excluding your primary home)
or make $200,000 per year ($300,000 joint income), have done so for the past two years, and intend to make the same this year
or have a securities license or other verifiable professional credentials.
Even if you haven't reached accredited status yet, you can still invest in real estate syndications. However, these deals may be much harder to find since they cannot be publicly advertised.
How Trusting Are You?
Passive investing requires you to have mountains of trust in your sponsor team, the decisions they make, the people they hire, and the renovations they choose. If you've got a control freak gene deep down inside, this may not be the best investment for you.
On the other hand, if you 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 address the elephant in the room. Yes, you could lose money investing in a real estate syndication.
Real estate syndications like stocks, mutual funds, or any other investment vehicle do not come with a guarantee. If things go South, you could lose some or all of your original investment capital.
Yep, there it is—the honest truth.
If you invest right, that shouldn't happen—the less experienced the operator and the less savory the submarket, the greater likelihood of losing money. But if you're smart about the deals you invest in, that shouldn't happen, which brings us to my last point.
Why Smart Investing Isn't Truly Passive
Suppose you want to be a real passive investor, who's able to relax as the sponsor team works on your behalf. In that case, it's imperative you learn to invest smartly.
Would you like to maintain a level of trust in the investment and the sponsor team and genuinely enjoy the passive income without lifting a finger? You have to practice due diligence and critical thinking at the front-end of the deal.
Pushing through the overwhelm of markets, metrics, interest, splits, accreditation, and everything you have to learn and understand before making an informed decision is imperative. There's a TON of work you have to do upfront to attain a truly passive investor's comfort level.
You wouldn't just throw around $25,000 of your hard-earned cash without educating yourself about where it's going first, right? Put in the work, connect with the right people, and do your research to attain a high comfort level toward your investment deal. Then you will be able to sleep soundly at night while your passive investment earnings get deposited.
While real estate syndications are fantastic (duh!), they aren't perfect, and they are not for everyone.
Real estate syndications have pros and cons, risks and rewards, and require lots of research and time invested up front.
Suppose you're willing to invest your time and do your research to facilitate wise investments on your part. In that case, I think you'll find real estate syndication to be a fabulous experience.